UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission file number 0-15205
-------
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6428 Parkland Drive
Sarasota, Florida 34243
(Address of principal executive offices) (Zip Code)
(941) 758-0389
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value, $.01 Per Share
(Title of Class)
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant at June 9, 2000, computed by reference to the closing price of
the Registrant's Common Stock on such date as quoted by the National Market
System of NASDAQ, was approximately $25,014,899. Shares of Common Stock held by
each officer, director and holder of 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
At June 17, 2000, there were 13,742,391 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
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AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
The undersigned registrant hereby amends Part II Item 8. Consolidated
Financial Statements and Supplementary Data and Part IV Item 14. Exhibits,
Financial Statement Schedules and Reports on Form 8-K of its Annual Report on
Form 10-K for the fiscal year ended March 31, 2000 for the sole purpose of
filing a revised Independent Auditors' Report.
2
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 4
Consolidated Balance Sheets at March 31, 2000 and 1999 5
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the years ended
March 31, 2000, 1999 and 1998 6
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998 7
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 2000, 1999 and 1998 8
Notes to Consolidated Financial Statements 9
Financial Statement Schedules:
All financial statement schedules are omitted because they
are not required or are not applicable, or the required
information is shown in the consolidated financial
statements or notes thereto
----------
3
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Elcotel, Inc.:
We have audited the accompanying consolidated balance sheets of Elcotel, Inc.
and subsidiaries (the "Company") as of March 31, 2000 and 1999, and the related
consolidated statements of operations and other comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, at March 31, 2000, the Company was in default
of certain financial covenants contained in the Loan and Security Agreements
(the "Loan Agreements") between the Company and its bank. The Company's
difficulties in meeting the covenants of its Loan Agreements and its losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 16.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
June 20, 2000
4
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ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,153 $ 16
Accounts and notes receivable, less allowances for credit
losses of $1,593 and $1,970, respectively 8,073 12,209
Inventories 8,768 13,978
Refundable income taxes 82 1,997
Deferred tax asset - current portion -- 2,215
Prepaid expenses and other current assets 997 912
-------- --------
Total current assets 19,073 31,327
Property, plant and equipment, net 5,867 5,064
Notes receivable, less allowances for credit losses
of $272 and $312, respectively 395 898
Identified intangible assets, net of accumulated amortization
of $2,665 and $1,541, respectively 6,610 7,734
Capitalized software, net of accumulated amortization of $505
and $240, respectively 4,786 1,573
Goodwill, net of accumulated amortization of $1,567
and $878, respectively 22,403 23,218
Deferred tax asset -- 948
Other assets 575 533
-------- --------
$ 59,709 $ 71,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 1,428
Accounts payable 4,868 4,186
Accrued expenses and other current liabilities 3,123 4,197
Notes, debt and capital lease obligations payable - current 11,611 823
-------- --------
Total current liablilities 19,602 10,634
Notes, debt and capital lease obligations payable - noncurrent 208 10,355
-------- --------
Total liabilities 19,810 20,989
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value,
40,000,000 and 30,000,000 shares authorized,
13,794,391 and 13,551,693 shares issued, respectively 138 136
Additional paid-in capital 47,423 46,667
Retained earnings (deficit) (7,508) 3,680
Holding gain on marketable securities 23 --
Less - cost of 52,000 shares of common stock in treasury (177) (177)
-------- --------
Total stockholders' equity 39,899 50,306
-------- --------
$ 59,709 $ 71,295
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSVE INCOME (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues and net sales:
Product sales $ 33,834 $ 54,748 $ 43,426
Services 13,461 10,515 2,824
-------- -------- --------
47,295 65,263 46,250
-------- -------- --------
Cost of revenues and sales:
Cost of products sold 24,930 34,755 26,624
Cost of services 10,250 8,880 2,021
-------- -------- --------
35,180 43,635 28,645
-------- -------- --------
Gross profit 12,115 21,628 17,605
-------- -------- --------
Other costs and expenses:
Selling, general and administrative 9,984 10,560 9,930
Engineering, research and development 6,479 6,121 4,514
Amortization 2,263 2,084 654
Other charges 733 1,772 --
Interest expense (income) 558 517 (103)
-------- -------- --------
20,017 21,054 14,995
-------- -------- --------
(Loss) income before income tax expense (7,902) 574 2,610
Income tax expense (3,286) (213) (853)
-------- -------- --------
Net (loss) income (11,188) 361 1,757
Other comprehensive income, net of tax:
Holding gain on marketable securities 23 -- --
-------- -------- --------
Comprehensive (loss) income $(11,165) $ 361 $ 1,757
======== ======== ========
(Loss) earnings per common and common
equivalent share:
Basic $ (0.83) $ 0.03 $ 0.18
======== ======== ========
Diluted $ (0.83) $ 0.03 $ 0.18
======== ======== ========
Weighted average number of common
and common equivalent shares outstanding:
Basic 13,532 13,456 9,641
======== ======== ========
Diluted 13,532 13,777 9,842
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $(11,188) $ 361 $ 1,757
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,558 3,247 1,299
Provisions for obsolescence and warranty expense 1,454 825 253
Provision for credit losses 545 117 1,352
Loss on impairment of assets 148 -- --
Loss on disposal of equipment 4 12 2
Deferred tax expense 3,247 563 270
Stock option compensation (credits) expense (19) 112 --
Changes in operating assets and liabilities
(net of acquisition of Technology Service Group, Inc.
and certain assets from Lucent Technologies Inc.):
Accounts and notes receivable 3,807 (1,471) (2,695)
Inventories 3,809 (5,296) 3,112
Refundable income taxes 1,915 (1,188) (110)
Prepaid expenses and other current assets 239 112 (555)
Other assets (227) (113) (199)
Accounts payable 682 976 (1,695)
Accrued liabilities and other current liabilities (964) (943) (90)
-------- -------- --------
Net cash flow provided by (used in) operating activities 7,010 (2,686) 2,701
-------- -------- --------
Cash flows from inveating activities
Net cash used for acquisition of Technology
Service Group, Inc -- -- (447)
Acquisition of certain assets of Lucent Technologies Inc. -- -- (5,957)
Capital expenditures (1,831) (1,468) (960)
Capitalized software (3,618) (680) (129)
Proceeds from disposal of equipment -- 8 --
-------- -------- --------
Net cash flow used in investing activities (5,449) (2,140) (7,493)
-------- -------- --------
Cash flows from financing activities
Proceeds from exercise of common stock options 642 285 295
Net proceeds (payments) under revolving credit lines 1,191 (2,460) 3,675
(Decrease) increase in bank overdraft (1,428) 1,428 --
Proceeds from notes payable -- 4,000 8,770
Principal payments on notes payable (829) (66) (7,302)
-------- -------- --------
Net cash flow (used in) provided by financing activities (424) 3,187 5,438
-------- -------- --------
Net increase (decrease) in cash 1,137 (1,639) 646
Cash at beginning of year 16 1,655 1,009
-------- -------- --------
Cash at end of year $ 1,153 $ 16 $ 1,655
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------ Additional Retained Other
Shares Paid-in Earnings Comprehensive Treasury
Issued Amount Capital (Deficit) Income Stock Total
------ -------- ---------- ------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 8,234 $ 82 $ 11,160 $ 1,562 $ -- $ (177) $ 12,627
Exercise of stock options 158 2 293 -- -- -- 295
Tax benefit from exercise of
stock options -- -- 62 -- -- -- 62
Acquisition of Technology Service
Group, Inc. 5,025 50 35,208 -- -- -- 35,258
Registration expenses of
acquisition of Technology
Service Group, Inc. -- -- (339) -- -- -- (339)
Net income -- -- -- 1,757 -- -- 1,757
------ -------- -------- -------- ------ ------ --------
Balance, March 31, 1998 13,417 134 46,384 3,319 -- (177) 49,660
Exercise of stock options 135 2 283 -- -- -- 285
Net income -- -- -- 361 -- -- 361
------ -------- -------- -------- ------ ------ --------
Balance, March 31, 1999 13,552 136 46,667 3,680 -- (177) 50,306
Exercise of stock options 242 2 658 -- -- -- 660
Tax benefit from exercise of
stock options -- -- 98 -- -- -- 98
Holding gain on marketable
securities, net of tax -- -- -- -- 23 -- 23
Net loss -- -- -- (11,188) -- -- (11,188)
------ -------- -------- -------- ------ ------ --------
Balance, March 31, 2000 13,794 $ 138 $ 47,423 $ (7,508) $ 23 $ (177) $ 39,899
====== ======== ======== ======== ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Elcotel, Inc. and its wholly owned subsidiaries (the "Company") design,
develop, manufacture and market a comprehensive line of integrated public
communications products and services. The Company's product line includes
microprocessor-based payphone terminals known in the industry as "smart" or
"intelligent" payphones, software systems to manage and control networks of the
Company's smart payphone terminals, electromechanical payphone terminals also
known in the industry as "dumb" payphones, replacement components and
assemblies, and an offering of industry services including repair, upgrade and
refurbishment of equipment, operator services, customer training and technical
support. In addition, the Company has developed non-PC Internet terminal
appliances for use in a public communications environment, which will enable the
on-the-go user to gain access to Internet-based content and information through
the Company's client-server network supported by its back office software
system. The Company's a non-PC Internet terminal appliances were designed to
provide the features of traditional smart payphone terminals, to provide
connectivity to Internet-based content, to support e-mail and e-commerce
services, and to generate revenues from display advertising, sponsored content
and other services in addition to traditional revenues from public payphones.
