UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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
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ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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
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PART I
Item 1. THE COMPANY'S BUSINESS
The following description of the Company's business contains forward looking
information regarding its financial position, business strategy, plans,
projections and future performance based on the beliefs, expectations,
estimates, intentions or anticipations of management as well as assumptions made
by and information currently available to management. Such information reflects
the Company's current view with respect to future events and is subject to risks
and uncertainties related to various factors that could cause its actual results
to differ materially from those expected, including competitive factors,
customer relations, the risk of obsolescence of its products, relationships with
suppliers, the risk of adverse regulatory action affecting its business or the
business of its customers, changes in the international business climate,
product introduction and market acceptance, general economic conditions,
seasonality, changes in industry practices, the outcome of litigation to which
it is a party, and other uncertainties detailed herein and in the Company's
other filings with the Securities and Exchange Commission.
Overview of the Company
Elcotel, Inc. and its subsidiaries, which are referred to herein as the
Company, we, us or our, was incorporated in 1985 to design, develop, manufacture
and market microprocessor-based "smart" payphone electronics with embedded
operating software and back office payphone management software systems with
features and functions required for independent providers to compete with the
Regional Bell Telephone Operating Companies ("RBOCs") in the provision of
payphone terminals and related public telephone services. We have since expanded
our payphone business through internal development and through acquisitions to
supply payphone terminals that operate in wireless and wireline
telecommunications networks, and to supply payphone terminals, smart payphone
electronics, management software systems and other products and services to the
RBOCs, interexchange carriers (IXCs) and other domestic and foreign public
communications providers. In addition, we have developed what we believe to be
the first non-PC Internet appliances (the "Grapevine(TM) terminals") for use in
a public communications environment, which will enable the on-the-go user to
gain access to internet-based content through our client-server network
supported by the e-Prism(TM) back office software system. Our Grapevine
terminals, supported by the e-Prism system, were designed to provide the
features of the traditional smart payphone terminal, to provide internet-based
content, to support e-mail and e-commerce services, and to generate revenues
from display advertising, sponsored content and other applications and services
in addition to traditional revenues from public payphones. The e-Prism software
was designed to manage and deliver display advertising content, internet-based
content and personalized services to the Grapevine terminals. Our Internet
appliance business is presently in the development stage and to date has not
generated any significant revenues.
The Domestic Public Communications Industry
We market our products and services to the public communications or
"payphone" industry. Public telecommunications services in the United States are
provided by regulated telephone companies (or "local exchange carriers") which
include GTE and the RBOCs; long distance carriers ("IXCs"), such as AT&T;
independent payphone service providers; and competitive local exchange carriers
("CLECs"), all of which are collectively referred to herein as Payphone Service
Providers ("PSPs"). The operations of regulated telephone companies, long
distance carriers and CLECs (collectively referred to herein as "telephone
companies") are subject to extensive regulation by the Federal Communications
Commission ("FCC") and state regulatory agencies (see "Government Regulation and
the Telecommunications Act," below). Virtually all services offered by telephone
companies, including payphone services, are provided
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in accordance with tariffs filed with appropriate regulatory agencies, including
the FCC. Independent payphone service providers are subject to regulations of
state regulatory agencies.
The Telecommunications Act of 1996 (the "Telecommunications Act" or the
"Act"), the most comprehensive reform of communications law since the enactment
of the Communications Act of 1934, eliminated long-standing legal barriers
separating local exchange carriers, long distance carriers, and cable television
companies and preempted conflicting state laws in an effort to foster greater
competition in all telecommunications market sectors, improve the quality of
services, and lower prices. In addition the Act included specific provisions
relating to the payphone operations of telephone companies and the payment of
compensation by long distance carriers to other PSPs for toll free (800, 877 and
888) calls and access code ("10xxx") calls (collectively "dial-around" calls)
made from payphones to the networks of the long distance carriers. See
"Government Regulation and the Telecommunications Act," below.
As a result of the regulatory changes created by the Act and regulations
adopted by the FCC to implement its provisions and competition from cellular and
other wireless forms of communication, we believe that the public communications
industry is undergoing fundamental changes. The rapid growth in cellular and
wireless telephone usage has resulted in declining payphone usage and revenues.
In addition, the growth in dial-around calls from payphones has further
compressed payphone revenues. The RBOCs, which control a major share of the
payphone market, are no longer permitted to subsidize losses generated by their
public communications businesses with profits from their regulated businesses.
As a result of these market factors, the PSPs are eliminating marginal payphone
sites, building inventories of payphone equipment, using these inventories to
maintain their installed base, and curtailing new equipment purchases and
programs to upgrade the installed base while repairing and refurbishing existing
equipment. In addition, there have been widespread consolidations in the
telecommunications industry. These consolidations have also resulted in a
decline in the number of installed payphone terminals and in the number of PSPs.
Further, coin collection expense is growing while coin revenue is declining,
further compressing profit margins of PSPs. The embedded base of payphones in
the United States has contracted from an estimated 2.4 million terminals in
operation in 1998 to an estimated 2 million terminals today and is expected to
contract further beyond 2000. These industry conditions are adversely affecting
the business of the PSPs as well as the suppliers of products and services to
the PSPs, including us.
We believe that six PSPs control approximately 80% of the payphone
terminals in service in the United States. These PSPs, which include SBC
Communications, Inc. ("SBC") (which acquired Pacific Telesis, Inc. and
Ameritech, Inc.), Bell Atlantic, Inc. (which acquired NYNEX and is acquiring
GTE), BellSouth Corporation, US West, AT&T and Davel Communications, Inc., are
reevaluating their business strategies, considering divestitures of all or a
portion of their installed base and are also seeking new service solutions and
revenue sources, such as advertising, e-mail and content, to combat competition
from cellular and other wireless forms of communication and stimulate usage of
public terminals.
The Internet and Public Access Interactive Media Market
The explosive growth of the Internet, which is revolutionizing how, when,
where and why people communicate is beginning to impact the public
communications industry. Consumers now have easy access to news, information and
services of value to them through some personalized service, such as the Yahoo!
Inc. connectivity portal. As a result, telecommunications today is about
personal connectivity on a twenty-four hour basis seven days a week. Consumers
increasingly demand access to "content" anytime, anywhere, not just the voice
communications provided by wireline or wireless phones. Content equals
information, ranging from voice calls to local news, local hotels and
transportation, mapped directions, weather forecasts and investment updates to
e-commerce transactions and e-mail.
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For consumers on-the-go, however, the technology to deliver this content
connectivity on a twenty-four hour basis seven days a week is still largely
bound to the home or office. Today, fifty or more companies have introduced
Internet kiosks in order to stimulate industry demand and generate new revenue
streams for PSPs. These kiosks, at which educated consumers can surf the web in
a public access environment at their leisure, are built upon a "top down"
technology consisting of hardware and software containing all of the features
and functionality of a personal computer ("PC"). The consumer must figure out
how and what information and content to access from the Internet. Also, we
believe that Internet kiosks are intimidating, cumbersome, and difficult and
expensive to deploy. Consequently, we do not believe these kiosks effectively
respond to the emerging need of the "on-the-go" consumer for easy, simple and
widespread public access content connectivity. Further, these Internet kiosks
are not physically configured so that they can serve as a replacement for the
hundreds of thousands of payphones located in suitable sites. As a result, we
believe that only about 20,000 Internet kiosks have been sold worldwide through
the end of 1999.
The Internet is an increasingly significant global mass medium for
conducting business, collecting and exchanging information, facilitating
communication and providing entertainment. International Data Corporation
estimates that the number of Internet users worldwide will grow from
approximately 142 million users at the end of 1998 to 502 million by the end of
2003. We expect the growth in Internet usage to translate into growth in demand
for devices to access Internet-based content. Also, we believe that the emerging
non-PC Internet appliance market is growing rapidly and gaining focus with
consumers, especially business travelers. It is estimated that the non-PC
Internet appliance market, which includes the Palm Pilot, Casio Casiopia and
Compaq and other thin client based technology devices, totaled $3.5 billion in
1999, will grow at a compound annual growth rate of 36 percent to $16.2 billion
by 2004 and will exceed the PC market within five years.
Travel is part of the American psyche. Technology and infrastructure
improvements have created travel products that are easy to use and affordable.
It is estimated that the total person-trips made in 1998 were 1.3 billion. So
the potential for out-of-home, electronic interactive advertising, e-mail and
Internet-based content delivery is substantial. Advertisers and businesses now
view the Internet as a new medium that effectively targets consumers, enables
instantaneous transactions and offers new, easily updateable services that
stimulate sales. Content-based, transaction-oriented Internet advertising is
expected to increase in the coming years. In the third quarter of 1999, the
Internet Advertising Bureau recorded web-advertising revenue of $1.2 billion,
three times greater than in the third quarter of the previous year. On an annual
basis, Internet advertising revenues are expected to exceed $4 billion for 1999.
A recent report from Forrester Research, Inc. estimates that content advertising
will account for $22 billion, or about 8 percent of all U.S. advertising
spending by the year 2004 and grow to $50 billion in 2005. That would make
content advertising the fourth highest spending category behind television,
newspapers and direct mail.
The public access interactive media market is a hybrid of the out-of-home
media market (which includes local promotions) and interactive media market that
targets consumers personally. We believe that the current public access
interactive media market has been limited to a small number of niche product
providers primarily offering Internet kiosk-type workstations. We also believe
that out-of-home media advertisers are searching for new ways to improve the
value of their advertising, and that solutions that offer interactivity, the
ability to place an order and track consumer response command a premium. In
addition, we believe that targeting specific demographics with local advertising
and information is more valuable than mass media, banner advertising.
The interactivity, reporting and ability to generate immediate demand from
the Grapevine terminals are similar to Internet offers in the home or office. On
the Internet, as in traditional media, there are two widely recognized types of
advertising - brand advertising and response-oriented advertising.
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Brand advertising is intended to generate awareness of and create a specific
image for a particular company, product or service. In contrast,
response-oriented advertising, or direct marketing, is intended to generate a
specific response or action from the consumer after exposure to an
advertisement. Response-oriented advertisers focus on the short-term benefit of
advertising and seek to maximize the number of desired responses per advertising
dollar.
Our Domestic Market Strategy
Over the past 100 years, the public telecommunications industry, more
commonly known as the "payphone industry", has made "on-the-go" communications
possible for millions of people daily. A decade ago, the payphone was the only
way most people on the go kept connected to home or office. Although payphone
usage and revenues have declined with the growth of wireless services, payphones
still command the preferred communications site locations, particularly in high
profile, high traffic locations, such as airports, malls and convention centers.
We plan to continue to provide smart payphone electronics, replacement
components and repair and refurbishment services to PSPs and maximize the
performance of our payphone business while the installed base of traditional
payphones and payphone usage revenues contract and enter into customer/partner
relationships with the PSPs to deploy our Grapevine non-PC Internet terminal
appliances in high profile, high traffic locations. We also plan to develop our
Internet-based content, information and consumer services business to provide a
content-driven personal communications portal in a public access environment. We
believe that the successful implementation of our Internet business strategy
will enable PSPs to generate display advertising revenues from targeted
demographic specific advertisements, revenues from sponsored-paid content banner
advertisements and other sources of service revenues that are two to four times
greater than the revenues generated from traditional payphones. With this
strategy, we believe that the public communications payphone industry and our
$100 million to $200 million-estimated payphone equipment market can now expand
to encompass the $3 billion Internet and interactive media market.
In our Internet appliance business, we intend to manage and deliver
specialized and personalized services to consumers in a public environment
through our Grapevine terminals. We are focusing on real-world content, such as
directories, classified advertisements, e-mail, real-time stock quotes and
sports results, weather forecasts, horoscopes, maps, and information on local
hotels, restaurants, transportation and events. We believe that combining
reformatted Internet-based content from information aggregators integrated with
related content using our proprietary technology and service delivery
capabilities will increase the convenience, relevance and enjoyment of
consumers' visits to our Grapevine terminals, thereby promoting increased
traffic and repeat usage. We also believe that increased traffic and usage will
enhance the value of advertising and other services provided through the
Grapevine terminal network.
We intend to deliver and support the sending and receiving of emails with
our Grapevine terminals in various forms, visually on the display, audibly
through the handset using voice attachments (send) and text-to-speech (receive),
to or from personal digital assistants ("PDAs") or wireless phones through an
infra-red data ("IrDA") port, and to or from a PC. We also intend to support
directory and information transfers from any of our Grapevine terminals to PDAs
used by the traveling public.
The cornerstone of our content solution is the distribution of content to
consumers in airport concourses and airline lounges, convention centers,
shopping malls, hotel lounges and suites, gas stations, factories and fast food
chains. This distribution would be provided from the same sites that now host
payphones. Using our proprietary technology, we intend to integrate real-world
content for consumers to easily and rapidly access for their immediate needs
without having to surf the Internet or hook up their PC. In a business model,
which assumes that consumers have less than 20 minutes to make, collect, store
or use updated information from e-mails, and to make phone calls, Grapevine
terminals would help
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consumers in public areas find interesting personalized and generic information
easily. As examples, the Grapevine terminals are designed to offer immediate
delivery of e-mail, personal speed-dial numbers or e-mail addresses with
automated access allowing consumers to complete a transaction while on-the-go.
We have designed our Grapevine terminals, content and telephone services
to be highly flexible and customizable, enabling our customers/partners to offer
a broad range of feature options. We believe that our approach of integrating
off-the-shelf technology with our internally developed technology enables us to
employ a scalable architecture adapted specifically for our Internet-based
delivery of services. We can maintain the same look and feel and navigation
features across a broad geographical deployment base of Grapevine terminals, but
create the impression to consumers that each customer/partner has its own
branded and packaged information offering. Our back-office management systems
have been designed to include the capability to manage both the content-rich
multimedia Grapevine terminals and the existing embedded bases of payphones for
the same customer/partner. By leveraging off the shelf technology, we believe we
will be able to focus on management and distribution of content and back office
services to consumers in a public access environment.
Our revenues in this Internet service business may include a percentage of
the total revenues generated from advertising, sponsorships, promotions, and
electronic commerce transactions from the Grapevine terminals; sale of Grapevine
terminals to our customers/partners; management fees from collecting, analyzing,
and reporting on phone performance data; managing delivery of advertising,
sponsorships, information and promotions, which are site, terminal and
time-of-day specific; personalization of enhanced information and e-mail;
customization fees for formatting advertising, sponsorships and promotions for
the Grapevine terminal network; and management fees from collecting, analyzing,
and reporting on performance data for embedded bases of traditional payphones.
Through the combined sales forces of our customers/partners, information
aggregators, and our content creation group, we plan to offer a variety of
national and local advertising, sponsorships and promotions that enable
advertisers to access both broad and targeted audiences. We believe that our
planned interactive information delivery and personalization capabilities and
e-mail delivery methods will have an important impact on the level of revenues
derived by our customers/partners. We believe that these capabilities and
relationships will provide us with a distinct advantage over competitors while
minimizing our own sales infrastructure investment. We believe that our reach
and message to advertisers in terms of targeting, sensory intensity and
interactivity will be unmatched in a public communications environment. However,
there can be no assurance that we will be able to implement our domestic market
strategy in whole or in part.
The International Public Communications Industry
Public communications services in foreign countries are generally provided
by large government-controlled postal, telephone and telegraph companies
("PTTs"), former PTTs that have been privatized for the purpose of investing in
and expanding telecommunication networks and services, and cellular/wireless
carriers. The Company believes that a trend toward privatization and
liberalization of the international telecommunications industry is opening the
international markets, previously dominated by monopoly and government
infrastructure, to increased competition.
We believe that there are several million payphones internationally in the
installed base. However, the density of payphone installations in many foreign
countries on a per capita basis is far less than that in the United States. The
Company believes that many of these countries are seeking to expand and upgrade
their telecommunications systems and are funding programs to provide
communication services to the public. The Company believes that the
international public communications industry, particularly in underdeveloped
nations, will continue to evolve and be a significant growth industry over
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the next several decades to the extent that privatization and the investment in
both wireline and wireless networks progresses.
Our International Business Strategy
We focus on foreign markets undergoing deregulation including Canada,
South America, Central America, Africa and the Far East and on providers of
public communications services that are affiliated with or owned by the RBOCs
and those licensed to compete against the PTTs. Our strategy is to provide
competitive wireless and coin operated payphone terminals to foreign markets
with underdeveloped telecommunications networks, and to provide high profile
card/coin operated payphone terminals to developed markets such as Canada. Our
strategy provides for the integration of cellular and other wireless radio
technologies into our domestic payphone products for niche applications and to
reduce the cost of payphone deployment in major metropolitan areas.
We are implementing our Grapevine Internet terminal strategy on a North
American basis and targeted the Canadian market for the first commercial
deployments of our Grapevine terminals. We intend to capitalize on what we
perceive to be significant opportunities in other international markets, but
only after we have penetrated the North American market. We expect to reduce the
costs and risks of international expansion by entering into strategic alliances
with partners able to provide local directory, content, information, e-mail and
electronic commerce, as well as major local sales forces and contacts.
Furthermore, we plan to use the Internet and our regional servers for
downloading content and uploading management data from/to our data center to
in-country locations outside North America. We have entered into discussions
with several large PSPs in Europe and South America to explore the prospects for
suitable business relationships. However, we do not anticipate operational
capability of our services outside of North America before calendar year 2001.
Notwithstanding, we are continuing to evaluate additional international
opportunities. The expansion into international markets involves a number of
risks as further described herein. Also, there can be no assurance that we will
be able to implement our international market strategy in whole or in part.
Products and Services of Our Payphone Business
We design, develop, manufacture and market a comprehensive line of public
communications products, including payphone electronics and management software
systems, payphone terminals, and payphone components and assemblies. Our
microprocessor-based payphone electronics, with embedded operating software,
serve as the engine of payphone terminals known in the industry as "smart" or
"intelligent" payphones. Networks of payphone terminals equipped with our
microprocessor-based electronics are programmed, monitored and controlled via
telemetry by our back office management software systems. Our electronic modules
provide the capability to communicate with a caller by digitized human voice
messages and prompts activated by the microprocessor, and have the capability to
internally process the functions associated with call processing, call rating
and collecting data for accounting, coin and route management functions. Call
timing and rating functions are performed via proprietary "answer detection" and
"answer supervision" designs. Our microprocessor-based electronic modules
include the Series 5(TM) module, the 5501(TM) module, the 5502(TM) module and
the Gemini System III(TM) module. The low electric current available from the
telephone line, which eliminates the cost of electrical installation, generally
powers these electronic modules and our payphone terminals.
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Our electronic modules together with our back office software management
systems offer standard features and options that provide, among others, the
ability to:
o Monitor and report coin box status;
o Monitor and report the service condition of the payphone via
maintenance and diagnostic alarms;
o Report, in real time, any critical conditions to the management
system;
o Record and store call records, including called numbers, types and
length of calls and call revenue;
o Retrieve programming information, call records, cash box status, and
maintenance and diagnostic data remotely;
o Program and monitor various options, rates, alarms and free phone
numbers on-site or remotely;
o Download voice prompts;
o Calculate time-of-day discounts and control other timed functions
via clock and calendar features; and
o Download revisions to the software operating system.
In addition, we provide software options including custom voice prompts,
multilingual voice prompts, customized maintenance alarms and call routing
features, programmable initial rates and timed local calls. We also support
multiple payment options, including coin, credit cards and smart cards. The
Series 5 module operates exclusively on a B-1 line and is marketed primarily to
independent payphone providers. The 5501 and 5502 modules operate on either a
B-1 line or a specialized coin line for access to central office services and
are marketed to private operators and telephone companies. The extensive
features of the 5502 module include a high-speed modem for faster data
transmission and retrieval, user selectable language, customized tariff tables
and speed dial programmability for ease of use and generation of additional
revenues. The 5502 module also supports a data port interface for access to the
Internet via laptop computers and liquid crystal and vacuum florescent displays
to augment audible voice instructions and to provide advertising capability. The
Gemini System III module is programmable to operate on either a B-1 line or on a
specialized coin line for access to central office services and is marketed
primarily to telephone companies. Its modular connector design allows the PSP to
choose the desired feature set, which reduces installation time. The Gemini
System III module also supports a data port interface for access to the Internet
via laptop computers and multiple payment options.
Our network management software systems are designed to manage and control
both small and large networks of payphone terminals equipped with our
microprocessor-based electronic modules. Our payphone management software
systems operate on personal computers in a multi-tasking environment, and
provide PSPs with the ability to manage and control all aspects of their
installed payphone network interactively from a single location. The Company's
management software systems provide PSPs with the ability to remotely configure
product features, control the download of software changes, program rate files,
monitor operating status, and to download coin box, call record, maintenance and
diagnostic data for accounting, coin and route management functions. The
Company's network management systems include the PNM Plus(TM) System, the
PollQuest(TM) System and the CoinNet(TM) System. The PNM Plus system is a
user-friendly Windows-based management system that is used to remotely program,
manage, and monitor payphone terminals equipped with our Series 5, 5501 or 5502
electronic modules. This software system has a built-in 24-hour monitoring
function that reports all pertinent phone activity, including call detail
records, maintenance reports and alarm reports. The monitoring and reporting
function can be configured to be completely hands-free and to perform late at
night, optimizing the busy-hour performance. The PollQuest system is a
Windows-based management system designed to remotely program, manage and monitor
our international payphone terminals generally equipped with our 5502 electronic
module. PollQuest has the ability to generate call detail and maintenance
reports, manage the communications
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with the payphones and generate performance-based reports. The CoinNet system is
a Unix or DOS-based management system that is used to remotely program, manage,
and monitor payphone terminals equipped with our Gemini System III electronic
modules. The CoinNet system provides call detail reports, maintenance and alarm
reports, and the customized operating characteristics of each Gemini System III
module.
Our product line also includes payphone terminals, non-programmable
electronic payphone modules which serve as the network interface in payphones
known in the industry as "dumb" payphones that require a coin line for access to
central office services for rating and routing of calls, replacement components
and assemblies, and a full offering of industry services including repair,
upgrade and refurbishment of equipment, operator services, customer training and
technical support.
Our payphone terminals consist of a wide range of models including
coin-operated payphones, payphones that accept smart cards and credit cards, and
multi-payment (coin and card) payphones for both domestic and international
applications, including cellular and other wireless applications. We offer
traditional GTE style and Western Electric or AT&T style payphones equipped with
our electronic modules, electronic coin mechanisms to support domestic and
foreign coins, displays to support multilingual messages in languages selected
by the customer, speed dial buttons and card readers. Our custom payphone
terminals include the following:
Eclipse(TM) and Komet(TM) Payphone Terminals. The Eclipse and Komet
payphone terminals are sophisticated, feature-rich GTE style and Western
style terminals, respectively, equipped with the 5502 electronic module.
The Eclipse and Komet payphone terminals include a data port interface for
access to the Internet via laptop computers and speed dial buttons, and
are configured for multiple payment options, including coin, credit cards
and smart cards. Their liquid crystal or optional vacuum florescent
displays augment audible voice instructions and provide advertising
capability. These products are marketed to both domestic telephone
companies and independent payphone service providers for installation in
high profile locations such as airports, hotels and convention centers.
The Eclipse payphone terminal is also offered in an international
configuration that accepts and stores larger coins.
IPT(TM) Payphone Terminal. The IPT payphone terminal is an international
GTE style terminal equipped with the 5502 electronic module. The terminal
is provided in either a coin configuration or a coin and card
configuration, includes a liquid crystal display to augment audible voice
instructions and to display remaining card value when applicable, and is
configured to accept and store larger international coins. This terminal
can also be configured with a backlit liquid crystal display with an
auxiliary power source.
Solarus(TM) Payphone Terminal. The Solarus payphone terminal is a custom
designed stainless steel international card-only terminal equipped with
the 5502 electronic module, and includes a liquid crystal display to
augment audible voice instructions and to display remaining card value.
This terminal can also be configured with programmable speed dial buttons
and a backlit liquid crystal display with an auxiliary power source. Our
cellular model of the Solarus payphone terminal operates in an AMPS
wireless environment.
Solarus II(TM) Payphone Terminal. The Solarus II payphone terminal is a
Western style network access terminal that integrates TDMA and CDMA
wireless technology serving as a fixed portal for prepaid, emergency and
free voice services.
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SolarusCity(TM) Payphone Terminal. The SolarusCity payphone terminal is a
Western style terminal equipped with a 5502 electronic module that
operates in a 900 MHz wireless environment. The 900 MHz base unit used
with the SolarusCity terminals is installed within 500 feet of the
terminal and provides connection to the existing wireline network. This
terminal powered by solar panels eliminates the need of wires to avoid the
high construction cost to install curbside phones in major metropolitan
areas.
We supply our microprocessor-based electronic modules and payphone
terminals to RBOCs and other telephone companies that are upgrading the
technology of their installed base of payphones and to independent payphone
service providers, distributors and resellers. In addition, the Company supplies
replacement components and assemblies that include, among others,
non-programmable payphone electronics, electronic coin mechanisms, card readers,
cash box switches, dial assemblies, handsets, coin relays, and volume
amplification assemblies.
We also offer comprehensive services to assist customers manage, maintain
and expand their installed payphone network. The Company provides repair
services, refurbishes and upgrades customer-owned terminals and components and
provides operator services, training, technical support and field engineering
services. Our refurbishing activities involve the rebuilding of payphone
terminals, components and assemblies to "like new" condition. Our upgrade
services include the modification of payphone terminals and assemblies to an
updated or enhanced technology.
Products and Services of Our Grapevine Internet Appliance Business
We have developed what we believe to be the first non-PC Internet terminal
appliances, the Grapevine(TM) terminals, for use in a public communications
environment, which were designed to enable the on-the-go user to gain access to
Internet-based content through our client-server network supported by the
e-Prism(TM) back office software system. Our Grapevine terminals, supported by
the e-Prism system, 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 payphone terminals. The e-Prism service bureau network was
designed to manage and deliver display advertising content, Internet-based
information and specialized and personalized services to the Grapevine
terminals. Our Internet appliance business is presently in the development stage
and to date has not generated any significant revenues.
Our Grapevine Internet Terminal Appliances. Our Grapevine Internet
terminal appliances are wired personal digital assistants (PDAs), which are
designed to carry out-of-home, electronic interactive content in public spaces.
Our Grapevine terminals use WinCE thin client technology, are managed by what we
believe to be unique back-office software systems, and are equipped with a
high-resolution, wide-angle active ("TFT") matrix color display for delivery of
display advertising, sponsored advertising and Internet-based content. Also, the
Grapevine terminals have an IrDA port to communicate e-mail and content to/from
hand-held PDAs, soft keys which are used to obtain information and content, a
card reader for both magnetic stripe and smart chip cards to offer loyalty and
personalized services, a data port to access the Internet with a PC, and a
handset with voice advertising to support free phone calls. The Grapevine
terminals are not Internet surfing devices, but rather were designed to provide
consumer-specific, branded content from our integrated back-office network of
servers.
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[GRAPHIC OMITTED]
Grapevine Internet Appliance Terminal (wall-mount version)
The Grapevine terminals are provided in a wall-mount version using the
same footprint of a traditional payphone and in a desktop version. The
wall-mount version is intended to look like an evolution of the payphone so that
young and old consumers recognize the terminal as easy-to-use and is targeted to
replace traditional payphones in high profile, high traffic sites such as
airports, malls and convention centers. The desktop version is targeted to
replace telephones located in airport airline lounges, hotel executive centers
and lounges and high-end hotel accommodations.