The Company's service bureau network was designed to manage and deliver display
advertising content, Internet-based content and specialized and personalized
services to its non-PC Internet terminal appliances. The Company's Internet
appliance business is presently in the development stage and to date has not
generated any significant revenues.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7, at March 31,
2000, the Company was in default of certain financial covenants contained in the
loan agreements between the Company and its bank. The Company's difficulties in
meeting the covenants of its loan agreements and its losses from operations
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 16. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Elcotel, Inc. and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Sales of products and related costs are recorded upon shipment or when
customers accept title to such goods. The Company recognizes revenues from
software licenses upon delivery of the software. Revenue from repair,
refurbishment and upgrade of customer-owned equipment is recorded upon shipment.
Revenues from other services are recognized as the services are rendered.
9
<PAGE>
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
based on the first-in, first-out ("FIFO") method or standard cost, which
approximates cost on a FIFO basis.
Reserves to provide for losses due to obsolescence and excess quantities
are established in the period in which such losses become probable.
Marketable Securities
All marketable securities, classified as other current assets, are deemed
by management to be available for sale and are reported at fair value with net
unrealized gains or losses reported within stockholders' equity. Realized gains
and losses are recorded based on the specific identification method. There were
no realized gains or losses for the years ended March 31, 2000, 1999 and 1998.
The carrying amount of the Company's marketable securities, consisting of equity
securities, approximated $326 and $1 at March 31, 2000 and 1999, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed by the straight-line method based upon
the estimated useful lives of the related assets, generally three years for
computers, five years for equipment, furniture and fixtures and thirty-five
years for buildings.
Additions, improvements and expenditures that significantly extend the
useful life of an asset are capitalized. Expenditures for repairs and
maintenance are charged to operations as incurred. When assets are retired or
disposed of, the cost and accumulated depreciation thereon are removed from the
accounts, and any gains or losses are included in income.
Engineering, Research and Development Costs
Costs and expenses incurred for the purpose of product research, design
and development are charged to operations as incurred. Engineering, research and
development costs consist primarily of costs associated with development of new
products and manufacturing processes. The Company capitalizes software
development costs once technological feasibility has been achieved. Once the
product is released, the capitalized costs are amortized to operations based on
the straight-line method over the estimated useful life of the product, which
ranges from five to ten years. Capitalized software development costs are
reported at the lower of cost, net of accumulated amortization, or net
realizable value. Software development costs incurred prior to achieving
technological feasibility are charged to research and development expense as
incurred. Software development costs capitalized during the years ended March
31, 2000, 1999 and 1998 approximated $3,618, $639 and $100, respectively.
Amortization of Goodwill and Identified Intangible Assets
The excess of the purchase price over the fair value of assets and
liabilities of acquired businesses is being amortized to operations on a
straight-line basis over a period of 35 years. Identified intangible assets are
being amortized over the following estimated useful lives: trade names and
workforce - 35 years; customer contracts - 3.45 years; license agreements - 5
years; patented technology - 4 years; non-compete agreement - 2 years; and
customer relationships - 15 years.
10
<PAGE>
Income Taxes
The Company uses the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109"), Accounting for Income Taxes. Income tax benefit (expense) is based upon
income (loss) recognized for financial statement purposes and includes the
effects of temporary differences between such income (loss) and that recognized
for tax purposes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The deferred tax asset is reduced
by a valuation allowance when, on the basis of available evidence, it is more
likely than not that all or a portion of the deferred tax asset will not be
realized.
Earnings (Loss) Per Common Share
Earnings (loss) per common share is computed in accordance with Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share,
which requires disclosure of basic earnings per share and diluted earnings per
share. Basic earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding and dilutive potential
common shares outstanding during the year. The weighted average number of shares
outstanding during the years ended March 31, 2000, 1999 and 1998 for purposes of
computing basic earnings per share were 13,531,587, 13,456,255 and 9,640,530,
respectively. During the year ended March 31, 2000, potential common shares
outstanding were not dilutive. During the years ended March 31, 1999 and 1998,
dilutive stock options had the effect of increasing the weighted average number
of shares outstanding used in the computation of diluted earnings per share by
321,144 shares and 201,585 shares, respectively.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable and accounts payable
approximates fair value due to the short maturity of the instruments. The fair
value of notes receivable is estimated by discounting the future cash flows
using current interest rates offered for similar transactions and approximates
carrying value. The fair value of the Company's debt obligations is estimated
based on the interest rates currently available to the Company for bank loans
with similar terms and average maturities and approximates carrying value.
Credit Policy and Concentration of Credit Risks
Credit is granted under various terms to customers that the Company deems
creditworthy. In addition, the Company provides limited secured note financing
with terms generally not exceeding two years and interest charged at competitive
rates. Trade accounts and notes receivable are the primary financial instruments
that subject the Company to significant concentrations of credit risk. In order
to minimize this risk, the Company performs ongoing credit evaluations of its
customers. With respect to notes receivable, the Company generally requires
collateral consisting primarily of the payphone terminals and related equipment.
Allowances for credit losses on accounts and notes receivable are estimated
based upon expected collectibility. Allowances for impairment of notes
receivable are measured based upon the fair value of collateral or the Company's
estimate of the present value of future expected cash flows in accordance with
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan."
11
<PAGE>
Warranty Reserves
The Company accrues and recognizes warranty expense based on historical
experience and statistical analysis. The Company provides warranties ranging
from one to three years and passes on warranties on products manufactured by
others.
Stock Based Compensation Plans
The Company recognizes compensation expense with respect to stock-based
compensation plans based on the difference, if any, between the per-share market
value of the stock and the option exercise price on the measurement date in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"). In
addition, in accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company discloses
the pro forma effects on net income (loss) per share assuming the adoption of
the fair value based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation set forth in SFAS 123.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of property plant and equipment,
goodwill and other intangible assets when indicators of impairment are present,
and recognizes impairment losses if the carrying value of the assets is less
than expected future undiscounted cash flows of the underlying business in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Impairment losses are measured by the amount of the
asset carrying values in excess of fair market value. During the year ended
March 31, 2000, the Company recorded impairment losses of $148 related to the
closure of one of its manufacturing facilities and the abandonment of a software
development project. No impairment losses were recorded during the years ended
March 31, 1999 and 1998.
Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," during the
year ended March 31, 1999. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements, and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. In addition, SFAS 130
requires enterprises to classify items of other comprehensive income by their
nature and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. During the year ended March 31,
2000, the Company had one item of other comprehensive income relating to
marketable equity securities. The Company had no items of other comprehensive
income during the years ended March 31, 1999 and 1998.
Disclosure about Segments of an Enterprise and Related Information
During the year ended March 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual and interim financial statements. See Note 12.
12
<PAGE>
Derivative Financial Instruments and Hedging Activities
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, 2000. 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.
Computer Software Developed or Obtained for Internal Use
During the year ended March 31, 2000, the Company adopted the provisions
of 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") in March 1998. 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. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 did not have a
material impact on the Company's results of operations, financial position or
cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification of Prior Years
The Company's consolidated financial statements at March 31, 1999 and 1998
and for the years then ended have been reclassified to conform to the
presentation at and for the year ended March 31, 2000.
NOTE 2 - ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase
method. Accordingly, the purchase prices have been allocated to assets acquired
and liabilities assumed based on fair value at the dates of acquisition. The
results of acquired businesses and assets are included in the consolidated
financial statements of the Company from the dates of acquisition.
On December 18, 1997, the Company acquired, via a merger, Technology
Service Group, Inc. ("TSG"), and issued 4,944,292 shares of common stock in
exchange for the outstanding common stock of TSG based on an exchange ratio of
1.05 shares of the Company's common stock for each share of common stock of TSG,
and TSG became a wholly owned subsidiary of the Company. In addition, the
Company issued 80,769 shares of common stock in payment of certain acquisition
expenses. Further,
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<PAGE>
holders of options and rights to purchase shares of common stock of TSG pursuant
to option and stock purchase plans received options and rights to purchase, at a
proportionately reduced per share exercise price, a number of shares of common
stock of the Company equal to 1.05 times the number of shares of common stock of
TSG they were entitled to purchase immediately prior to the merger. Similarly,
holders of warrants to purchase shares of common stock of TSG received warrants
to purchase, at a proportionately reduced per share exercise price, a number of
shares of common stock of the Company equal to 1.05 times the number of shares
of common stock of TSG they were entitled to purchase immediately prior to the
merger.
A summary of the purchase price is set forth below.
Issuance of 4,944,292 shares of common stock
stock at a market price of $6.50 per share $ 32,138
Fair value of outstanding common stock
warrants, options and purchase rights 2,595
Costs and expenses of the merger 872
--------
Total purchase price $ 35,605
========
The Company registered the shares of common stock issued pursuant to the
Merger and incurred registration expenses of $339. These expenses were charged
to paid-in capital during the year ended March 31, 1998.
A summary of the book value of the assets and liabilities of TSG at
December 18, 1997 as compared to their estimated fair values recorded at the
acquisition date is set forth below.
<TABLE>
<CAPTION>
Estimated
Book Fair
Value Value
------- ---------
<S> <C> <C>
Cash and temporary investments $ 239 $ 239
Accounts receivable 3,703 3,703
Inventories 11,103 6,490
Refundable income taxes 604 604
Deferred tax asset, current 748 3,719
Prepaid expenses and other current assets 12 12
Property, plant and equipment 662 782
Capitalized software 875 846
Identified intangible assets 147 6,684
Other assets 29 29
Accounts payable (3,634) (3,634)
Accrued expenses (1,519) (2,719)
Borrowings under lines of credit (3,970) (3,970)
Deferred tax liability, non-current (4) (1,276)
------- --------
Net assets acquired $ 8,995 11,509
=======
Excess of purchase price over net assets acquired 24,096
--------
Total $ 35,605
========
</TABLE>
The fair value of identified intangible assets includes TSG's trade names
of $2,869, assembled workforce of $1,372, patented technology of $419, and
customer contracts of $2,024 (see Note 6). The
14
<PAGE>
fair value of inventories was reduced by $4,810 to reflect the estimated net
realizable value of inventories related to products discontinued by the Company.
The fair value of accrued liabilities includes estimated liabilities of $1,200
pursuant to a plan to exit certain activities of TSG and terminate and relocate
employees of TSG (see Note 8). During the year ended March 31, 2000, the Company
reduced the estimated liabilities related to the exit plan and credited $126
against the excess of the purchase price over the net assets acquired
("goodwill").
On September 30, 1997, the Company acquired from Lucent Technologies Inc.
("Lucent") inventories, machinery, and equipment and tooling, as well as
licenses of certain patent and other intellectual property rights, related to
the payphone manufacturing and component parts business conducted by Lucent. The
purchase price, including acquisition expenses of $367, was $5,957.
A summary of the allocation of the purchase price to the net assets
acquired from Lucent based on the Company's estimates of their fair values is
set forth below.
Inventories $ 2,991
Equipment and tooling 500
Intangible assets 2,591
Accrued warranty expense (125)
-------
Total purchase price $ 5,957
=======
Identified intangible assets are comprised of license agreements of $938,
a non-compete agreement of $77 and customer relationships of $1,576 (see Note
6).
Assuming the acquisitions had occurred on April 1, 1997, the Company's pro
forma results of operations for the year ended March 31, 1998 would have been as
follows:
1998
--------
Net sales $ 66,554
========
Net income $ 14
========
Basic earnings per share $ --
========
Diluted earnings per share $ --
========
The pro forma results of operations for the fiscal year ended March 31,
1998 include the operating results of TSG from April 1, 1997 to December 18,
1997 and pro forma adjustments consisting of an increase in amortization of
goodwill and other intangible assets of $932 due to the increase in the carrying
value of intangible assets and amortization over their estimated useful lives, a
decrease in depreciation of $228 due to an increase in the carrying value of
property and equipment and depreciation over different estimated useful lives, a
decrease in deferred tax expense of $104 resulting from the allocation to
deferred tax assets and liabilities and a decrease in income tax expense of $179
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 fiscal year ended March 31, 1998 include an increase in
amortization of intangible assets of $130, an increase in depreciation of $50,
an increase in interest expense of $245 and a decrease in income tax expense of
$149.
15
<PAGE>
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Current accounts and notes receivable at March 31, 2000 and 1999 include
notes receivable due within one year of $487 and $803, respectively, net of
credit and impairment allowances of $1,080 and $1,242, respectively. Notes
receivable consist of trade notes receivable from customers with remaining
maturities of two years or less, and are generally collateralized by the
payphone equipment sold and giving rise to the asset. The notes bear interest at
rates ranging from 12% to 16%. Interest income on impaired notes is recognized
as the interest is collected. The Company recognizes interest income on notes
with no related credit loss allowance as earned.
Changes in allowances for credit losses on accounts and notes receivable
for the years ended March 31, 2000, 1999 and 1998 are summarized as follows:
2000 1999 1998
------- ------- -------
Balance, beginning of year $ 2,282 $ 2,410 $ 1,301
Provision for credit losses 545 117 1,352
Write-offs, net of recoveries (962) (245) (243)
------- ------- -------
Balance, end of year 1,865 2,282 2,410
Long-term allowances (272) (312) (487)
------- ------- -------
Current allowances $ 1,593 $ 1,970 $ 1,923
======= ======= =======
NOTE 4 - INVENTORIES
Inventories at March 31, 2000 and 1999 consisted of the following:
2000 1999
-------- --------
Finished products $ 1,679 $ 1,875
Work-in-process 1,068 924
Purchased components 7,835 11,630
-------- --------
10,582 14,429
Reserve for obsolescence (1,814) (451)
-------- --------
$ 8,768 $ 13,978
======== ========
Substantially all inventories are pledged to secure bank indebtedness (See
Note 7).
Changes in reserves for potential losses due to obsolescence and slow
moving inventories for the years ended March 31, 2000, 1999 and 1998 are
summarized as follows:
2000 1999 1998
------- ------- -------
Balance, beginning of year $ 451 $ 100 $ 100
Provision for losses 1,401 406 13
Write-offs (38) (55) (13)
------- ------- -------
Balance, end of year $ 1,814 $ 451 $ 100
======= ======= =======
16
<PAGE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 2000 and 1999 is comprised of
the following:
2000 1999
-------- --------
Land $ 372 $ 372
Buildings 3,067 2,842
Engineering and manufacturing equipment 5,671 4,291
Furniture, fixtures and office equipment 2,250 1,841
-------- --------
11,360 9,346
Less accumulated depreciation (5,493) (4,282)
-------- --------
$ 5,867 $ 5,064
======== ========
Depreciation expense for the years ended March 31, 2000, 1999, and 1998
was $1,295, $1,163, and $645, respectively. Substantially all property, plant
and equipment are pledged to secure bank indebtedness (see Note 7).
Assets under capital leases are capitalized using interest rates
appropriate at the date of purchase or at the inception of the lease, as
applicable. The cost and accumulated depreciation of engineering and
manufacturing equipment under capital leases included in property and equipment
was $279 and $28 at March 31, 2000. No assets under capital leases were held at
March 31, 1999.
NOTE 6 - IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets recorded in connection with acquisitions, net
of accumulated amortization, at March 31, 2000 and 1999 consisted of the
following:
2000 1999
------ ------
Trade names, net of accumulated
amortization of $187 and $105 $2,682 $2,764
Customer contracts, net of accumulated
amortization of $1,341 and $754 683 1,270
Workforce, net of accumulated
amortization of $90 and $50 1,282 1,322
License agreements, net of accumulated
amortization of $469 and $281 469 657
Patented technology, net of accumulated
amortization of $239 and $135 180 284
Non-compete agreement, net of accumulated
amortization of $77 and $58 -- 19
Customer relationships, net of accumulated
amortization of $262 and $158 1,314 1,418
------ ------
$6,610 $7,734
====== ======
17
<PAGE>
NOTE 7 - NOTES, DEBT AND CAPITAL LEASE OBLIGATIONS PAYABLE
Notes, debt and capital lease obligations payable at March 31, 2000 and
1999 are summarized as follows:
2000 1999
-------- --------
Secured Promissory Notes Payable to Bank:
Revolving credit lines due July 31, 2000 $ 6,376 $ 5,185
11.5% installment note, payable in four equal
monthly installments of $80 including interest,
with remaining principal balance of $3,215
due on July 31, 2000 3,322 4,000
11.5% mortgage note, payable in four equal
monthly installments of $19 including interest,
with remaining principal balance of $1,755
due on July 31, 2000 1,762 1,833
Capital lease obligations 263 --
Unsecured promissory note, payable in thirty
equal monthly installments of $6 including interest 96 160
-------- --------
11,819 11,178
Amount payable within one year (11,611) (823)
-------- --------
Amount payable after one year $ 208 $ 10,355
======== ========
As of March 31, 2000, the Company was in default of certain financial
covenants contained in the Loan and Security Agreements (the "Loan Agreements")
between the Company and its bank. On April 12, 2000, the Company entered into a
Forbearance and Modification Agreement (the "Forbearance Agreement") with its
bank that modified the terms of the Loan Agreements. Under the terms of the
Forbearance Agreement, the maturity date of all indebtedness outstanding under
the Loan Agreements, including indebtedness outstanding under the revolving
credit lines, the installment note and the mortgage note was accelerated to July
31, 2000. In addition, the annual interest rates of the installment note and
mortgage note were increased to 11.5% from 7.55% and 8.5%, respectively, the
annual interest rate under the revolving credit lines was increased from one and
one-half percentage point over the bank's floating 30 day Libor rate (7.63% at
March 31, 2000) to two and one-half percentage points above the bank's prime
interest rate (11.5% at April 12, 2000), and the availability of additional
funds under a $2,000 export revolving credit line (none of which is outstanding
at March 31, 2000) and a $1,500 equipment revolving credit line ($281 of which
was outstanding at March 31, 2000) was cancelled. The Forbearance Agreement
permits an overadvance of indebtedness outstanding under a $10,000 working
capital revolving credit line ($6,095 of which was outstanding at March 31,
2000) and a $4,000 installment note ($3,322 of which was outstanding at March
31, 2000) of $2,800 through June 30, 2000 and $1,500 thereafter based on the
value of collateral consisting of eligible accounts receivable and inventories.