Each Grapevine terminal has three major modules - the Windows CE Content
Delivery Module, the Telephone Module and the Card Reader Module. The wall-mount
version also has a coin path, including a coin scanner, escrow, chutes, and an
anti-stuffing device, a coin return bucket, a cashbox and a security package.
[GRAPHIC OMITTED]
Grapevine Internet Terminal Appliance (desktop version)
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The Windows CE Content Delivery Module manages the display of the
advertising and Internet- based content received from our remote e-Prism Content
Server. The primary components in the Windows CE Content Delivery Module are the
Communications Interface, the Content Delivery Processor and the User Interface.
Advertisements and Internet-based content are received from the remote e-Prism
Content Server through the Communications Interface. Advertisements and static
content are stored as cached content in memory in the Content Delivery
Processor. Dynamic content will be provided through a persistent connection to
our e-Prism portal. The Content Delivery Processor determines what
advertisements and content is displayed on the User Interface, delivers the
advertisements and content to the User Interface and responds to consumer
actions through the User Interface. The User Interface consists of the TFT color
display and five push-button soft keys mounted at the base of the display. The
consumer will interact with content through the soft keys or through the IrDA
port in the Card Reader Module. The Communications Interface is designed so that
advertisements and internet-based content can be delivered to the Windows CE
Content Delivery System by high-speed modem, on a standard telephone line, a
Digital Subscriber Line ("DSL") interface, an ethernet connection over a local
area network, or an Integrated Services Digital Network ("ISDN"). The Microsoft
Windows CE operating system is used for all real-time software operations,
including support for the Microsoft Internet Explorer browser to manage content.
The Content Delivery Processor also has a high-speed serial data interface to
the Telephone Module so that commands and data can be exchanged between the
Telephone Module and Windows CE Content Delivery Module.
We have designed the soft keys for navigation through directories to
Internet-based content. These context-sensitive soft keys provide the ability to
offer flexible applications and information delivery. They have different
instructions on each key for each screen that is displayed on the Grapevine
terminal. One of these soft keys will typically offer Help details for the
particular screen displayed to the consumer. Others will support scrolling of
directories, navigation through different levels of an information tree, and the
delivery of specific functions associated with other modules in the Grapevine
terminal including use of the IrDA port for uploading and downloading e-mail,
activation of the handset for voice prompts, and use of the speakerphone in the
desktop version. As our applications and services are expanded these soft keys
will continue to offer more flexibility for ease and convenience of information
delivery to consumers.
The Telephone Module supports the payphone application in each Grapevine
terminal. It has two primary elements, the Digital Signal Processor ("DSP") and
Applications Processor. The DSP provides all telephone line and voice interfaces
in the phone including voice decompression from stored compressed voice files;
high-speed modem; call progress tone detection and generation; DTMF detection
and generation; management of audio functions; and provides interfaces for the
handset and phone line. In addition, the Telephone Module contains the features
and functions that are provided with our microprocessor-based payphone
electronics. The Application Processor provides extensive I/O interfaces for the
coin scanner, coin escrow, keypad, speed-dial buttons, hook switch, alarm
switches, card reader and the Content Delivery Processor components of the
Grapevine terminal.
The Card Reader Module provides the card reader functions, the IrDA port
functions and the PC data port functions. The card reader is designed to support
magnetic stripe cards, memory IC cards and microprocessor smart cards, two (2)
Security Access Modules (SAMs) in the standard configuration and an additional
four (4) SAMs for advanced electronic commerce and loyalty programs in which
multiple purses are required. The IrDA Port is mounted on the Card Reader Module
and is connected to the Content Delivery Processor. The IrDA port provides a
high-speed data interface for hand-held devices supporting an IrDA port, such as
PDAs, wireless phones and laptop computers. It can be used to transfer data such
as e-mail between these devices and the Grapevine terminal. The PC data port is
an industry
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standard connector mounted on the Card Reader Module and is connected to the
Telephone Module. The PC data port is used to provide a standard phone
connection for higher-powered portable devices, such as laptop PCs, to enable
the consumer to access a high-speed persistent connection to Internet services
and other networks.
The e-Prism Management Server Network and Software System. The e-Prism
Server Network is a comprehensive system of servers for "back office" support
and content management to drive the Grapevine terminals and services delivered
to consumers. The e-Prism proprietary software system manages the terminals and
is designed to tailor advertising messages, sponsor-paid content and information
delivered to the Grapevine terminals, to manage sending and receiving e-mail,
and to manage, bill and clear smart card and electronic commerce transactions
made at the terminals. Additionally, the e-Prism system is designed to offer
full service capabilities, including reports on usage and provisioning and
reports on performance measurements for all services.
The e-Prism system is currently comprised of the e-Prism Phone Server, the
e-Prism Content Server and the Report Generator Server located at our Service
Bureau Data Center. The e-Prism Phone Server manages phone data such as coin
collections, maintenance and diagnostic alarms and performance of the telephone
functions of the terminals. The e-Prism Content Server manages content data, the
delivery of advertising and sponsored information content to the terminals and
reports content display performance. The Report Generator Server is used to
report information to PSPs and advertisers. As our Grapevine terminals are
deployed, our e-Prism service bureau network servers will be expanded as needed.
Also, the network will be expanded to include regional servers throughout the
United States and Canada, which will be used as polling engines and local
download managers, which will provide our customers/partners with the direct
ability to provision Grapevine terminals and to obtain data and reports.
The e-Prism system manages terminal data, site data, customer data,
advertising agency data, advertisements and advertising categories and provides
the ability to filter advertisements based on sites and advertising categories.
In addition, the e-Prism system provides the ability to retrieve remotely all
telemetry data, including call records, alarm data, cash box data, programming
information, maintenance and diagnostic data, and advertising data including the
number of times each advertisement is displayed, the number of times each
advertisement is displayed while the terminal is in use, the number of times the
advertisement auto-dial feature is used and the related date/time ranges. The
system also provides the capability to download advertising and content data,
including images, messages, advertising format type and display duration. In
addition, the system provides the ability to remotely download changes to
operating software to both the Telephone Module and Content Delivery Module. The
e-Prism system is able to store a month of telemetry data in its operational
database and provide reports on the data. The system also replicates the data in
a separate reporting database for analytical reporting.
The regional servers, which will be located in regions of up to 35,000
deployed Grapevine terminals, will be used by our customers/partners to
provision the Grapevine terminals and to obtain call detail records and coin
collection, cash box and maintenance and alarm reports. They will have polling
engines and local download management functions associated with the Phone
Server. Regional servers will also have the content caching associated with the
Content Server to store and download advertising content to the Grapevine
terminals. The regional servers will act as repositories for content from which
a Grapevine terminal draws information.
Advertising Services. We are in the initial stage of implementing our
advertising services. The advertising sales team is planned include each
customer/partner, information aggregators and our advertising support team. The
advertising sales team will establish the sources of advertising on Grapevine
terminals. Formatted content is e-mailed to our content creation group by
advertisers, other team members, or their representatives. Our services include
the reformatting of content for delivery to
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the Grapevine terminals from our network service bureau, the loading of content
into the Content Server and the downloading of content to Grapevine terminals
designated by the other advertising team members. Our content creation team in
conjunction with the other advertising sales team members establishes the
appropriate delivery schedules and delivery format, by vertical market or
customer. To monitor quality of service and report to the advertisers, our
customers/partners have access to reports for retrieval of details regarding
content delivery and reporting. Presently, we are capable of providing static,
passive JPEG/GIF advertising and content images. Capability to provide animated
advertising images and MPEG images is presently under development.
Advertisements downloaded to Grapevine terminals rotate continuously, 24
hours per day. Presently, we provide the ability to display up to 40
advertisements, each 5 to 10 seconds in duration. However, the number of
advertisements, their duration and the number of frames per advertisement on a
per terminal basis can be modified to meet the requirements of advertisers, our
customers/partners, or information aggregators. Selective downloads of additions
or changes to advertisements as well as bulk content downloads on a
terminal-by-terminal basis are also available. Advertising content is downloaded
periodically via modem and displayed on a timed schedule. Grapevine terminals
display advertising that is stored in the terminals themselves. The ability to
use speed dial numbers for connection to the call centers of advertisers via
voice is also available.
e-Prism Terminal Management Services. Our e-Prism terminal management
services, consisting of a variety of necessary support functions to successfully
manage and maintain Grapevine terminals, are also in the initial implementation
stage. These services consist of: Content Management Services, Phone Management
Services, Network Server Management Services, Application Development Services
and Content Creation Services, including all of the necessary support functions.
e-Prism Content Management Services focus on the management and delivery
of the content (advertising and information) to the entire Grapevine terminal
network. These services include media contract administration, including media
scheduling, development of display templates and specifications and the
associated reporting; media management, including downloads, updates, trial
tests and termination; interactive reporting on advertising, including standard
reports on active impressions, speed dial contacts, and direct dials to the
sponsors; and help desk functions for media specifications and content
questions.
e-Prism Phone Management Services focus on the management of basic phone
functions and reporting on the Grapevine terminal network. These services
include interactive reporting on phone functions including call detail records
and cash collection data, maintenance data and alarm data; downloads of terminal
software and changes to regional servers; terminal polling through the regional
servers; and help desk functions for phone operation and maintenance questions.
e-Prism Network Server Management Services focus on the development,
management, and maintenance of the server network system. These services include
designing, configuring, installing and managing the e-Prism Management and
Content Data Center network; establishing, maintaining and managing network user
security parameters; monitoring and improving network performance; managing
network and database backups and disaster recovery; managing the database;
regional server help desk functions; designing, configuring and installing
regional servers; establishing high-speed links between regional servers and the
data center; and configuring software for data center applications, terminals
and regional servers.
e-Prism Application Development Services focus on developing interactive
consumer applications and information services that maximizes value to the
paying sponsor and increases terminal traffic. These new applications would be
available as they are released. These services include
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development of enhanced functions, such as animated advertising and MPEG video
files and development of information services that attract end-users. This
includes adding new functions and interactive features that bring value to the
end-user. We would attempt to develop and release new applications such as
e-commerce, wireless phone docking station and advanced e-mail services as new
technologies present additional service and revenue opportunities.
Content Creation Services focus on creating, adding, moving and changing
interactive local consumer advertising and information display screens for
Grapevine terminals in different geographical deployments. The advertising and
information screens would be made available to the paying sponsor and our
customers/partners as they are released. These services include reformatting
Internet-based content and coordination with advertisers and advertising
agencies on finished products before they are released. Most of this content is
generally considered static, since it does not change its format more than daily
and can, therefore, be handled by our Content Creation team. Content, such as
financial results, which must be updated more frequently, will come from an
information aggregator and be reformatted for delivery on our network.
We also intend to provide smart card marketing and support to create
consumer promotions and loyalty programs for advertising customers such as
fast-food chains. Smart cards will provide the ability to personalize content
and e-mail delivery to the consumer at nominal or no cost, which is established
by the customer/partner based on advertising and sponsorship revenues.
Customers/partners, hotels, executive clubs and other site owners will be able
to brand their specific or general programs to create awareness. Smart cards
will also provide secure customer profiles that will enable us to deliver
personal speed-dial directories, personal e-mail addresses, personalized stock
portfolios and secure electronic commerce transactions for the consumer. We plan
to establish a membership group for personalization, with a specific card-based
and 4-digit personal identification number ("PIN") for each member. To access
personalized information at any Grapevine terminal, the Grapevine Club member
would insert a designated card and lift the handset to enter a PIN. The member's
directory or menu would then appear on the Grapevine terminal's visual display.
Sales, Revenues and Distribution
General. We market our products and services to the public communications
or "payphone" industry and we focus our selling and marketing efforts on
regulated telephone companies including GTE and the RBOCs, AT&T, large
independent PSPs and our distributors who serve the smaller PSPs. We also market
our products and services internationally focusing on foreign markets undergoing
deregulation, including Canada, South America, Central America, Africa and the
Far East, and on PSPs that are affiliated or owned by the RBOCs and those
licensed to compete against the PTTs. We are focusing our selling and marketing
efforts on the PSPs that control the majority of the payphone terminals in
service in the United States, including SBC Communications, Inc., Bell Atlantic,
Inc., GTE, BellSouth Corporation, US West, AT&T and Davel Communications, Inc.
and to Canada Payphone Corporation ("CPC") in Canada. Our marketing activities
principally include advertising in trade publications, participation at industry
trade shows and hosting seminars and training programs for our customers.
We have historically earned the majority of our revenues from the sale of
our microprocessor-based payphone electronics, payphone terminals and components
and from repair and refurbishment services. In the future, we believe that the
majority of our revenues may be earned from sales of Grapevine terminals and
recurring revenues from services related thereto, including a percentage of
out-of-home advertising revenues generated by the terminals. However, there can
be no assurance in that regard. We believe that a majority of out-of-home media
expenditures are concentrated among only a few types of advertiser segments that
lend themselves to the Grapevine media. We also believe that
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companies within these segments will find the unique features of the Grapevine
media attractive with high value demographics, changeable advertisements, and
the ability for the consumer to place an order.
Our Grapevine Terminal Revenue Strategy. We intend to enter into strategic
alliances with the PSPs, as customers/partners, that control the majority of the
installed payphone base in the United States. We have already formed a strategic
alliance with CPC, believed to be the second largest growing public
communications service provider in Canada. We also intend to enter into
strategic allowances with information aggregators and providers such as Lycos,
MyWay/CMGI and Amazon.com to deliver content and information to our e-Prism data
center and service bureau for delivery to the Grapevine terminal network. These
customer/partners and information aggregators would have the primary
responsibility for the selling and marketing activities directed at advertisers
and sponsors. We are building a team of sales and marketing professionals whose
efforts are focused on establishing the Grapevine brand, educating consumers
about the features and benefits of our Grapevine services and developing
awareness of the Grapevine advertising medium. The advertisers and sponsors will
include national, regional and local accounts and their agencies. We believe
that regional and local advertising represents an attractive and underserved
market opportunity. In the Internet world today, spending by local businesses is
a very small percentage of their overall advertising expenditures. We believe
that our directory-based integrated content, information and commerce services
provide a platform for targeted and differentiated local advertising solutions
that may be of substantial appeal and generate tangible economic benefits to
local businesses. We also intend to establish relationships with direct
marketing companies to sell local advertising and information through mail and
telephone solicitation.
The Grapevine terminal advertising medium competes within the out-of-home
and interactive media markets. With the Grapevine medium, we are targeting both
the branding and response-oriented advertising media market segments and those
advertisers that sponsor content and information services. These advertisers
place a high value on reaching target demographics at less cost or more
effectively than competing media. Sponsors seek to reach the consumer while they
are in a decision or purchase mode and we believe that the Grapevine terminals
provide this capability.
Based on the advertising industry standard that values each 1,000
impressions made (referred to as CPM, or cost-per-thousand), we believe that
advertising and sponsorship on Grapevine terminals can be compared with other
out-of-home media that generate advertising revenue, per advertisement, ranging
from $10 to $70 per CPM. We believe that our Grapevine terminals offer content
sponsors several unique advantages over other out-of-home media targeted at
"on-the-go" consumers. First, Grapevine terminals offer interactive capability
and measurement in a market that traditionally relies on passive advertising
impressions. We believe that advertisers may pay a premium for captured
attention and reporting. Second, Grapevine terminals offer public access to
interactive services and advertising that today is only available through the
Internet in homes or offices or publicly through cumbersome Internet kiosks.
Third, service providers and advertisers will be able to target content delivery
to specific markets and demographics, some of which cannot be addressed by
traditional out-of-home medium, such as colleges. Fourth, Grapevine terminals,
through the e-Prism system, are designed to offer the ability to change the
actual message, schedule advertisements around special promotions or sales, and
coordinate message delivery around specific times of the day without large
set-up and installation costs.
The Grapevine terminals are also designed to accommodate loyalty programs
and promotions for individual customers, such as a national fast-food chain or a
consumer products firm, using smart chip card purses issued to consumers and
used for an array of applications that can be managed by our e-Prism back-office
systems. Our sales strategy is to focus on national accounts that could benefit
from such loyalty or promotional programs. We believe that our
customers/partners will lead the efforts to secure banner and rotating
advertisements and sponsorships. We also believe that we will be able to
establish strategic relationships with major information aggregators that will
also assist in the efforts to secure
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banner and rotating advertisements and sponsorships. Each major U.S. information
aggregator has hundreds of advertising salespeople, and the PSPs are expected to
use similar sales tactics as those used when they sold Talking Yellow Pages
advertising in the 1990s. Pricing policies are expected to remain consistent
with existing advertising industry rates.
As the PSPs seek a reinvention of their businesses, we believe that we are
positioned to retain our long-standing relationships with these customers as
partners in our new specialized service delivery business based on our Grapevine
Internet terminal appliances with state-of-the-art back-office phone, content,
card and e-commerce management capabilities. We intend to be involved in the
advertising and information delivery business in this public market by
leveraging our business arrangements with these customers/partners. We believe
that we have a nine to twelve month product and business development lead in
non-PC, PDA-like Internet terminal appliances for this market.
Target markets for Grapevine terminal installations are high-traffic,
indoor payphone locations determined by revenue levels and our
customers/partners strategic accounts. These markets include airport concourses;
transportation centers, such as truck stops and train stations; convention
centers; hotel and airline lounges; shopping malls; and other high traffic
locations such as fast-food chains, factories and gas stations.
Our market strategy is to move into a different public communications
market space, which associates us with Internet media, advertising and services
as an Application Service Provider ("ASP") with specialized service offerings
oriented to the public consumer and personalization for the business traveler
on-the-go, and to become the dominant niche player within this market sector. We
believe that the addressable public communications market in the United States
for wall mounted Grapevine terminals ranges from 400,000 to 600,000 units,
representing the indoor market sector of the estimated total 2-million payphone
sites in operation today. In addition, we believe that there are two other
addressable market sectors, the U.S. desktop market sector of an estimated
750,000 units and the international indoor market of an estimated 250,000 units,
primarily in Western Europe and Latin America.
Our mission is to be a universal provider of technology-enhanced content,
e-mail and commerce services for public communications networks, while
cultivating diverse advertising revenue sources. The Grapevine business model is
based on our ability to team with our customer/partners and operate as an ASP.
We intend to sell our Grapevine Internet terminal appliances to our
customer/partners at a price that enables deployment in quantities four to six
times greater than Internet kiosks. This strategy provides a modest margin on
each terminal. In addition, we intend to license our software and provide
service support for the phone, content and enhanced services from a central data
center on a monthly fee basis. We also intend to introduce and operate the
delivery of specific advertisements, information, e-mail, electronic commerce
and other new services for a percentage share of the revenues earned by our
customers/partners. We believe that our planned service business can generate
significant recurring revenues as the deployment of Grapevine terminals
increases, although there can be no assurance in that regard.
We intend to provide content and services with broad appeal to consumers
that will increase the value and functionality of our services. We believe that
consumers place a premium on content that is relevant to their everyday lives
and that they will, therefore, increase the frequency and duration of their
usage of our Grapevine terminal appliances to access such content. We are
focusing our efforts on location-specific coverage with local content for
targeting local demographics. We are also focusing our efforts at providing
personalized information and services, such as e-mail, that have the potential
for targeted advertising or commerce opportunities. By regularly adding and
integrating new and useful content, we believe we can drive increased traffic to
our public communication customer/partners and generate additional revenue
opportunities for them and us. The link to the site owners is almost
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exclusively through the PSPs. However, we also plan to direct our sales and
marketing efforts towards these site owners and create a pull sales process from
the site owners to the PSPs.
We believe that the key to the advertising value of the Grapevine
terminals is built on the media's targetability, sensory intensity and
interactivity, and we believe that the Grapevine terminal is positioned high on
all three quadrants creating a high value medium for advertisers. Our electronic
interactive advertising and information delivery capability targets specific
demographics (gender, age, ethnicity), psychographics (interest or mind set) and
geography (location specific). The benefits sought by advertisers include
sensory intensity (sight, sound and motion); targeting (reaching consumers with
efficiency and at a justifiable cost); interactivity (personalized two-way
communications with the target consumers); measurement (to validate consumer
response by management from the e-Prism back-office); and critical mass
(sufficiently large consumer base to support brand marketing efforts). The
degree of sensory intensity, targeting and interactivity influences the medium's
selling price. Media platforms, such as Grapevine terminal appliances, are
analyzed based on their ability to link advertising impressions to consumer
behavior, such as soft key strokes and electronic commerce purchases. In
addition, we believe that the development of personalized relationships with
member consumers will command premium advertising impression prices for our
Grapevine terminals.
By providing a general package of information available free of charge to
all consumers, we believe that consumers will begin to value the benefits of
detailed and instant information from our Grapevine terminals, and that we will
be able to promote personalization services. After we begin these personal
services, we intend to continue to promote more expansive and valuable
capabilities. For example, a recent Jupiter Communications study indicates that
e-mail is a high-use, highly-sought service for "on-the-go" consumers, followed
by local events, on-line directories and news, all of which are achievable on
our Grapevine terminals. Also, we believe that the availability of an IrDA port
enables our Grapevine terminals to become a universal "docking station" for
portable PDAs, for which an ever-increasing amount of new services can be
offered.
We believe that electronic commerce will continue to grow as an increasing
number of consumers embrace Internet-based platforms for evaluating, selecting
and purchasing goods and services. In cooperation with information aggregators,
financial service providers and e-ticketing providers (such as airlines and
theaters) we intend to start offering some electronic commerce capabilities in
2001. We believe that Grapevine terminal shopping would be a valuable service
for all consumers on-the-go, and that these services, including features to
select from on-line stores and catalogs, could be made available from any
Grapevine terminal.
Our Payphone Business. We sell our products directly through our sales
personnel and through distributors that are supported by our sales, engineering
and technical support personnel. Our direct sales force consists of a staff of
six sales managers and four sales engineers. We presently have four distributors
in the United States and representatives/distributors in certain foreign
markets, including Venezuela, Argentina, Nigeria and Chile. All of our sales to
foreign markets are export sales. We do not presently have any foreign
operations.
We generally enter into non-exclusive sales agreements with our customers,
that include, when applicable, non-exclusive licenses to use our proprietary
operating systems and payphone management software systems. Our agreements with
the RBOCs generally have terms ranging from one to five years, are renewable at
the option of the customers, and contain fixed sales prices with limited
provisions for price increases, but do not generally specify or commit the
customers to purchase a specific volume of products. Also, these agreements
generally contain clauses that require us to provide prices and other terms at
least as favorable as those extended to other customers and indemnify customers
against expenses, liabilities, claims and demands resulting from our products,
including those related to patent
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infringement. These agreements may generally be terminated at the option of the
customer upon notice, or if we default under any material provision of an
agreement. Our agreements with other PSPs generally set forth product pricing
and terms for specified purchase volumes, and include provisions that enable us
to change prices upon thirty (30) to ninety (90) days notice. Agreements with
our international customers generally set forth the pricing and terms for
specified purchase volumes, and sales prices are generally fixed with respect to
volume stipulated in the agreements. Our customers are not prohibited from using
or reselling competing products and are generally not required to purchase a
minimum quantity of products, although our price lists and agreements offer
discounts based on volume. All purchase orders from customers are subject to
acceptance by us. Our policy is to grant credit to customers that we deem
creditworthy. In addition, we have historically provided limited secured
financing with terms generally not exceeding 24 months and interest charged at
competitive rates.
Sales of our payphone business reflect the acquisition of the public
terminal assets of Lucent Technologies Inc. (the "Lucent Assets") on September
30, 1997 and the purchase of Technology Service Group, Inc. ("TSG") on December
17, 1997. Information with respect to sales of our payphone products and
services, which include sales related to the acquisition of the Lucent Assets
and the purchase of TSG from the dates of the transactions, for the years ended
March 31, 2000, 1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Payphone terminals $ 12,896 $ 23,758 $ 22,920
Electronic 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
-------- -------- --------
$ 47,217 $ 65,263 $ 46,250
======== ======== ========
</TABLE>
Sales of our payphone business by geographic region for the years ended
March 31, 2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
United States $ 40,935 $ 57,583 $ 37,051
Canada 2,773 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
-------- -------- --------
$ 47,217 $ 65,263 $ 46,250
======== ======== ========
</TABLE>
Our Grapevine Internet Appliance Business. We intend to sell our Grapevine
terminals and enter into strategic customer/partner relationships through our
sales, marketing and business development executives with support from the
direct sales force of our payphone business. We intend to develop the awareness
of the Grapevine advertising medium and assist our customers/partners, who will
have the primary responsibility for the selling and marketing activities
directed at advertisers and sponsors, to sell display and banner advertising
through a direct specialized advertising sales force which presently consists of
one sales manager. We started the development of the Grapevine technology and
our service business in October 1998 and deployed the first Grapevine terminal
in a controlled test location in December 1999.
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We have entered into an agreement with CPC that provides for the sale of
45,000 Grapevine terminals over a five-year period at stipulated prices that are
subject to change annually based on inflation. The agreement provides CPC with
the exclusive right to deploy and market our Grapevine terminals in Canada
provided CPC complies with the terms and conditions of the agreement. The
agreement stipulates the per-terminal license and management services fees and
the percentages of advertising, e-commerce and other new revenue sources to be
paid to us. The initial deployment of our Grapevine terminals by CPC began in
April 2000.
Our Grapevine terminals and specialized phone and content management
services are currently in trials with one of the RBOCs and with one of the IXCs.
We hope that we will be able to enter into strategic alliances for the
commercial deployment of Grapevine terminals by each of these customers/partners
when they complete the initial application and market test phase. We also intend
to pursue other strategic alliances with the other PSPs that control the rest of
the majority of the installed base of payphone terminals in the United States.
We expect to begin full deployment of our Grapevine terminals with the
customers/partners presently in trials, as well as with other PSPs, in the third
and fourth quarters of calendar year 2000. However, there can be no assurance in
that regard.
We expect to install 300,000 to 500,000 of our wall-mount Grapevine
terminals over the next five years, in cooperation with our customers/partners.
A similar opportunity exists with our desktop terminal appliance, which will be
targeted for installation in airline and hotel lounges, and up-market hotel
rooms. However, there is no assurance that our Grapevine terminals will be
accepted in the market or that they will be deployed in the quantities we
expect.
The critical factors necessary for the success of our Grapevine Internet
terminal appliance business are to:
o Establish strategic alliances and enter into supply agreements with
the targeted customers/partners in the U.S.;
o Establish the Grapevine network as a new, valuable advertising
media;
o Establish strategic alliances with information aggregators, content
providers and others who have a commitment to the non-PC based
appliance industry;
o Emphasize service, support and technological innovation to
differentiate us from wireless phone and Internet kiosk vendors;
o Focus on delivering value to consumers through services they want,
and expanding and improving offerings to remain ahead of competitive
alternatives;
o Expand our sales and marketing efforts and assist our
customers/partners in their sales and marketing efforts, including
the development of relationships with others to sell advertising;
and
o Leverage our infrastructure to create a shared services operation to
control expenses and development costs.
Our Grapevine terminal appliance business is still in the development
stage. Accordingly, revenues from our Grapevine terminal appliance business were
not significant during the year ended March 31, 2000. All shipments of Grapevine
terminals to US-based customers/partners were made under trial agreements. Sales
of Grapevine terminals to CPC shipped in March 2000 approximated $78,000. We did
not receive any revenues from license and management services fees or from
advertising contracts during the year ended March 31, 2000. Our first
advertising order was received in April 2000.
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Dependence on Customers. During the years ended March 31, 2000 and 1999,
one customer (Bell Atlantic, Inc.) accounted for 39% and 20%, respectively, of
our consolidated sales and revenues. During the year ended March 31, 1998, no
single customer accounted for 10% or more of our consolidated sales and
revenues. Our domestic distributors accounted for approximately 7%, 7% and 5% of
our consolidated sales and revenues during the years ended March 31, 2000, 1999
and 1998, respectively.