Indebtedness outstanding under the Loan Agreements is collateralized by
substantially all of the assets of the Company. As a result of the default and
modification of the Loan Agreements, the Company has classified outstanding bank
debt in the aggregate amount of $11,460 at March 31, 2000 as a current
liability.
On March 29, 1999, the Company and its bank entered into an amendment (the
"Amendment") that modified the terms of the Loan Agreements. Pursuant to that
Amendment, the Company's working capital revolving credit line was reduced from
$15,000 to $10,000 and the Company borrowed $4,000 pursuant to an installment
note and established a $1,500 revolving credit line to finance its capital
18
<PAGE>
expenditures and a $2,000 revolving credit line to finance its export
activities. The proceeds from the term note were used to reduce the Company's
outstanding indebtedness under the $15,000 revolving credit line.
The Loan Agreements, as modified by the Forbearance Agreement, 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 Loan
Agreements, as modified by the Forbearance Agreement, require the Company to
maintain a working capital ratio of 1 to 1 and a ratio of total liabilities to
net worth of 1.5 to 1. Noncompliance with any of these conditions and covenants
or the occurrence of an event of default, if not waived or cured, could
accelerate the maturity of the indebtedness outstanding under the Loan
Agreements.
Scheduled maturities of notes, debt and capital lease obligations payable
for the next five years are as follows:
Fiscal 2001 $11,611
Fiscal 2002 127
Fiscal 2003 81
-------
$11,819
=======
The Company leases certain equipment under capital lease obligations. The
present value of future minimum lease payments for the assets under capital
leases at March 31, 2000 is as follows:
Fiscal 2001 $ 111
Fiscal 2002 109
Fiscal 2003 85
-----
Total minimum capital lease obligation 305
Less portion representing interest (42)
-----
Present value of minimum lease payments $ 263
=====
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of March 31, 2000 and 1999
consist of the following:
2000 1999
------ ------
Payroll and payroll taxes $1,237 $1,218
Warranty expense 561 1,101
Relocation, severance and reorganization charges 440 615
Professional fees 48 248
Royalities and technology transfer fees 249 284
Customer advances 329 457
Other 259 274
------ ------
$3,123 $4,197
====== ======
In November 1999, the Company announced a restructuring plan to
consolidate manufacturing operations, resize its core payphone business
operations, reorient its distribution strategy and begin to build operations
required to introduce its new public access Internet appliance products and back
office
19
<PAGE>
management systems to the marketplace. In connection with this restructuring,
the Company recognized other charges of $733 during the year ended March 31,
2000. These other charges consisted of estimated employee termination benefits
under severance and benefit arrangements of $608 and future lease payments of
$125 related to the closure of leased facilities. The other charges do not
include the recognition of impairment losses of $148 related to closed
facilities and the Company's decision to abandon a software development project
related to certain discontinued activities. Impairment losses of $140 and $8 are
classified as engineering, research and development expenses and selling,
general and administrative expenses, respectively, during the year ended March
31, 2000.
Under the November 1999 restructuring plan, the Company will terminate the
employment of 56 employees by December 31, 2000, including 28 employees in
connection with the consolidation of manufacturing operations and the closure of
its manufacturing facility in Sarasota, Florida and 28 corporate employees in
all major functions. As of March 31, 2000, the Company had terminated the
employment of 54 employees under the plan. During the year ended March 31, 2000,
the Company charged $320 of severance and benefit payments against the
restructuring liability, which is included in accrued relocation, severance and
reorganization liabilities.
Under the restructuring plan, the Company closed a leased office facility
in Alpharetta, Georgia and leased a larger facility to accommodate service
operations related to its new public access Internet appliance products and back
office management systems. The restructuring charges related to future lease
payments include a termination settlement of $27 under a lease termination
agreement with respect to the closed office facility and remaining lease
payments of $98 under the lease agreement related to the Company's manufacturing
facility. During the year ended March 31, 2000, payments of $47 related to the
lease termination agreement and the closed facility were charged against the
restructuring liability.
During the year ended March 31, 1999, the Company reorganized its sales
and marketing organization. The Company accrued and recognized reorganization
charges of $490, which included the estimated costs of severance and salary
continuation arrangements and related employee benefits with respect to
terminated employees. During the years ended March 31, 2000 and 1999, the
Company charged $373 and $117 of severance and benefit payments against the
restructuring liability accrued in connection with the reorganization.
The restructuring and reorganization charges of $733 and $490 during the
years ended March 31, 2000 and 1999, respectively, are included in other charges
(credits) in the accompanying consolidated statements of operations and other
comprehensive income (loss).
In connection with the acquisition of TSG, the Company assumed estimated
liabilities of $1,200 pursuant to a plan to exit certain activities of TSG and
terminate and relocate employees of TSG. These liabilities included the
estimated costs of severance and salary continuation arrangements and related
employee benefits of $730 and the estimated costs to relocate employees and
property of TSG of $470. The plan provided for the closure of TSG's corporate
facility and the integration of TSG's general, administrative and engineering
activities into those of the Company, and identified the employees that were
expected to be relocated or terminated as a result of the acquisition. During
the years ended March 31, 2000, 1999 and 1998, the Company charged payments of
$42, $806 and $152, respectively, against the liabilities accrued pursuant to
the plan. During the year ended March 31, 2000, the Company charged $126 of the
liabilities accrued pursuant to plan against goodwill recorded in connection
with the acquisition, such amount representing a change in estimate related to
remaining liabilities to be paid.
20
<PAGE>
Changes in accrued relocation, severance and reorganization charges for
the years ended March 31, 2000, and 1999 are summarized as follows:
2000 1999 1998
------- ------- -------
Balance, beginning of year $ 615 $ 1,048 $ --
Acquired obligations -- -- 1,200
Restructuring and reorganization charges 733 490 --
Payments (782) (923) (152)
Adjustment to goodwill (126) -- --
------- ------- -------
Balance, end of year $ 440 $ 615 $ 1,048
======= ======= =======
Changes in accrued warranty expense for the years ended March 31, 2000,
1999 and 1998 are summarized as follows:
2000 1999 1998
------- ------- -------
Balance, beginning of year $ 1,101 $ 1,170 $ 295
Acquired obligations -- -- 1,075
Expense provision 53 419 240
Charges incurred (593) (488) (440)
------- ------- -------
Balance, end of year $ 561 $ 1,101 $ 1,170
======= ======= =======
21
<PAGE>
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the
years ended March 31, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Cash paid (received) during the year for
Interest $ 950 $ 861 $ 427
Income taxes (1,876) 845 694
Non-cash investing and financing activities
Receipt of marketable securities to satisfy
accounts receivable resulting in an increase
in other current assets and a reduction in
accounts receivable 287 -- --
Equipment acquired under capital lease
obligations 279 -- --
Tax benefit from exercise of options resulting in
an increase in stockholders' equity and
an increase in non-current deferred tax assets
in 2000 and a decrease in income taxes payable
in 1998 98 -- 62
Issuance of common stock to acquire
Technology Service Group, Inc. (see Note 2) -- -- 35,258
Write-off of acquired accrued restructuring
liabilities resulting in a decrease in accrued
expenses and goodwill 126 -- --
Compensation related to exercised stock options
resulting in an increase in stockholders' equity
and a decrease in accrued expenses 18 -- --
Other assets acquired by issuance
of note payable -- 160 --
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock
On November 2, 1999, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to increase the number of shares
of common stock, $.01 par value, authorized for issuance to 40,000,000 shares,
from 30,000,000 shares. Holders of voting common stock are entitled to one vote
per share on all matters to be voted on by the stockholders. No dividends have
been declared or paid on the Company's common stock during the years ended March
31, 2000, 1999 and 1998.
Common Stock Warrants
At the acquisition date of TSG, TSG had issued and outstanding 1,150,000
redeemable warrants to purchase 575,000 shares of common stock at an exercise
price of $11.00 per share (the "Redeemable Warrants") and warrants to purchase
100,000 shares of common stock at an exercise price of $10.80 per
22
<PAGE>
share (the "Underwriter Warrants"). In connection with the acquisition, the
Redeemable Warrants were converted into warrants of the Company to purchase
603,750 shares of common stock at a per share exercise price of $10.48, and the
Underwriter Warrants were converted into warrants of the Company to purchase
105,000 shares of common stock at a per share exercise price of $10.29 (see Note
2). On May 9, 1999, the Redeemable Warrants, none of which had been exercised or
redeemed, expired pursuant to their terms. The Underwriter Warrants may be
exercised at any time until May 9, 2001, the expiration date of the Underwriter
Warrants. The Underwriter Warrants contain anti-dilution a provision providing
for adjustments of the number of warrants and exercise price under certain
circumstances. The Underwriter Warrants grant to the holders thereof certain
rights of registration of the securities issuable upon their exercise.
Stock Option Plans
On October 15, 1999, the Board of Directors of the Company adopted the
1999 Stock Option Plan (the "1999 Plan"). The Compensation Committee (the
"Committee") appointed by the Board of Directors of the Company administers the
1999 Plan, and pursuant to the 1999 Plan have the authority to grant
non-qualified stock options to senior executive officers of the Company.
Non-qualified stock options to purchase up to an aggregate of 539,988 shares of
common stock may be granted under the 1999 Plan at option exercise prices
determined by the Committee. The Committee has the authority to interpret the
provisions of the 1999 Plan, to determine the terms and provisions of options
granted under the 1999 Plan and to determine the number of shares subject to
options granted and the vesting periods thereof. The Committee's authority to
grant options under the 1999 Plan expires on October 15, 2004. Options granted
under the 1999 Plan expire five years from the date of grant unless they are
terminated prior thereto upon the termination of employment of a grantee.
Unvested options granted under the 1999 Plan expire immediately upon the
termination of a grantee's employment by the grantee for any reason or by the
Company for cause. Upon the termination of a grantee's employment by the Company
without cause, options that would have vested during the twelve months after
such termination of employment or during the remaining term of any employment
agreement between the grantee and the Company, whichever is less, immediately
vest and are thereafter exercisable until their expiration date, and any
remaining unvested options expire as of the termination date. Pursuant to the
terms of an employment agreement between the Company and its President and Chief
Executive Officer dated October 15, 1999, the Company granted options under the
1999 Plan 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,
which expires on October 11, 2002. As of March 31, 2000, options to purchase
90,000 shares of common stock are exercisable.
On July 2, 1991, the Company adopted the 1991 Stock Option Plan (the "1991
Plan"). The 1991 Plan provides the Board of Directors of the Company with the
authority to grant to employees, officers and directors of the Company
non-qualified stock options and incentive stock options within the meaning of
Section 422A of the Internal Revenue Code. On November 2, 1999, the stockholders
approved an amendment to the 1991 Plan that increased the number shares of the
Company's common stock that may be issued under the 1991 Plan from 2,100,000
shares to 2,600,000 shares. The Board's authority to grant options under the
1991 Plan expires on July 2, 2001. The Board has the authority to determine the
number of shares subject to options granted and such other terms and conditions
under which options may be exercised. The per-share option price of stock
options granted under the 1991 Plan shall not be less than the greater of the
per-share fair market value of the Company's common stock as of the date of
grant or $.75, or 110% of the per-share market value with respect to incentive
stock options granted to employees owning 10% or more of the total combined
voting power of all classes of the Company's stock. Options granted under the
1991 Plan expire five years from the date of grant or 30 days after termination
of employment, except for termination of employment for certain specified
reasons or unless the Board of Directors extends such 30-day period.
23
<PAGE>
As of March 31, 2000, options to purchase 541,534 shares of common stock
were available for grant under the 1991 Plan. The weighted average exercise
price of options outstanding under the 1991 Plan at March 31, 2000, 1999 and
1998 was $4.77, $5.09 and $4.72, respectively. At March 31, 2000, 1999 and 1998,
options outstanding under the 1991 Plan had weighted average remaining
contractual lives of 3.7 years, 3.0 years and 3.2 years, respectively.
The following table summarizes information, including the status and
changes in stock options outstanding, with respect to the 1991 Plan for each of
the years in the three-year period ended March 31, 2000:
Number of Option Price
Shares Range Per Share
------------ ---------------
Outstanding at March 31, 1997 391,448 $1.31 - $7.50
Granted 285,400 $5.56 - $6.00
Exercised (69,385) $1.31 - $6.19
Cancelled (62,188) $3.50 - $7.50
------------
Outstanding at March 31, 1998 545,275 $1.81 - $7.38
Granted 561,000 $4.56 - $5.88
Exercised (22,600) $1.81 - $3.50
Cancelled (57,675) $3.50 - $6.94
------------
Outstanding at March 31, 1999 1,026,000 $3.50 - $7.38
Granted 806,250 $1.88 - $6.19
Exercised (140,250) $4.56 - $6.19
Cancelled (535,825) $1.88 - $7.38
------------
Outstanding at March 31, 2000 1,156,175 $1.88 - $6.81
============
Options exercisable at March 31, 2000 258,899 $4.56 - $6.81
============
Options exercisable at March 31, 1999 291,255 $3.50 - $7.38
============
Options exercisable at March 31, 1998 137,800 $1.81 - $6.19
============
On July 2, 1991, the Company adopted a Directors' Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for the grant of non-qualified
stock options to directors who are not employees of the Company. On November 2,
1999, the stockholders of the Company approved an amendment to the Directors
Plan that increased the number shares of the Company's common stock that may be
issued under the Director Plan from 225,000 shares to 300,000 shares. The
Board's authority to grant options under the Directors Plan expires on July 2,
2001. Pursuant to the Directors Plan, each new non-employee director
automatically receives a non-qualified option to purchase 4,000 shares of common
stock upon appointment or election to the Board. Thereafter, on March 31 of each
year, each non-employee director receives a non-qualified stock option to
purchase 1,000 shares of common stock for each committee of the Board on which
such non-employee director is then serving and for each committee of the Board
on which such non-employee director is then serving as chairman. Non-employee
directors are also eligible for discretionary grants of options under the
Directors Plan. The per-share option price of stock options granted under the
Directors Plan shall not be less than the greater of the per-share fair market
value of the Company's common stock as of the date of grant or $2.00. Options
granted under the Directors Plan become exercisable on the first anniversary of
the date of grant. Options granted under the Directors Plan expire five years
from the date of grant or 30 days after the date a
24
<PAGE>
director ceases to serve as a director (one year in the event of death or
disability), except that such 30-day period does not apply if director status
ceased within one year after a change in control of the Company or unless the
Board of Directors extends such 30 day period.
As of March 31, 2000, options to purchase 124,000 shares of common stock
were available for grant under the Directors Plan. The weighted average exercise
price of options outstanding under the Directors Plan at March 31, 2000, 1999
and 1998 was $4.71, $4.75 and $4.78, respectively. At March 31, 2000, 1999 and
1998, options outstanding under the Directors Plan had weighted average
remaining contractual lives of 3.3 years, 3.9 years and 2.3 years, respectively.
The following table summarizes information, including the status and
changes in stock options outstanding, with respect to the Directors Plan for
each of the years in the three-year period ended March 31, 2000:
Number of Option Price
Shares Range Per Share
------------ ---------------
Outstanding at March 31, 1997 100,000 $2.00 - $6.31
Granted 28,000 $5.56 - $5.88
Exercised (31,000) $2.00 - $3.94
Cancelled (4,000) $5.88
------------
Outstanding at March 31, 1998 93,000 $3.81 - $6.31
Granted 51,000 $3.59 - $4.56
Exercised (22,000) $3.81 - $5.25
Cancelled (28,000) $3.81 - $6.31
------------
Outstanding at March 31, 1999 94,000 $3.59 - $6.31
Granted 12,000 $3.16
Exercised (2,000) $3.94
Cancelled (13,000) $3.59 - $3.94
------------
Outstanding at March 31, 2000 91,000 $3.16 - $6.31
============
Options exercisable at March 31, 2000 79,000 $3.59 - $6.31
============
Options exercisable at March 31, 1999 43,000 $3.94 - $6.31
============
Options exercisable at March 31, 1998 69,000 $3.81 - $6.31
============
In connection with the acquisition of TSG, options to purchase 41,000
shares of common stock outstanding under TSG's 1995 Non-Employee Director Stock
Plan (the "1995 Directors Plan") were converted into options to purchase 43,050
shares of common stock of the Company. No additional options may be granted
under the 1995 Directors Plan subsequent to the acquisition. Such options became
exercisable in full as a result of the acquisition of TSG and expire one year
after the date a director ceases to serve as a director of TSG or ten years from
the date of grant, whichever is earlier. At March 31, 1998, options to purchase
43,050 shares of common stock were outstanding at exercise prices ranging from
$4.76 to $10.30 per share, and all such options were exercisable. The weighted
average exercise price of options outstanding under the 1995 Directors Plan at
March 31, 1998 was $7.83, and the remaining weighted average contractual life of
such options was .7 years. During the year ended March 31, 1999, all options
outstanding under the 1995 Directors Plan expired unexercised.