Telephone companies (primarily RBOCs) accounted for approximately $27.2
million, $32.5 million and $16.0 million of our consolidated sales and revenues
during the years ended March 31, 2000, 1999 and 1998, respectively. Sales to
other PSPs including foreign customers accounted for approximately $20.1
million, $32.8 million and $30.3 million of our consolidated sales and revenues
during the years ended March 31, 2000, 1999 and 1998, respectively.
We believe that the large PSPs will account for the majority of our sales
and revenues in the years ahead. Accordingly, the loss of one or more of these
customers or a significant decline in volume from one or more of these customers
could have a material adverse effect on our sales, revenues and business.
Other Strategic Alliances. We have entered into an agreement with
Caribbean Hotel Services, Incorporated ("CHS"). Under the agreement, we agreed
to manufacture CHS's desktop video payphone terminal on an exclusive basis. The
Company believes that this alliance could generate meaningful revenues in the
future, although there can be no assurance in that regard.
We began marketing operator services cooperatively with a large domestic
operator service provider during the latter part of fiscal 1998. Under our
program, we have marketed operator services to domestic PSPs at agreed upon
unbundled rates. Call revenues, net of agreed upon charges for the operator
services, and our administrative fees, are payable to the PSPs utilizing the
program. We believe that the program offers revenues to PSPs from
operator-assisted calls competitive with other domestic operator service
providers. Our sales revenues from these operator services programs approximated
$930,000, $244,000 and $101,000 during the years ended March 31, 2000, 1999 and
1998, respectively.
Research and Development
Our research and development activities during the last two years were
focused on the development of our Grapevine terminal appliances, related
embedded operating software and e-Prism management software systems. Our
research and development efforts in the payphone business have been focused on
wireless applications and expansion of software product features. During fiscal
2000, we expended approximately $10.1 million in research and development
activities, including approximately $3.6 million in capitalized software
development costs, and we estimate that approximately 80% of these expenditures
related to our Internet appliance business. During fiscal 1999, we expended
approximately $6.8 million in research and development activities, including
approximately $639,000 in capitalized software development costs, and we
estimate that approximately 25% of these expenditures related to our Internet
appliance business. Our research and development expenditures approximated $4.6
million including capitalized software development costs of approximately
$100,000 in fiscal 1998 and consisted primarily of development of payphone
terminal equipment and related software, management software systems and other
products.
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We believe that research and development is important to the continuation
and enhancement of our competitive position and to expand the size of our
addressable market. We also believe that our research and development
expenditures will continue to represent a significant percentage of our sales
and revenues in the future. Our ability to adequately fund future research and
development is dependent upon our ability to generate sufficient funds from
operations or external sources.
We intend to continue to make significant investments in the development
of our Internet appliance business. Research and development expenditures in our
payphone business will consist primarily of sustaining our payphone products,
software and services. We also plan to develop our e-Prism software systems to
communicate with and manage all of our payphone terminals as well as terminals
manufactured by our competitors and offer payphone management services as part
of our service offering.
Our research and development activities are presently focused on
development of the content features of our Grapevine terminals, application
services, specialized service offerings oriented to the public consumer and
content personalization for the business traveler on-the-go. These activities
surround the development and implementation of persistent communications
connections, expanded content delivery capabilities, regional network servers, a
card validation platform, loyalty programs, voice advertising, interactive
personalized information, personalized e-mail, e-mail voice attachments, IrDA
access, PDA e-mail upload/download capability, text to speech e-mail capability
on the telephone handset, MPEG film clips display capability and WAP links to
wireless phones through the IrDA port.
We also intend to purchase and develop card management, billing, voice
advertising and e-mail servers that will be the enabling platforms and
associated software for magnetic stripe and smart card management and other key
attributes to our Grapevine business strategy. These servers are intended to
have a broad range of applications pertinent to the continued development of our
public communications network services with capabilities, including, among
others, the following:
o Real time credit card authentication and fixed limit
transaction/call charging;
o Personalization services with differentiation of content by consumer
and managing ranges of consumer profiles accessible by personal card
and PIN;
o e-mail voice attachment sending to one or more of a personalized
list of e-mail addresses, and e-mail downloading to the display on
any Grapevine terminal;
o Profiling of members' preferences and contact data for any and all
personalized services offered on the Grapevine terminals;
o Loyalty points management, in conjunction with smart chip card
usage, allowing basic multi-application crediting and debiting of
awarded points and/or cash by adding a software loyalty package to
the card database as defined in specific applications required by
customer/partners;
o Prepaid transaction/calling card services to resellers and consumers
further increasing the use of Grapevine terminals; and
o Whispering advertising slots into calls-in-session, or at the
initiation of a call from the handset, subsidizing phone call
charges through sponsorship.
Licenses, Patents and Trademarks
We own ten United States patents relating to payphone components, smart
payphone electronics and other technology, which expire between April 2010 and
May 2014. We have filed twenty-four patent applications related to various
aspects of our Grapevine technology, designs and implementations in an
operational environment. Additional patent applications are in preparation on
other features of our
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Grapevine technology. Patents with respect to our Grapevine technology may not
be granted, and, if granted, they may be challenged or invalidated. If we are
not successful in obtaining the patent protection we seek, our competitors may
be able to replicate our technology and more effectively compete with us. In
addition, issued patents may not provide us with any competitive advantages and
may be challenged by third parties.
We also own several service marks and trademarks used in the operation of
our business and have applied for registration of other service marks and
trademarks, including "Elcotel" and "elcotel.com" and our Grapevine logo in the
United States and in other countries. However, there is no assurance that we
will be successful in obtaining the service marks and trademarks that we apply
for or that they will be valuable.
Although we believe that our patents, service marks and trademarks are
important to our business, we do not believe that patent protection, service
marks or trademarks are critical to the operation or success of our business.
While we do not believe that we are infringing on the patents of others, there
can be no assurance that infringement claims will not be asserted in the future
or that the results of any patent-related litigation would not have a material
adverse effect on our business.
To protect our proprietary rights, we rely on a combination of copyright
and trademark laws, patents and patent applications, trade secrets,
confidentiality agreements with employees and third parties, and protective
contractual provisions. Our employees have executed confidentiality and non-use
agreements that transfer any rights they may have in copyrightable works or
patentable technologies to us. In addition, prior to entering into discussions
with potential content providers and affiliates regarding our business and
technologies, we generally require that such parties enter into a non-disclosure
agreement. If these discussions result in a license or other business
relationship, we also generally require that the agreement setting forth the
respective rights and obligations of the parties include provisions for the
protection of our intellectual property rights. In addition, we license the use
of our proprietary software and designs through licensing agreements and
provisions in our sales agreements, and the agreements and provisions are
designed to prevent duplication and unauthorized use of our software.
Despite our efforts to protect our intellectual property rights,
unauthorized parties may copy aspects of our products or services or obtain and
use information that we regard as proprietary. The laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. We have filed two patent applications in foreign
countries, but we do not currently have any patents in any foreign country. In
addition, others could possibly independently develop substantially equivalent
intellectual property.
Companies in the computer and service provider businesses have frequently
resorted to litigation regarding intellectual property rights. We may have to
litigate to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of proprietary rights of other
parties. From time to time, we have received, and may receive in the future,
notice of claims of infringement of proprietary rights of other parties. Any
such claims could be time-consuming, result in costly litigation, divert
management's attention, cause product or service release delays, require us to
redesign our products or services or require us to enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, may
not be available on acceptable terms or at all. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and
cost-effective basis, our business could be materially and adversely affected.
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We license certain technologies, patents and other intellectual property
rights from third parties under agreements providing for the payment of
royalties. Royalty expense during the years ended March 31, 2000, 1999 and 1998
approximated $319,000, $220,000 and $86,000, respectively.
Assembly and Sources of Supply
Subcontractors and established contract manufacturers assemble our
payphone electronic circuit board assemblies, our Grapevine terminals and many
other products in accordance with our designs and specifications. The
subcontractors and contract manufacturers are generally responsible for
purchasing the electronic and mechanical components for our circuit boards,
electronic assemblies and products from external suppliers. These suppliers must
be selected and/or approved by our design engineering and manufacturing
operations, which are also responsible for designing and procuring any
specialized tooling required by suppliers to manufacture any custom components,
such as the mechanical components of our Grapevine terminals. Our selection
and/or approval of suppliers are based on quality, delivery, performance and
cost. Design engineering attempts to utilize components available from several
manufacturers, as well as avoiding single source component restraints. However,
occasionally it is necessary to use a single source component and we currently
have several items in this category. While we believe that we could find
alternative suppliers for our components, or in the case of single source
components, substitute other components for the ones currently used, our
operations could be adversely affected until alternative sources or substitute
components could be obtained or designed into our products. In addition, we
believe that we could use alternate subcontractors, if necessary, with minimal
interruption to production, since there are many suitable subcontractors and
manufacturers capable of manufacturing and assembling our products. Also, we
generally own any specialized tooling and equipment required for these
manufacturing and assembly operations. However, our operations could be
adversely affected until alternative sources could be developed.
A foreign supplier manufactures and/or assembles products that we acquired
in connection with the acquisition of the public terminal assets of Lucent
Technologies Inc. We have entered into an agreement for the assembly of our
Grapevine terminals with a local contract manufacturer. These arrangements
generally include provisions regarding prices, changes in prices based on the
cost of materials, orders and delivery, quality and payment, but do not include
any minimum purchase commitment.
Our repair and refurbishment operations are located in a 53,400 square
foot manufacturing facility in Orange, Virginia. We also assemble and test
payphone terminals and components at this facility. Our operations are designed
so that production volumes within certain limits could be readily increased.
Our payphone terminals are offered in various configurations based upon
the GTE style housing, the Western Electric style housing and various custom
designed housings, including the Grapevine terminal Valox(TM) plastic and steel
reinforced housing. One principal supplier supplies GTE style housings; however,
alternative suppliers providing essentially equivalent housings are available.
We acquired tooling to manufacture the Western Electric style housing as part of
the acquisition of the public terminal assets of Lucent Technologies Inc. during
the year ended March 31, 1998 and our foreign subcontractor manufactures these
housings. We have also established alternative suppliers providing essentially
equivalent housings. Custom designed housings are generally available from sole
sources. While we believe that we could find alternative suppliers for such
housings, our operations could be adversely affected until alternative sources
could be obtained.
Our terminals are supplied with coin mechanisms that may be unique to a
particular configuration or that may be supplied by a sole source. We acquired
tooling to manufacture the AT&T electronic coin
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scanning mechanism as part of the acquisition of the public terminal assets of
Lucent Technologies Inc. during the year ended March 31, 1998 and our foreign
subcontractor manufactures these assemblies. The other coin mechanisms we use
are available from various sole sources. We believe that we could redesign our
products to use other available coin mechanisms, develop alternative suppliers
for such assemblies, or use or develop essentially equivalent assemblies.
However, if a shortage or termination of the supply of one or more of the
electronic coin mechanisms were to occur, our operations could be materially and
adversely affected.
Our circuit board assemblies are subjected to various automated tests and
defect-inducing processes to improve their quality and reliability. After
testing, the circuit board assemblies may be installed in and tested as a
terminal and shipped to the customer or packaged separately and shipped for
customer installation. Our service organizations in Sarasota, Florida were ISO
9002 certified in December 1995 and we are currently pursuing ISO 9002
certification for our Orange, Virginia manufacturing and service organizations
and ISO 9001 certification for our Sarasota, Florida operations.
Warranty and Service
We provide product warranties ranging from one to three years on products
we manufacture and a warranty ranging from ninety (90) days to one year on
terminal equipment that we repair, refurbish or upgrade. Under our warranty
program, we repair or replace defective parts and components at no charge to our
customers. After warranties expire, we provide non-warranty repairs and services
for a fee. Our distributors are also authorized to repair our products.
Backlog
Our backlog is subject to fluctuation based on the timing of the receipt
and completion of orders. The Company calculates its backlog by including only
items for which there are purchase orders with firm delivery schedules. At May
31, 2000, the backlog of all products and services on order was approximately
$5,328,000 compared with a backlog of approximately $5,877,000 at May 31, 1999.
Our backlog at any given date is not necessarily indicative of future revenues.
Competition
Our Internet Appliance Business. Our Grapevine terminal appliances face
competition from other fixed location terminals such as Internet kiosks,
conventional payphones and wireless products. We believe that our Grapevine
terminal appliances are products that have superior features as compared to both
Internet kiosks and traditional payphones. Internet kiosks permit users to surf
the Internet in a public access setting at their leisure. We believe that many
users are intimidated by the kiosks, and find them to be cumbersome and
difficult to use. As a result, we do not believe that these kiosks effectively
respond to the emerging needs of consumers for easy, simple and widespread
public access content connectivity. Once a kiosk is in use by a customer, they
tend to stay on the terminal for a very long time, which makes them less
valuable as an advertising vehicle than a higher user turnover product which we
believe the Grapevine terminal will be. In addition, Internet kiosks are larger
than conventional payphones, cost three to six times more than our Grapevine
terminals and are not a cost effective replacement for installed payphones.
Further, Internet kiosks have limited ability to offer local services without
extensive Internet surfing. The Internet kiosk sector has over 50 suppliers,
most of which have not penetrated long-term markets such as telephone company
public communications groups. However, most of these firms have financial,
management and technical resources substantially greater than ours. In addition,
there are many other firms that have the resources and ability to develop and
market products and services that could compete with our Grapevine terminals and
related services. Also, there are many other firms that have
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the resources and ability to develop and market Internet terminal appliance
products and services that could compete with our Internet terminal appliance
products and services.
Traditional payphones are losing market share and profits due to the
growth of cellular phone usage and the growth in dial-around programs. We
believe that our Grapevine terminals will offer PSPs the ability to generate
revenues that are two to four times greater than those available from a
traditional payphone. Although traditional payphones are expected to compete
effectively in low traffic and outdoor locations, we believe our Grapevine
terminals will outperform traditional payphones in high use indoor locations.
We believe our Grapevine terminals are positioned to effectively compete
against cellular competitors. We believe that we have a twelve to eighteen month
lead over cellular competitors on the delivery of location-based services. We
believe that location-based services will require cellular operators to make new
infrastructure investments. Today, cellular operators have adopted a flat-rate
pricing methodology to sell excess capacity available on their network. Once the
minutes are gone they are gone forever. So the cellular operators are willing to
sell minutes at a flat rate to induce higher usage to increase total revenues
and increase customer loyalty. However with increased infrastructure purchases
to offer location-based services at higher transmission speeds, we believe that
the cellular community will charge premium prices for these location-based
value-added services. In addition, we believe the quality of the audio and
visual content will be superior with a fixed based line feed than what will be
available from the cellular community. Our Grapevine terminals offer a value
proposition for cellular users because we believe many if not all of these
location-based services will be provided throughout the Grapevine terminal
network at "No Charge" to the consumer.
The primary competition for traditional out-of-home media is billboards,
transit and in-store visual displays. In addition, our Internet appliances
compete for potential advertising and e-commerce revenues, directly or
indirectly, with online service providers, such as AOL, Earthlink and Microsoft,
Internet portals, such as Lycos and Yahoo!, and manufacturers of other Internet
appliances and PDAs. The primary competition for public access interactive media
includes TelWeb/Schlumberger, I-Magic and others. Further, existing content
providers, such as Double Click, Flycast, 24/7 and AdSmart may target public
access as a natural evolution of their Internet-based business. In the
application service provider market, the Company expects to face numerous
competitors. The Company expects competition from other public Internet
appliances, whether PC or non-PC, and back-office management software from
potential future vendors and service providers, including European public
terminal vendors such as Landis & Gyr and Schlumberger, Protel, Internet kiosk
vendors such as Ascom/King, NetNearU and Lexitech, interactive television
terminals with Internet access, and limited-feature devices.
We believe that the primary competitive factors in the market for public
interactive Internet appliance content and services are:
o the ability to deliver content having broad appeal, which is likely
to result in increased consumer traffic and brand name value for the
information content aggregator and advertisers;
o the ability to meet the specific content demands of local, targeted
demographic groups of public consumers and to deliver detailed and
attractive information to personalized accounts;
o the cost-effectiveness and reliability of the content, e-mail and
electronic commerce services;
o the ability to provide content and information delivery formats that
are attractive to advertisers;
o the ability to achieve location-specific downloading of content and
information on a terminal-by-terminal and, as appropriate, a
person-by-person basis; and
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o the ability to integrate related content to increase the utility of
the content and electronic commerce services.
Our Payphone Business. The payphone business is highly competitive. We
compete with numerous domestic and foreign firms that manufacture and market
payphone terminal equipment and numerous domestic firms that market repair and
refurbishment services that have financial, management and technical resources
substantially greater than ours. In addition, there are many other firms that
have the resources and ability to develop and market products and services that
could compete with our products and services. We believe that our ability to
compete depends upon many factors within and outside our control, including the
timing and market acceptance of new products developed by us and our
competitors, performance, price, reliability and customer service and support.
We believe that the primary competitive factors affecting our payphone
business are quality, service, price and delivery performance. We believe that
we compete aggressively with respect to the pricing of our products and services
and we attempt to reduce manufacturing costs rather than to increase our prices.
We also attempt to maintain inventory at levels that enable us to provide timely
service and to fulfill the delivery requirements of our customers.
We believe that our principal competitors domestically include Protel,
Inc. (a subsidiary of Inductotherm Industries, Inc.), Intellicall, Inc. and
QuorTech, which recently acquired the payphone business of Nortel Networks, Inc.
It is also possible that new competitors with financial, management and
technical resources substantially greater than ours may emerge and acquire
significant market share. Possible new competitors include large foreign
corporations, the RBOCs and other entities with substantial resources. Some
telecommunications companies, already established in the telephone industry with
substantial engineering, manufacturing and capital resources, are positioned to
enter the payphone market. The Telecommunications Act lifted the restriction on
the manufacturing of telecommunications equipment by the RBOCs. After the FCC
finds that an RBOC has opened its local exchange market to competition, the
RBOC, through a separate affiliate, may manufacture and provide
telecommunications equipment and may manufacture customer premises equipment,
such as payphone terminals. As a result of the Act, we could face new
competitors in the manufacture of payphones and payphone components from one or
more of the RBOCs or their affiliates.
Internationally, we compete with numerous foreign competitors, all of
which have financial, management and technical resources substantially greater
than ours and have greater experience in marketing their products
internationally. These foreign competitors market payphone products
predominately to the PTTs and thereby dominate the international payphone
market. In addition, our international marketing efforts are subject to the
risks of doing business abroad. We believe that the primary competitive factors
affecting our international business are the ability to provide products that
meet the specific application requirements of the customers, quality and price.
A number of personal communications technologies are becoming increasingly
competitive with payphone services provided by the PSPs. Such technologies
include radio-based paging services, cellular mobile telephone services and
personal communication services. These competing services continue to grow and
are adversely affecting the payphone industry. However, we believe that the
payphone industry will continue to be a major provider of telecommunications
access in the future.
Although we expect to continue to be subject to intense competition in the
future, we believe that our products and services are currently competitive with
those of other manufacturers in such areas as equipment capability, quality,
cost and service. Since the payphone industry is highly competitive, we may be
required to develop enhancements, new products and services to remain
competitive in the future.
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Governmental Regulation
General. Our products and services and the operations of our
customers/partners are subject to varying degrees of regulation at both the
federal and state levels. There can be no assurance that any changes in such
regulation would not have an adverse impact on our operations or the operations
of our customers.
Parts 15 and 68 of the FCC rules govern the technical requirements that
payphone and other telephone products, including our Grapevine terminals, must
meet in order to qualify for FCC registration and interconnection to the
telephone network. We have performed those tests necessary to assure compliance
with these technical requirements and obtained FCC registration for our
products.
Our products must be tested and approved by various regulatory bodies in
international markets to which we export, and customers must obtain these
approvals before the importation of our products. The appropriate regulatory
body has approved products exported by us.
The regulation of telecommunications providers by the FCC and state
regulatory authorities has a direct effect on our product designs. We design our
products to comply with regulations applicable to provision of public
communications services. Our products may require modification to comply with
new technical or regulatory requirements or other factors upon adoption of new
regulations by federal and state authorities.
State regulatory authorities have adopted a variety of regulations that
vary from state to state, governing technical and operational requirements of
privately owned payphones, which are also applicable to our Grapevine terminals.
These requirements include dial tone-first capability to allow free calls to
operator, emergency, information and toll free numbers without a coin deposit;
multi-coin capability; calculation of time-of-day and weekend discounts;
prohibition of post-call charges; advisement to callers of additional charges
for additional time before disconnecting; provisions of certain information
statements posted on cabinets; provision of local telephone directories;
mandatory acceptance of incoming calls; reduced charges for local calls from
certain locations such as hospitals or rest homes; and restrictions as to the
location and hours of operation of such payphones. The states have also
established tariffs for local and intrastate coin "sent-paid" calls, and in many
instances for zero-plus calls.
With respect to the use restrictions and requirements, such as restricted
locations for payphones, informational statements on cabinets, or the provision
of access to the carrier of choice, the owner/operators of our products have the
sole responsibility to determine and comply with all applicable use
requirements, including the responsibility to ensure that the rates charged
remain current and do not exceed the maximum rates permitted by state or federal
regulations for the particular location of the product.
Most states require that owner/operators of private payphones be certified
by the state's public utility commission and file periodic reports. As a
manufacturer and seller of payphone terminals, we do not believe that any states
currently require us to be certified.
The Telecommunications Act. On September 20, 1996, the FCC released its
order (the "Order") adopting regulations to implement the section of the
Telecommunications Act that mandated fair compensation for all payphone service
providers and otherwise changed the regulatory regime for the payphone industry
pursuant to the Telecommunications Act. The Telecommunications Act requires that
the FCC establish a per call compensation plan to ensure that all payphone
service providers are fairly compensated for each and every completed intrastate
and interstate call using their payphone. Among other matters, the Order
addressed compensation for non-coin calls and local coin calling rates, ordered
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the discontinuation of payphone subsidies from basic exchange and exchange
access revenues which favored payphones operated by telephone companies, and
authorized RBOCs and other providers to select service providers.
The Order required payphones operated by regulated telephone companies to
be removed from regulation, separating payphone costs from regulated accounts by
April 15, 1997. This requirement was intended to eliminate all subsidies that
favored payphones operated by the telephone companies. Telephone companies were
also required to reduce interstate access charges to reflect separation of
payphones from regulated accounts. In order to eliminate discrimination, the
telephone companies were also required to offer coin line services to
independent payphone service providers if they continue to connect their
payphones to central office-driven coin line services. The FCC did not mandate
unbundling of specific coin line related services, but did make provisions to
allow states to impose further payphone services requirements that are
consistent with the Order.
The Order authorized RBOCs to select the operator service provider serving
their payphones and for independent payphone service providers to select the
operator service provider serving theirs. This provision preempted state
regulations that require independent payphone service providers to route
intralata calls to the telephone companies. The FCC, however, did not establish
conditions that require operator service providers to pay independent payphone
providers the same commission levels as the RBOCs demand.
In the Order, the FCC decided that the dial-around compensation rate for
access code calls and toll free calls should be equal to the deregulated local
coin call rate. The FCC also established an interim compensation plan whereby
compensation for access code and toll free calls would be paid to payphone
service providers. Under the first phase of the FCC's interim compensation plan,
payphone service providers would be compensated at a flat rate of $45.85 per
payphone per month, as compared to the previous compensation of $6.00 per month.
This interim rate was to expire on September 1, 1997, and replace all other
dial-around compensation prescribed at the state or federal level. This
compensation was to be paid by the major inter-exchange carriers based on their
share of toll revenues in the long distance market. By October 1, 1997, under
the second phase of the interim compensation plan, all payphones would switch to
a per-call compensation rate set at $.35 per toll free or access code call. The
carrier that was the primary beneficiary of the call would pay the per-call
compensation. After one year of deregulation of coin rates (October 1, 1998),
the permanent compensation rate would have been adjusted to equal the local coin
rate charge for a particular payphone.
On July 1, 1997, the United States Court of Appeals for the District of
Columbia Circuit issued its decision on appeals of certain portions of the
Order. The Court ruled that the FCC was unjustified in setting the per-call
compensation rate at an amount equal to the deregulated local coin rate. The
Court also held that interim compensation for zero-plus calls must be included
in the new interim compensation plan. Finally, the Court upheld the FCC's
authority to regulate the rates charged for local coin calls (thereby
eliminating state limitations on such rates) and the FCC's decision to require
the carrier rather than the calling party to pay the compensation to payphone
service providers for toll free and access code calls. The Court vacated and
remanded to the FCC for further consideration the issues of compensation for
toll free and access code calls both on a permanent and an interim basis.
On October 9, 1997, the FCC adopted a revised compensation plan on remand
from the Court of Appeals. The revised plan set compensation at a rate of $.284
per completed call during the period October 7, 1997 through October 6, 1999.
After October 6, 1999, the per-call compensation rate was set at the local coin
rate minus $.066. The FCC's decision was appealed to the U.S. Court of Appeals
for the District of Columbia Circuit, which reversed and remanded the matter to
the FCC.
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On January 28, 1999, the FCC adopted a Third Report and Order in its
proceeding implementing the payphone compensation provisions of the
Telecommunications Act. This Order established a compensation rate for dial
around and toll free calls of $.24 per completed call. In addition, the FCC
applied the new rate retroactively to all compensation owed since October 7,
1997. Multiple petitions for reconsideration of the Order are pending before the
FCC, which seek both to increase and decrease the compensation amount, and to
change the compensation amount from a flat rate per call to a variable rate
depending on call duration. There can be no assurance as to the impact on dial
around compensation of such petitions to the FCC and the courts. The ultimate
outcome with respect to dial around compensation will have a significant impact
on the business and operations of payphone service providers and thus the demand
for payphones.
We cannot predict the outcome of future FCC actions with respect to
compensation to payphone service providers or other matters, the outcome of
additional rulings, if any, by the courts, nor the impact that such additional
actions might have on the Company, its customers or the public communications
industry in general.
Our Internet Terminal Appliance Business. Government regulation may
present a risk to our Internet Appliance business. The increasing use of the
Internet may result in the Government adopting laws and regulations that address
issues such as user privacy, pricing, content, taxation, copyrights,
distribution, and product and service quality. We may be subject to provisions
of the Federal Trade Commission that regulate advertising in the media,
including the Internet, and require advertisers to substantiate advertising
claims before disseminating advertising. The FTC has recently brought several
actions charging deceptive advertising through the Internet and is actively
seeking new cases. We may also be subject to the provisions of the recently
enacted Communications Decency Act. This Act imposes substantial monetary fines
and/or criminal penalties on any firm that distributes or displays certain
prohibited material over a public network. Although recent court decisions have
cast doubt on the constitutionality of this Act, it could subject us to
substantial liability. These or any other laws or regulations that may be
enacted in the future could have several adverse effects on our business. These
effects include substantial liability, including fines and criminal penalties;
the prevention of our ability to offer certain products or services; and the
limitation of growth in public information electronic commerce usage.
Environmental Matters
We are a potentially responsible party for undertaking response actions at
certain facilities for the treatment, storage, and disposal of hazardous
substances operated by others. In addition, we have received a formal "no
further action status" notification from the Florida Department of Environmental
Protection (the "FDEP") after several years of evaluation, assessment and
monitoring of soil and groundwater contamination at a former facility. We were a
small generator "De Minimis" party with respect to the sites operated by others,
and have been able to execute and should be permitted to continue to execute
buy-out agreements with respect to the remediation activities at the sites
operated by others. We have not incurred any significant costs to date and we
believe, based on presently available information, that we have no further or
only insignificant obligations with respect to the sites operated by others.