25
<PAGE>
In addition, in connection with the acquisition of TSG, options to
purchase 531,125 shares of common stock outstanding under TSG's 1994 Omnibus
Stock Plan (the "Omnibus Plan") were converted into options to purchase 557,682
shares of common stock of the Company. No additional options may be granted
under the Omnibus Plan subsequent to the acquisition. The options are
exercisable in four equal annual installments beginning on the date of grant,
and expire ten years from the date of grant. The weighted average exercise price
of options outstanding under the Omnibus Plan at March 31, 2000, 1999 and 1998
was $4.23, $3.10 and $3.09, respectively. At March 31, 2000, 1999 and 1998,
options outstanding under the Omnibus Plan had weighted average remaining
contractual lives of 4.4 years, 5.2 years and 6.5 years, respectively.
The following table summarizes information, including the status and
changes in stock options outstanding, with respect to the Omnibus Plan for each
of the years in the three-year period ended March 31, 2000:
Number of Option Price
Shares Per Share
-------------- ------------
Options assumed and converted 557,682 $.95 - $10.26
Exercised (68,479) $.95 - $4.76
Cancelled (40,297) $.95 - $10.26
--------------
Outstanding at March 31, 1998 448,906 $.95 - $10.26
Exercised (90,244) $.95 - $4.76
Cancelled (23,887) $.95 - $10.26
--------------
Outstanding at March 31, 1999 334,775 $.95 - $9.05
Exercised (146,300) $.95 - $4.76
Cancelled (4,200) $9.05
--------------
Outstanding at March 31, 2000 184,275 $.95 - $9.05
==============
Options exercisable at March 31, 2000 184,275 $.95 - $9.05
==============
Options exercisable at March 31, 1999 320,662 $.95 - $9.05
==============
Options exercisable at March 31, 1998 402,614 $.95 - $10.26
==============
Accounting for Stock-Based Compensation
During the year ended March 31, 2000, the Company recognized stock-based
compensation expense of $64 with respect to compensatory options granted under
the 1999 Plan. During the year ended March 31, 1999, the Company modified the
terms of certain outstanding options to include provisions that would accelerate
their vesting upon a change in control of the Company and to extend the exercise
period of vested options upon certain events. As a result of the modifications,
the Company recognized stock-based compensation expense of $112 during the year
ended March 31, 1999. During the year ended March 31, 2000, the Company credited
$83 of previously recognized stock-based compensation expense related to
cancelled and expired options to income. The Company did not recognize any
compensation expense with respect to stock options granted under the Company's
plans during the year ended March 31, 1998.
26
<PAGE>
A comparison of the Company's net income (loss) and earnings (loss) per
share as reported and on a pro forma basis for the years ended March 31, 2000,
1999 and 1998 assuming the Company had adopted the fair value based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation set forth in SFAS 123 is as follows:
2000 1999 1998
--------- ------ -------
Net income (loss) As reported $ (11,188) $ 361 $ 1,757
Pro forma $ (11,928) $ (173) $ 1,522
Basic earnings (loss) As reported $ (0.83) $ 0.03 $ 0.18
per share Pro forma $ (0.88) $(0.01) $ 0.16
Diluted earnings (loss) As reported $ (0.83) $ 0.03 $ 0.18
per share Pro forma $ (0.88) $(0.01) $ 0.15
The fair value of each option granted under the Company's stock option
plans is estimated on the date of grant using the Black-Scholes Option pricing
model. The significant weighted-average assumptions used during the years ended
March 31, 2000, 1999 and 1998 to estimate the fair values of options granted
under the Company's stock option plans are summarized below:
2000 1999 1998
--------- --------- ----------
1999 Plan
Expected dividend yield -- -- --
Expected volatility 77.66% -- --
Risk free interest rate 6.20% -- --
Expected life 4.0 years -- --
1991 Plan
Expected dividend yield -- -- --
Expected volatility 77.66% 47.07% 45.32%
Risk free interest rate 6.20% 6.20% 6.20%
Expected life 4.13 years 4.7 years 3.8 years
Directors Plan
Expected dividend yield -- -- --
Expected volatility 78.52% 45.33% 45.32%
Risk free interest rate 6.20% 6.20% 6.20%
Expected life 4.0 years 4.0 years 3.8 years
Based on these assumptions, the weighted average fair value of each option
granted under the Company's 1999 Plan during the year ended March 31, 2000 was
$1.01. The weighted average fair value of each option granted under the 1991
Plan during the years ended March 31, 2000, 1999 and 1998 was $2.52, $2.25 and
$2.46, respectively. The weighted average fair value of each option granted
under the Directors Plan during the years ended March 31, 2000, 1999 and 1998
was $0, $1.80 and $2.38, respectively.
27
<PAGE>
Common Stock Reserved
The number of shares of common stock reserved for issuance pursuant to the
Company's stock option plans and outstanding common stock warrants at March 31,
2000 and 1999 is summarized as follows:
2000 1999
--------- ---------
Stock Option Plans 2,636,972 1,807,734
Redeemable Warrants -- 603,750
Underwriter Warrants 105,000 105,000
Stockholder Rights Plan
The Company adopted a Stockholder Rights Plan and granted common stock
purchase rights as a dividend at the rate of one right ("Right") for each share
of outstanding common stock of the Company held of record as of the close of
business on May 11, 1999. When the Rights become exercisable, the holders
thereof will be entitled to purchase, for an amount equal to $10 per Right (the
"Purchase Price," which is subject to adjustment) common stock of the Company
with a fair market value equal to two times such amount. Subject to certain
exceptions, if certain persons or entities (an "Acquirer"), as defined in the
Stockholder Rights Agreement between the Company and its transfer agent, become
the beneficial owners of 10% or more of the common stock of the Company or
announce a tender or exchange offer which would result in its ownership of 10%
or more of the common stock of the Company, the Rights, unless redeemed by the
Company, become exercisable ten (10) days after a public announcement that an
Acquirer has become such. If, following the Rights becoming exercisable, the
Company is acquired in a merger or similar transaction, or if 50% or more of the
Company's assets or earning power are sold in one or more related transactions,
the holders of the Rights would be entitled to purchase, upon exercise, common
stock of the acquiring company with a fair market value of two times the
Purchase Price. The Rights may be redeemed at any time until ten days following
a public announcement that an Acquirer has become such at $.001 per Right upon a
vote therefore by a majority of the outside directors. Presently, the Rights are
not exercisable nor are they separately traded from the Company's common stock.
The Rights expire on May 11, 2009.
28
<PAGE>
NOTE 11 - INCOME TAXES
Income tax expense for the years ended March 31, 2000, 1999 and 1998 is
comprised of the following:
2000 1999 1998
------- ------- -------
Current tax expense (benefit):
Federal $ 67 $ (422) $ 624
State (28) 72 21
------- ------- -------
39 (350) 645
------- ------- -------
Deferred tax expense (benefit):
Federal 2,894 550 124
State 353 13 84
------- ------- -------
3,247 563 208
------- ------- -------
Net tax expense $ 3,286 $ 213 $ 853
======= ======= =======
During the year ended March 31, 2000, the Company recorded a valuation
allowance equal to the entire deferred tax asset balance because the Company's
financial condition gives rise to an uncertainty as to whether the deferred tax
asset is realizable. The increase in the valuation allowance during the year
ended March 31, 2000 was $6,193. There was no increase or decrease to the
valuation allowance for the years ended March 31, 1999 and 1998.
Deferred tax assets and liabilities as of March 31, 2000 and March 31,
1999 are comprised of the following:
2000 1999
------- -------
Deferred tax assets:
Accounts and notes receivable reserves $ 691 $ 845
Inventory and inventory reserves 760 723
Warranty and other accruals 621 847
Other assets and liabilities (14) --
State taxes 187 --
Tax credit carryforwards 1,442 1,213
Net operating loss carryforwards 6,236 3,729
------- -------
9,923 7,357
------- -------
Deferred tax liabilities:
Property, plant and equipment 6 75
Intangible and other assets 1,395 1,675
State taxes -- 85
------- -------
1,401 1,835
------- -------
Excess of deferred tax assets over
deferred tax liabilities 8,522 5,522
Less valuation allowance (8,522) (2,359)
------- -------
Net deferred tax asset -- 3,163
Less current deferred tax asset -- (2,215)
------- -------
Non-current deferred tax asset $ -- $ 948
======= =======
29
<PAGE>
At March 31, 2000, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $16,789 and
$15,705 respectively, which expire from 2001 through 2015. In addition, the
Company has available approximately $1,442 in research and other tax credit
carryforwards, which expire from 2001 through 2015.