However, if additional waste is attributed to us, it is possible that we could
be liable for additional costs. We cannot estimate a range of costs, if any,
that we could incur in the future since such costs would be dependent upon the
amount of additional waste, if any, that could be attributed to us. Also, it is
always possible that the FDEP could reopen its investigation in the future and
require us to take further actions at our former facility. We cannot estimate
the range of costs, if any, that we could incur in the future since such costs
would be dependent upon the scope of additional actions, if any, that may be
required by the State of Florida.
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Employees
As of June 5, 2000, the Company employed 186 full-time employees. The
Company is not a party to any collective bargaining agreement and believes that
its relations with its employees are good.
Competition for qualified personnel in our industry is intense,
particularly among software development and other technical staff. We believe
that our future success will depend in part on our continued ability to attract,
hire and retain qualified personnel.
Seasonality
Our equipment sales are generally stronger during periods when weather
does not interfere with the maintenance and installation of payphone equipment
by our customers. Accordingly, our sales and revenues could be adversely
affected during certain periods of the year.
Risk Factors
Our business is subject to a number of risks, some of which are beyond our
control. If any of these risks actually occur, our business, financial condition
and operating results could be materially and adversely affected. Some of these
risks, in addition to those described throughout this document, are set forth
below:
We Have Incurred Recent Operating Losses. We have incurred net losses
since December 1998. During the quarter ended March 31, 1999, we incurred a net
loss of $1,520,000 and during the year ended March 31, 2000, we incurred a net
loss of $11,188,000. We expect to incur significant operating losses on a
quarterly basis in the foreseeable future until our Grapevine Internet appliance
business begins to generate sufficient sales and revenues to achieve
profitability. However, it is possible that this business may not become
profitable. The operating losses were attributable to non-recurring charges of
$1,772,000 during the quarter ended March 31, 1999 and $733,000 during the year
ended March 31, 2000, income tax expense of $3,286,000 as a result of recording
a valuation allowance against the entire balance of our deferred tax asset,
declining sales and revenues from our payphone business and investments in the
development of our Grapevine terminal appliances and e-Prism software systems.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early development stage
of a business, particularly companies in new and rapidly evolving markets such
as non PC Internet appliances and Internet services. To address these risks and
to achieve and sustain profitability, we must, among others things:
o Establish the strategic alliances and enter into supply agreements
with the targeted customers/partners in the U.S; o Establish the
Grapevine network as a new, valuable advertising media;
o Establish strategic alliances with information aggregators, content
providers and others who have a commitment to the non-PC based
appliance industry;
o Emphasize service, support and technological innovation to
differentiate us from wireless phone and Internet kiosk vendors;
o Focus on delivering value to consumers through services they want,
and continually expanding and improving offerings to remain ahead of
competitive alternatives;
o Expand our sales and marketing efforts and assist our
customers/partners in their sales and marketing efforts, including
the development of relationships with others to sell advertising;
and
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o Leverage our infrastructure to create a shared services operation to
control expenses and development costs.
If we do not effectively address the risks we face, we may never achieve
or sustain profitability from our Internet appliance business. In addition,
there is no assurance that our business will not continue to be adversely
affected by further declines in payphone usage and revenues.
Our Grapevine Internet Appliance Business Is in the Development Stage. We
have limited or no experience in marketing Internet terminal appliances,
developing advertising and content relationships and operating as an
applications service provider. We have recently begun deployment of our
Grapevine terminals and our initial display advertising application. Our
information content creation and delivery, e-mail and e-commerce applications
are still in development and there is no assurance that we will be able to
successfully develop, or develop on an timely basis, these and other
applications for our Internet appliance business that are necessary to
successfully position the Grapevine terminals as a valuable advertising medium.
We have not generated any significant revenues from our Internet terminal
appliance business. If we are unable to develop, or develop on a timely basis,
planned software applications and advertising and content relationships, market
our Grapevine terminals and position our Grapevine terminals as a valuable
advertising medium, we may not be able to generate any significant revenues from
this business, which would adversely affect our future prospects. Moreover, if
we are able to develop our Internet terminal appliance business, there can be
assurance that the public communications market will accept the business or that
it will generate significant revenues or be profitable. Also, our future success
in the Internet appliance business will depend on our ability to attract, train,
retain and motivate highly skilled technical, managerial, sales and marketing
and business development personnel.
Our Quarterly Results Are Likely to Fluctuate. Our operating results have
in the past been, and may continue to be, subject to quarterly fluctuations as a
result of a number of factors, many of which are beyond our control and which
could have an adverse impact on our operations and financial results. These
factors include the introduction and market acceptance of new products, the
timing of orders, variations in product costs or mix of products sold, increased
competition in the public communications industry, changes in general economic
conditions and changes in specific economic conditions in the public
communications industry. In the future, we believe that these factors will also
include variable demand for content and information services by Grapevine
terminal users, the cost of acquiring content, the availability of content, our
ability and the ability of our customers/partners to attract and retain
advertisers, our ability to attract and retain content and e-mail providers,
seasonal trends in Grapevine terminal usage and advertising placements, the
amount and timing of fees paid to our content and information aggregators, the
productivity of our direct sales force and the sales forces of our
customers/partners in generating advertising revenues, our ability to enhance
and support our technology, the amount and timing of increased expenditures for
expansion of our e-Prism network and operations, the result of litigation that
is currently ongoing against us and litigation that may be filed against us in
the future, our ability to attract and retain key personnel, the introduction of
competing Internet appliance products, technical difficulties and network system
downtime.
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Our Business Is Subject to Rapid Technological Change. Our operating
results will depend to a significant extent on our ability to reduce the costs
to produce existing products and introduce new products to remain competitive.
The success of new products, including without limitation our Grapevine
terminals, is dependent on several factors, including proper new product
definition, product cost, timely completion and introduction of new products,
differentiation of new products from those of our competitors and market
acceptance of those products. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products
to market in a timely manner, or achieve market acceptance of our products or
that products and technologies developed by others will not render our products
or technologies obsolete or noncompetitive.
In addition, evolving public network capabilities and standards, evolving
customer demands and frequent service introductions may impact the Internet
appliance market. Our future success in this market depends in part on our
ability to improve the performance, content personalization and service
reliability in response to user and competitive pressures. Our efforts in these
areas may not be successful. If the telephone companies adopt new network
technologies or standards, we may need to incur substantial expenditures
modifying or adapting the delivery vehicles for our planned content services. We
will also be dependent upon others to maintain the integrity and reliability of
the Internet infrastructure. Any degradation of Internet performance or
reliability could adversely affect the ability to market the Grapevine medium to
advertisers. In addition, if Internet technology does not continue to progress
it may not serve as a viable commercial platform for advertising, promotions and
electronic commerce, which would adversely affect our prospects and business.
Changes in Telecommunications Law and Regulations May Affect Our Business.
Changes in domestic and international telecommunications requirements could
affect sales of our products, including Grapevine terminals, and the operations
of our customers. In the United States, our products must comply with various
Federal Communication Commission and state regulatory requirements and
regulations. In countries outside of the United States, our products must meet
various requirements of local telecommunications authorities. Our failure to
obtain timely approval of products or to promptly modify the products as
necessary to meet new regulatory requirements could have a material adverse
effect on our business, operating results and financial condition.
Our International Business Is Subject to Numerous Risks. We conduct
business internationally through exports. Accordingly, our future results could
be adversely affected by a variety of uncontrollable and changing factors
including foreign currency exchange rates, regulatory, political or economic
conditions in a specific country or region, trade protection measures and other
regulatory requirements and changes thereto, government spending patterns and
natural disasters, among other factors. Any or all of these factors could have a
material adverse impact on our international business.
We intend to market our Grapevine terminal and related services
internationally after we have implemented our North American strategy. There is
no assurance that we will be successful marketing our Grapevine terminals and
services internationally. We have no experience in developing advertising,
content and information delivery applications or using local Internet service
capabilities in foreign markets. We also have limited experience as an
applications service provider in international markets, which include risks such
as regulation, tax consequences, export control, trade barriers and legal
liabilities, among others. If any of these risks occur, our prospective
international business could suffer.
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Our Common Stock Price Has Been and May Continue to be Volatile. Our
common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results and the
published expectations of analysts and announcements by our competitors and us.
In addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many technology companies in
particular and that have often been unrelated to the operating performance of
these companies. These factors, as well as general economic and political
conditions, may adversely affect the market price of our common stock in the
future.
Our Internet Terminal Appliance Business Model Is Evolving and Is
Unproven. Our Grapevine terminal appliance business model is evolving and
unproven. We plan to develop content internally and aggregate content from
third-party content providers, distribute this content to users of Grapevine
terminals nationally and internationally and share in the revenues from national
and local advertisements, sponsorships and promotions generated from Grapevine
terminals with our customers/partners. Our business model is new to the public
communications market both nationally and internationally, is unproven and is
likely to continue to evolve. Moreover, we may not be aware of all of risks
entailed by this new business model. Accordingly our business model may not be
successful, and we may need to change it. Our ability and the ability of our
customer/partners to generate advertising, sponsorship and promotional revenues
by distributing content services to the general public depends, in part, on our
success in persuading advertisers of the effectiveness of Grapevine terminals as
a new advertising medium. We intend to continue to develop our business model as
we explore our opportunities in this new electronic interactive advertising and
information delivery channel to the public. Our business and future prospects
would be adversely affected if our plans and business model do not prove
successful or if our customers/partners or we are unable to execute as
anticipated.
Our Payphone Revenues May Decline Faster Than Expected. Payphone usage and
our revenues from our existing payphone business may decline faster than
expected, which could have a material adverse impact on our operations and
financial results and the liquidity available to fund our Internet appliance
business.
Our Future Prospects Are Dependent on the Success of Our Internet Terminal
Appliance Business. In the future, we plan to rely significantly on sales of
Grapevine terminals, revenues from management services and a share of revenues
from advertising and sponsorships generated from Grapevine terminals. We plan to
derive significant revenues from sharing revenues generated by our
customers/partners and us from the sale of national and local advertisements,
sponsorships and promotions that support the profitable delivery of content and
information. Our ability and the ability of our customers/partners to generate
and increase these revenues will depend on such factors as the acceptance of
Grapevine terminals as an advertising medium by national and local advertisers,
the acceptance and regular use of our planned content, information and
electronic commerce capabilities by a large number of users who have demographic
characteristics that are attractive to advertisers, the success of our strategy
to sell local advertising, sponsorships and promotions across the nation, the
expansion and productivity of our advertising sales force and those of our
customers/partners, and the development of the Grapevine terminal as an
attractive platform for electronic commerce. Our business and future prospects
would be adversely affected if the Grapevine terminals were not accepted as a
valuable advertising medium and as a platform for electronic commerce.
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Our Internet Appliance Business Will Rely on Information Aggregators and
e-Mail Providers. We anticipate that we will rely on relationships with
information aggregators and e-mail service providers, which are in the early
stage of development. Our customers/partners and we will be able to generate
revenues from advertising, sponsorships and promotions only if we can secure and
maintain distribution of content, information and e-mail services on acceptable
commercial terms through mutually beneficial arrangements with information
aggregators. We cannot assure that any arrangements with information aggregators
can be developed, or if developed, can be maintained in the foreseeable future.
It is uncertain whether these relationships will become or remain profitable or
result in benefits to us that outweigh the costs of the relationships. Our
inability to develop these relationships, the loss of any relationship
established with information aggregators and the inability to replace any
relationships that are lost in a timely and effective manner with other
relationships that provide comparable content, information and e-mail service
could have an adverse effect on our business and future prospects.
We Rely on a Small Number of Customers. A few customers have historically
accounted for a significant portion of our sales and revenues of our payphone
business. In addition, we plan to derive a substantial portion of our sales and
revenues from our Internet appliance business from a small number of these
customers. If these customers do not accept our Grapevine terminal appliances or
our business model or determine that advertising and other revenues do not
justify the investment, our business and future prospects could be adversely
affected. Also, the loss of any significant customer or a significant reduction
in sales and revenues from any of these customers would materially adversely
affect our operations and business.
We will rely on our customers/partners to develop relationships with media
companies and direct marketing companies to market and sell advertising and
generate revenues from national and local advertisements, sponsorships and
promotions. These customers/partners have limited or no experience developing
these relationships or selling electronic media advertising. They may have to
expend significant time and effort in establishing the media relationships and
training their sales forces. Our customers/partners and us will also rely on the
media production infrastructure of the media companies for the billing and
collection of national and local advertisements, sponsorships and promotions and
the production of display and banner advertisements. The failure of our
customers/partners to establish media relationships that generate meaningful
revenues or the failure of the media companies to maintain and support an
advertisement production infrastructure could adversely affect our business.
Our Business Is Highly Competitive. The payphone business, the Internet
appliance business and interactive media market are extremely competitive, and
the Internet appliance and interactive media markets are evolving and rapidly
changing. Our current and prospective competitors include many large companies
that have substantially greater resources than we have.
Advertising Arrangements May Involve Risks. The development of advertising
and sponsorship arrangements by our customers/partners and us involve risks. We
anticipate that national and local advertising, sponsorship and promotion
arrangements will be sold under short-term agreements of less than six months.
In addition, we anticipate that advertisers and sponsors would be able to cancel
these agreements, change their expenditures or buy from potential competitors on
relatively short notice and without penalty. Because we expect to derive a large
portion of our future revenues from advertising, sponsorship and promotion
arrangements, short-term agreements could expose our customers/partners and us
to competitive pressures and potentially severe fluctuations in financial
results. We anticipate that advertisers and sponsors will require guarantees
regarding the minimum number of impressions or click-throughs by Grapevine
terminal users. These arrangements expose our customers/partners and us to
substantial risks, including the risk of providing free advertising until the
minimum levels are met, which could adversely affect the financial results of
our customers/partners and us.