The utilization of certain net operating loss carryforwards for federal
income tax purposes is subject to an annual limitation of approximately $200 as
a result of a previous change in ownership of TSG. In addition, these pre-change
losses may only be utilized to the extent that taxable income is generated by
TSG. These limitations do not reduce the total amount of net operating losses
that may be taken for federal income tax purposes, but rather substantially
limit the amount that may be used during a particular year. As a result, it is
more likely than not that the Company will be unable to use a significant
portion of these net operating loss carryforwards. The valuation allowance of
$2,215 at March 31, 1999 relates to these carryforwards.
The reconciliation of income tax attributable to income before taxes for
the years ended March 31, 2000, 1999 and 1998 computed at the U.S. statutory tax
rate to the Company's effective tax rate is as follows:
2000 1999 1998
------ ------ ------
U.S. statutory rate (34)% 34.0% 34.0%
Increases (decreases) resulting from:
State taxes, net of federal benefit -- 10.5 2.7
Business credits 2.9 (71.6) (7.4)
Amortization of goodwill (8.7) 40.8 2.5
Stock option compensation -- 6.6 --
Expired net operating losses -- 7.8 --
Change in valuation allowance 84.5 -- --
Other (3.1) 8.9 .9
---- ---- ----
Effective rate 41.6% 37.0% 32.7%
==== ==== ====
NOTE 12 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION
The Company has two business segments, the public payphone market segment
and the public Internet appliance market segment, which is in the development
stage. The Company has not generated any significant revenues from the public
Internet appliance market segment as of March 31, 2000. The Company's customers
include private payphone operators and telephone companies in the United States
and certain foreign countries and its distributors. During the year ended March
31, 2000, the Company modified the way it analyzes its business. Previously, the
Company analyzed its business based on three customer groups consisting of
domestic telephone companies, domestic private payphone operators and
international customers. Because of the development of its Internet business,
the Company now analyzes its business based on two segments, the payphone market
segment and the Internet appliance market segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies set forth in Note 1. The Company
evaluates segment performance based on gross profit and its overall performance
based on profit or loss from operations before income taxes.
30
<PAGE>
The products and services provided by each of the reportable segments
are similar in nature, particularly with regard to public telecommunications
terminals and related services. However, the public terminals provided by the
Internet appliance segment provide the capability to access internet-based
content in addition to their public telecommunications capability and the
services of this segment include the management of content delivered to the
interactive terminals. There are no transactions between the reportable
segments. External customers account for all sales revenue of each reportable
segment. 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
years ended March 31, 2000, 1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ------------------------ ------------------------
Sales Gross Profit Sales Gross Profit Sales Gross Profit
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Payphone segment $ 47,217 $ 16,091 $ 65,263 $ 24,607 $ 46,250 $ 19,869
Internet appliance
segment 78 19 -- -- -- --
-------- -------- -------- -------- -------- --------
$ 47,295 $ 16,110 $ 65,263 $ 24,607 $ 46,250 $ 19,869
======== ======== ======== ======== ======== ========
</TABLE>
The sales revenue of each reportable segment by customer group for the
years ended March 31, 2000, 1999 and 1998 is summarized as follows:
2000 1999 1998
------- ------- -------
Payphone segment:
Private operators $10,366 $20,081 $18,684
Telephone companies 27,209 32,507 15,999
Distributors 3,360 4,995 2,368
International operators 6,282 7,680 9,199
Internet appliance segment:
International operators 78 -- --
------- ------- -------
$47,295 $65,263 $46,250
======= ======= =======
The Company does not allocate assets or other corporate expenses to
reportable segments. A reconciliation of segment gross profit information to the
Company's financial statements is as follows:
2000 1999 1998
-------- -------- --------
Total gross profit of reportable segments $ 16,110 $ 24,607 $ 19,869
Unallocated cost of sales (3,995) (2,979) (2,264)
Unallocated corporate expenses (20,017) (21,054) (14,995)
-------- -------- --------
(Loss) income before income taxes $ (7,902) $ 574 $ 2,610
======== ======== ========
31
<PAGE>
Information with respect to sales of products and services of the
Company's reportable segments during the years ended March 31, 2000, 1999 and
1998 is set forth below:
2000 1999 1998
------- ------- -------
Payphone segment:
Payphone terminals $12,896 $23,758 $22,920
Printed circuit board control modules and kits 15,056 18,790 10,436
Components, assemblies and other products 5,804 12,200 10,070
Repair, refurbishment and upgrade services 12,363 9,895 2,285
Other services 1,098 620 539
Internet appliance segment:
Internet appliance terminals 78 -- --
------- ------- -------
$47,295 $65,263 $46,250
======= ======= =======
The Company markets its products and services in the United States and in
certain foreign countries. The Company's international payphone business
consists of export sales, and the Company does not presently have any foreign
operations. Sales by geographic region for the years ended March 31, 2000, 1999
and 1998 were as follows:
2000 1999 1998
------- ------- -------
United States $40,935 $57,583 $37,051
Canada 2,851 3,197 2,012
Latin America 3,023 3,943 6,168
Europe, Middle East and Africa 410 41 195
Asia Pacific 76 499 824
------- ------- -------
$47,295 $65,263 $46,250
======= ======= =======
During the years ended March 31, 2000 and 1999, one customer accounted for
39% and 20%, respectively, of the Company's sales. During the year ended March
31, 1998, no single customer accounted for 10% or more of the Company's sales.
Ten domestic customers and five international customers account for $4,735 (62%)
and $1,826 (24%), respectively, of the Company's accounts receivable at March
31, 2000. The domestic customers primarily include telephone companies and
distributors. The international customers include cellular carriers and private
operators in Canada, Puerto Rico, Guatemala and Ecuador. Five domestic customers
and three international customers account for (net of specific allowances for
credit losses) $479 (21%) and $1,276 (57%) respectively, of the Company's notes
receivable at March 31, 2000. The domestic customers include private operators
and the international customers include a telephone company and private
operators in Mexico and the Philippines.
NOTE 13 - SAVINGS PLAN
The Company has a savings plan pursuant to Section 401(k) of the Internal
Revenue Code, whereby eligible employees may voluntarily contribute a percentage
of their compensation, but not in excess of the maximum allowed under the Code.
The TSG 401(k) retirement and profit sharing plan was merged into the Company's
savings plan on January 1, 1999, and the Company's plan was amended to include
provisions at least as favorable as those of the TSG plan. The Company matches
up to 50% of the participants' contributions, up to an additional 2% of the
participants' compensation. Participants are 100% vested with respect to their
contributions to the plan. Vesting in Company matching contributions
32
<PAGE>
begins at 20% after one year of service with the Company and increases annually
each year thereafter until full (100%) vesting upon five years of service. The
plan pays retirement benefits based on the participant's vested account balance.
Benefit distributions are generally available upon a participant's death,
disability or retirement. Participants generally qualify to receive retirement
benefits upon reaching the age of 65. Early retirees generally qualify for
benefits provided they have reached age 55 and have completed 5 years of service
with the Company. Benefits are payable in lump sums equal to 100% of the
participant's account balance. Plan expense approximated $189, $151 and $114,
respectively, for the years ended March 31, 2000, 1999 and 1998.
NOTE 14 - OTHER CHARGES (CREDITS)
Other charges (credits) for the year ended March 31, 2000 consist of the
restructuring charges discussed in Note 8.
During the year ended March 31, 1999, the Company was involved in
negotiations concerning a possible business combination with an international
telecommunications equipment manufacturer. During April 1999, the Company
decided that the terms and conditions of the business combination as then
proposed would not be, at that time, in the best long-term interests of the
Company's stockholders, and terminated the negotiations. In connection
therewith, the Company charged to operations approximately $1.2 million of
expenses, consisting primarily of legal, accounting and consulting fees and
expenses incurred by the Company during the negotiations and in connection with
due diligence investigations. This charge, together with charges of $490 related
to the reorganization discussed in Note 8 and other miscellaneous charges of
$42, are reflected as other charges (credits) in the accompanying consolidated
statement of operations and other comprehensive income (loss) for the year ended
March 31, 1999.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant in a punitive class action alleging that 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 that customer by operating a Ponzi scheme.
Allegations include unlawful business practices, fraudulent and unfair business
practices, false and misleading advertising, fraud and deceit, conspiracy to
defraud, negligence and negligent misrepresentation, violations of California
law, professional negligence and legal malpractice and spoliation of evidence.
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. On June 8, 2000, the Court of Appeal, Fourth
Appellate District, Division One of the State of California affirmed the Summary
Judgment entered by the Superior Court of San Diego County in favor of the
Company.
While the Company is subject to various other legal proceedings incidental
to its business, there are no such pending legal proceedings, which are believed
to be material to the business of the Company.
33
<PAGE>
Operating Leases
Minimum future rental payments at March 31, 2000 under non-cancelable
operating leases with an initial term of more than one year are summarized as
follows:
Fiscal 2001 $266
Fiscal 2002 161
Fiscal 2003 123
Fiscal 2004 112
Fiscal 2005 66
----
$728
====
Rent expense for the years ended March 31, 2000, 1999 and 1998
approximated $399, $421 and $253, respectively.
Royalty and Technology Transfer Fee Agreements
Pursuant to the terms of patent license and technology transfer agreements
entered into in connection with the acquisition of the Lucent assets, the
Company agreed to pay royalties and fees with respect to sales of acquired
products. In addition, during the year ended March 31, 2000, the Company entered
into various other license agreements regarding technology used its Internet
appliance products. Royalties and fees under these agreements during the fiscal
years ended March 31, 2000, 1999 and 1998 approximated $318, $220 and $86,
respectively.
Employment Contracts
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. 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.
Pursuant to the terms of the agreement, the Company granted options under the
1999 Plan to purchase 539,988 shares of the Company's common stock at an
exercise price of $1.67 per share (see Note 10).
In addition, the Company has entered into employment agreements with
certain of its other officers that continue in effect until either party to the
agreement terminates the agreement with at least 60 days prior written notice,
subject to certain earlier termination provisions. Pursuant to the agreements,
the officers are entitled to minimum compensation aggregating $380 annually. In
addition, if these agreements are terminated by the Company without cause, the
officers are entitled to receive the amount of compensation and benefits they
would otherwise have received for a period of six months from the date of
termination and thereafter until they locate employment comparable to their
employment at the date of termination but not for a period longer than twelve
months from the date of termination of employment.
34
<PAGE>
NOTE 16 - LIQUIDITY
During the year ended March 31, 2000, the Company reported a net loss of
$11,188. Although sales and revenues from the Company's core payphone business
began to decline in the previous year, the Company believed that the decline
would stabilize. However, based on reduced sales and revenues for the year ended
March 31, 2000, non-recurring charges related to an aborted business combination
during the year ended March 31, 1999 and significant investments in the
development of the Company's Internet terminal appliances and back office
software systems, the Company breached one of the financial covenants contained
in the loan agreements between the Company and its bank, as further described in
Note 7. As a result of the covenant default, the bank stopped advancing funds to
the Company under the revolving credit lines provided under the loan agreements,
and had the right to accelerate the maturity of outstanding indebtedness under
the loan agreements. On April 12, 2000, the Company entered into the Forbearance
Agreement pursuant to which the maturity date of indebtedness outstanding under
the loan agreements was changed to July 31, 2000.
The Company will not be able to pay its outstanding bank indebtedness
on July 31, 2000 unless it is able to raise additional capital and/or
restructure the bank indebtedness, and may not be able to remain in compliance
with the terms of the Forbearance Agreement until July 31, 2000. As a result,
the Company is attempting to secure an asset-based financing arrangement and
raise additional equity capital and/or other sources of funding through a
private placement of securities.
The Company believes that its efforts to raise additional capital and/or
other funding will be successful, and that it will be able to refinance and/or
restructure its outstanding bank indebtedness. If the Company is successful in
raising additional equity capital, the percentage ownership of the Company's
then current stockholders will be reduced and such reduction may be substantial.
However, there is no assurance that the Company's efforts will be successful, or
if successful, that such financing would not be on onerous terms. If the
Company's efforts to raise additional equity capital and/or other funding and
refinance and/or restructure its bank debt are not successful, the Company could
experience difficulties meeting its obligations and it may be unable to continue
normal operations, except to the extent permitted by its bank.
Cash flows from operations will not be adequate to fund the Company's
obligations and operations for the next twelve months without raising additional
capital. The Company may require additional funds during or after such period in
addition to that currently sought. Additional financing may not be available
except on onerous terms, or at all. If the Company cannot raise adequate funds,
if and when necessary, to satisfy its capital requirements, it may have to limit
its operations significantly, which would adversely affect its prospects. The
Company's future capital requirements depend upon many factors, including, but
not limited to, the level of sales and revenues of its payphone business,
success of its Internet appliance business, the extent to which it develops and
upgrades its network, the extent to which it expands its content solutions and
delivery capabilities and the rate at which it expands its sales and marketing
operations.
35
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report.
(1) Financial Statements - See the index to the financial
statements in Item 8.
(2) Financial Statement Schedules - See the index to the financial
statement schedules in Item 8.
(3) Exhibits -
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation, as amended (incorporated by reference
to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999)
3.2 By-Laws, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
1992)
4.1 Form of Common Stock Certificate (incorporated by reference to
Registrant's Registration Statement on Form 8-A dated November 21,
1986)
4.2 Representative's Warrant Agreement between Technology Service Group,
Inc. and Brookehill Equities, Inc. dated May 10, 1996 (incorporated
by reference to Exhibit 4.3 to Registrant's Registration Statement
on Form S-4, File No. 333-38439)
4.3 Supplemental Warrant Agreement between the Registrant, Technology
Service Group, Inc. and Brookehill Equities, Inc. dated December 18,
1997 (incorporated by reference to Exhibit 4.4 to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1999)
4.4 Rights Agreement, dated as of May 10, 1999, between Registrant and
American Stock Transfer and Trust Company (incorporated by reference
to Exhibit 99.1 to Registrant's Form 8-K dated April 19, 1999)
10.1* 1991 Stock Option Plan, as amended (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999)
10.2* Directors Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999)
10.3* 1999 Stock Option Plan (incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999)
36
<PAGE>
10.4* 1994 Omnibus Stock Plan of Technology Service Group, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998)
10.5 Restated Loan Agreement between Registrant and NationsBank, N.A.
dated November 25, 1997 (incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997)
10.6 First Amendment to Loan and Security Agreement between Registrant
and NationsBank, N.A. dated March 29, 1999 (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K
for the year ended March 31, 1999)
10.7 Promissory Note between Registrant and NationsBank, N.A. dated March
29, 1999 (incorporated by reference to Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1999)
10.8 First Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (incorporated by reference to
Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year
ended March 31, 1999)
10.9 Second Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (incorporated by reference to
Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year
ended March 31, 1999)
10.10 Mortgage Modification and Future Advance Agreement between
Registrant and NationsBank, N.A. November 26, 1997 (incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997)
10.11 Business Loan Agreement between Elcotel, Inc. and NationsBank, N.A.
dated June 29, 1999 (incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999) Commercial Security Agreement between Elcotel, Inc.
and NationsBank, N.A. dated June 29, 1999 10.12 (incorporated by
reference to Exhibit 10.4 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.13 Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated
June 29, 1999 (incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.14 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement between Elcotel, Inc. and NationsBank,
N.A. dated June 29, 1999 (incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.15 Forbearance and Modification Agreement between Elcotel, Inc. and
Bank of America, N.A. dated April 12, 2000 (incorporated by
reference to Exhibit 10.15 to Registrant's Annual Report on Form
10-K for the Year Ended March 31, 2000)
10.16 Mortgage and Security Agreement between Elcotel, Inc. and Bank of
America, N.A. dated April 12, 2000 (incorporated by reference to
Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the
Year Ended March 31, 2000)
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10.17 Mortgage Modification Agreement between Elcotel, Inc. and Bank of
America, N.A. dated April 12, 2000 (incorporated by reference to
Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the
Year Ended March 31, 2000)
10.18* Employment Agreement between Elcotel, Inc. and Michael J. Boyle
dated October 15, 1999 (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.19* Retirement Agreement between Elcotel, Inc. and Tracey L. Gray dated
June 11, 1999 (incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.20* Employment Agreement between Elcotel, Inc. and C. Shelton James
dated June 10, 1999 (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.21* Employment Agreement between Elcotel, Inc. and David F. Hemmings
dated December 10, 1998 (incorporated by reference to Exhibit 10.3
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.22* Employment Agreement between Elcotel, Inc. and William H. Thompson
dated December 10, 1998 (incorporated by reference to Exhibit 10.4
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.23* Employment Agreement between Elcotel, Inc. and Kenneth W. Noack
dated December 10, 1998 (incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.24* Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla
dated December 10, 1998 (incorporated by reference to Exhibit 10.9
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.25* Employment Termination Agreement between Elcotel, Inc. and Eduardo
Gandarilla effective April 2, 2000 (filed herewith)
10.26 Technology and Transfer Agreement between Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by
reference to Exhibit 2.2 to Registrant's Form 8-K dated September
30, 1997)
10.27 Patent License Agreement between Registrant and Lucent Technologies
Inc. dated September 30, 1997 (incorporated by reference to Exhibit
2.3 to Registrant's Form 8-K dated September 30, 1997)
10.28 Stockholders' Agreement (incorporated by reference to Exhibit 2.3 to
Registrant's Registration Statement on Form S-4, File No. 333-38439)
38
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21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to Registrant's Annual Report on Form 10-K for the Year Ended
March 31, 2000)
23.1 Independent Auditor's Consent (filed herewith)
27 Financial Data Schedule (incorporated by reference to Exhibit 27 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
2000)
* Management compensation agreements and plans.
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the fourth
quarter of the year ended March 31, 2000.
39
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized, on the 31st day of August 2000.
ELCOTEL, INC.
By: /s/ William H. Thompson
--------------------------------------
William H. Thompson
Senior Vice President,
Chief Financial Officer,
Secretary (principal financial
officer)
40