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Advertisers May Not Accept the Grapevine Terminal Appliances as an
Advertising Medium. Our Grapevine terminals are not an established advertising
medium, and media companies, advertising agencies and potential advertisers have
no experience with the Grapevine terminal network. As the Grapevine medium
evolves, advertisers may find that traditional methods of advertising are more
effective methods of advertising than using the Grapevine medium.
Intense competition in the sale of advertising on the Internet and other
interactive media has led to a wide range of rates and offer a variety of
pricing models for various advertising services. As a result, we cannot
precisely predict the future advertising revenues that the Grapevine medium
could achieve or which pricing models advertisers will adopt. For example, if
many advertisers base their advertising rates on the number of clicks through
the content rather than the number of impressions, then advertising revenues
would be less. There are no widely accepted standards for measuring the
effectiveness of interactive media advertising, and standards may not develop
sufficiently to support the Grapevine medium as a significant advertising
medium. We believe that the Grapevine advertising rates will be based on a
combination of impressions and clicks to content, but there is no assurance in
that regard. Also, advertisers may not accept our measurements or our
measurements could contain errors.
Industry analysts and others have made many predictions concerning the
growth of the interactive media advertising market. Many of these predictions
have not been accurate and cannot be relied upon. This growth may not occur or
may occur more slowly than estimated. If the Grapevine medium does not develop
as an effective advertising medium, our business and prospects will be adversely
affected.
Our Internet Appliance Business Will Rely on the Performance of Our
Systems. Our Internet appliance business will be dependent upon the performance,
reliability and availability of our systems and content delivery mechanisms. Our
revenues will depend, in large measure, on the number of users that access our
content and electronic commerce services. Our servers and communications
hardware are located at our service bureau facility and additional disaster
recovery hardware is located at our headquarters facility. Our systems and
service operations could be damaged or interrupted by fire, flood, power loss,
telecommunications or Internet failure, break-in and similar events. In
addition, these systems host sophisticated software, which may contain bugs that
could interrupt service. Any systems interruptions that result in the
unavailability of phone, content and electronic commerce services and data would
reduce the volume of users and the value of our services to customers/partners,
advertisers, information aggregators and promotion sponsors, which could
adversely affect our business and prospects.
We Will Rely on the Internet Infrastructure. The success of our Internet
appliance business may depend in a large part on other companies maintaining the
Internet infrastructure. We will rely on other companies to maintain a reliable
network that provides speed, data capacity and security and to develop products
that enable reliable Internet access and services. If the Internet continues to
experience growth in the number of users, frequency of use and amount of data
transmitted, the Internet infrastructure may be unable to support the demands
placed on it, and the Internet's performance or reliability may suffer. Any
degradation of Internet performance or reliability could cause a degradation of
our content delivery services, which could adversely affect the ability of our
customers/partners and us to generate significant advertising revenues or cause
advertisers to reduce or eliminate the use of the Grapevine medium.
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We Are Subject to Pending and Potential Legal Proceedings. We are subject
to legal proceedings and claims from time to time, and expect to continue to be
in the ordinary course of our business, including claims of alleged infringement
of patents, trademarks and other intellectual property rights owned by others.
Such claims, even if without merit, could require the expenditure of significant
financial and managerial resources, which could harm our business. In addition,
any judgments against us, particularly for infringement of intellectual property
rights, could have a material adverse effect on our business, results of
operations and financial position.
We Will Receive Information That May Subject Us to Liability. We will
receive information and content from third parties and may be liable for the
data that is contained in the content because of the distribution of the content
and information to the Grapevine terminals. We could be subject to legal
liability for such things as defamation, negligence, intellectual property
infringement and product and service liability. Agreements that we may obtain
for content delivery may not contain indemnity provisions in favor of us. We do
not, to date, knowingly have such liabilities. While we have not received any
claims from third parties or users, we may receive claims in the future. Any
liability that we incur as a result of content we receive from third parties
could harm our financial results and financial position.
Potential Software Defects May Adversely Affect Our Business. Our product
software, our management systems software and our server software is developed
internally and integrated with licensed technology. We also use external
suppliers for the development of software. All of this software may contain
undetected errors, defects and bugs. Although we have not suffered significant
harm from any errors or defects to date, we may discover significant errors or
defects in the future that we may or may not be able to fix. The correction of
significant software defects could require the expenditure of significant
financial and engineering resources, which could have an adverse effect on our
business, operating results and financial position. In addition, if we were
unable to correct significant software defects our business and prospects would
be materially adversely affected.
Our e-Prism Network Is Subject to Capacity Constraints and Security Risks.
We will have to expand and upgrade our transaction processing systems and
network infrastructure if the volume of traffic on our Grapevine/e-Prism network
increases. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our Grapevine terminal content services or
expand and upgrade our systems and network equipment to accommodate these
increases in a timely manner. We could experience significant capacity
constraints, unanticipated system disruptions and poor service conditions, which
could have an adverse effect on our Internet Appliance business.
Even though we have implemented security measures, our e-Prism network
faces security risks common to other IP-based networks. As with similar
networks, our network may be vulnerable to hackers and others, computer viruses
and other disruptive problems. Someone who is able to circumvent security
measures could misappropriate our proprietary information, content and phone
usage data, or measurements of performance and reliability, or cause
interruptions to our service delivery and operations. Internet and online
service providers have in the past experienced, and may in the future
experience, interruptions in service as a result of accidental or intentional
actions of Internet users, and current and former employees. We will continue to
attempt to protect our network against the threat of security breaches or
alleviate problems caused by breaches. Eliminating human circumvention of these
measures, computer viruses and other security problems may require interruptions
or delays of service delivery and data recovery, any of which could harm our
business.
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We May be Unable to Protect or Enforce Our Intellectual Property Rights.
We may be unable to adequately protect or enforce our intellectual property
rights. Our success in the Internet appliance business may depend significantly
upon our proprietary technology. To protect our proprietary rights, we rely on a
combination of copyright and trademark laws, patents, trade secrets,
confidentiality agreements with employees and third parties and protective
contractual provisions. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our services and products or obtain and
use information that we regard as proprietary. In addition, others may possibly
independently develop substantially equivalent intellectual property. If we do
not effectively protect our intellectual property, our business could suffer. We
may have to litigate to enforce our intellectual property, to protect our trade
secrets or to determine the validity and scope of other parties' proprietary
rights. Whether or not a successful claim of infringement is brought in our
favor or in favor of a third party, such defense and litigation could harm our
financial results and impact our delivery of services in a timely and
cost-effective manner.
We Need Additional Financing. As of March 31, 2000, we were not in
compliance with one of the financial covenants contained in the loan agreements
between our bank and us. As a result, the bank stopped advancing funds under the
revolving credit lines provided to us under the loan agreements, and had the
right to accelerate the maturity of outstanding indebtedness under the loan
agreements. On April 12, 2000, we entered into a Forbearance and Modification
Agreement (the "Forbearance Agreement") with the bank that modified the
provisions of the loan agreements. Under the terms of the Forbearance Agreement,
the maturity date of indebtedness outstanding under the loan agreements was
accelerated to July 31, 2000 and the availability of additional funds under a
$2,000,000 export revolving credit line (none of which was borrowed as of such
date) and a $1,500,000 equipment credit line ($281,000 of which was borrowed as
of such date) was cancelled. During the term of the Forbearance Agreement, the
outstanding indebtedness under a $10,000,000 working capital revolving credit
line and a $4,000,000 installment note cannot exceed the value of collateral
consisting of eligible accounts receivable and inventories, except with respect
to permitted overadvances. The Forbearance Agreement permits an overadvance of
$2,800,000 through June 30, 2000 and $1,500,000 thereafter until July 31, 2000
when all outstanding indebtedness matures.
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
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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.
The Company's consolidated financial statements included in Item 8 of this
report have been prepared assuming that the Company will continue as a going
concern. 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 to the consolidated financial statements
included in Item 8 of this report. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Item 2. PROPERTIES
The Company owns and occupies two 24,000 square foot buildings located at
6428 Parkland Drive, Sarasota, Florida. These buildings, which were constructed
in 1987 and 1989, house our principal administrative, engineering, marketing and
sales personnel and activities. The two buildings are owned subject to mortgage
indebtedness pursuant to a promissory note with our bank.
The Company leases the following properties:
o 11,200 square feet of office space in a building located at 1060
Windward Ridge Parkway, Alpharetta, Georgia under a five-year lease
agreement dated November 17, 1997 containing a five-year renewal
provision, which was assigned to the Company in October 1999;
o A 53,400 square foot manufacturing facility located at 315 Waugh
Boulevard, Orange, Virginia under a one-year lease agreement that
ends on July 31, 2000 and that is renewable by the Company for two
additional terms of one year each; and
o A 24,000 square foot warehouse facility located at 13180 James
Madison Highway, Orange, Virginia under a six-month lease agreement
that ends on November 30, 2000 and that is renewable by the Company
for one additional six-month term.
Our service bureau data center and some of our selling, design and
development personnel are housed in the Alpharetta, Georgia leased facility. Our
assembly, refurbishment and warehouse facilities are housed in the Orange,
Virginia leased facilities. The Company believes that its owned and leased space
is adequate for its current business.
Item 3. LEGAL PROCEEDINGS
Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al.
defendants. San Diego Superior Court Case No. 691635. This punitive class action
was filed in 1995 in the Superior Court of the State of California for the
County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former
customer that filed for bankruptcy, conspired with its own officers and
professionals, and with various telephone suppliers (including the Company) to
defraud investors in Amtel by operating a Ponzi scheme. See Item 3, Legal
Proceedings of Part I of the Company's Form 10-KSB for the fiscal year ended
March 31, 1996 and Item 1, Legal Proceedings of Part II of the Company's Form
10-Q for the quarter ended September 30, 1996.
39
<PAGE>
On September 28, 1998, the Court granted our Motion for Summary Judgment
and the Court dismissed us from the class action. On December 11, 1998, the
plaintiffs appealed the Court's decision to grant our 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 we are subject to various other legal proceedings incidental to the
conduct of our business, we do not believe that there are any such pending legal
proceedings that are material to our business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended March 31, 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market System of The
Nasdaq Market under the symbol "ECTL." The following table sets forth the high
and low sales prices of our common stock for each of the quarterly periods
during the years ended March 31, 2000 and 1999 as reported by the Nasdaq
National Market System:
High Low
------ -------
Year Ended March 31, 2000:
Quarter Ended June 30, 1999 3 7/8 1 7/16
Quarter Ended September 30, 1999 2 3/32 1 7/32
Quarter Ended December 31, 1999 4 1 1/4
Quarter Ended March 31, 2000 8 1 13/16
Year Ended March 31, 1999:
Quarter Ended June 30, 1998 6 23/32 4 3/16
Quarter Ended September 30, 1998 6 1/2 4 1/4
Quarter Ended December 31, 1998 6 1/4 4 3/4
Quarter Ended March 31, 1999 5 7/8 3 1/4
At June 22, 2000, we had 367 holders of record of our common stock.
We have never declared or paid any cash dividends on our common stock and
do not intend to pay cash dividends in the foreseeable future. Under the terms
our bank loan agreements we are prohibited from paying dividends, other than
dividends payable in common stock, without the prior written consent of the
bank.
----------
40
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data (in thousands, except per share
data) is qualified in its entirety by reference to the more detailed
consolidated financial statements and notes thereto included elsewhere in this
report. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations (1)
Net sales $ 47,295 $ 65,263 $ 46,250 $ 26,832 $ 21,462
Gross profit 12,115 21,628 17,605 10,949 8,224
Selling, general and administrative
expenses 9,984 10,560 9,930 6,326 6,465
Engineering, research and
development expenses 6,479 6,121 4,514 2,623 2,257
Amortization expense 2,263 2,084 654 32 25
Other charges (credits) (2) 733 1,772 -- (331) 1,844
Net income (loss) (3) $(11,188) $ 361 $ 1,757 $ 1,628 $ (1,291)
Earnings (loss) per common and
common equivalent share (4):
Basic $ (0.83) $ 0.03 $ 0.18 $ 0.20 $ (0.16)
Diluted $ (0.83) $ 0.03 $ 0.18 $ 0.20 $ (0.16)
Financial Position
Current assets $ 19,073 $ 31,327 $ 28,124 $ 10,982 $ 10,227
Current liabilities 19,602 10,634 7,887 3,085 3,939
Total assets 59,709 71,295 67,438 15,944 14,929
Long-term obligations 208 10,355 9,891 232 432
Retained earnings (deficit) (7,508) 3,680 3,319 1,562 (66)
Stockholders' equity $ 39,899 $ 50,306 $ 49,660 $ 12,627 $ 10,558
</TABLE>
(1) On December 18, 1997, we acquired Technology Service Group, Inc.
("TSG") pursuant to a merger and on September 30, 1997 we acquired
from Lucent Technologies Inc. ("Lucent") certain assets related to
Lucent's payphone manufacturing and component parts business (the
"Lucent Assets"). Our consolidated statements of operations and
other comprehensive income (loss) for the years ended March 31, 2000
and 1999 include the operating results of TSG and the operating
results from the Lucent Assets. Our consolidated statement of
operations and other comprehensive income (loss) for the year ended
March 31, 1998 includes the operating results of TSG and the
operating results from the Lucent Assets from the respective dates
of acquisition. See Item 8 - "Consolidated Financial Statements and
Supplementary Data."
(2) Other charges for the year ended March 31, 2000 represent
restructuring charges. See Item 8 - "Consolidated Financial
Statements and Supplementary Data." Other charges for the year ended
March 31, 1999 include expenses of $1,240 incurred in connection
with a possible business combination that was terminated and $490 of
charges related to the reorganization of our sales and marketing
organization. Other charges (credits) for the years ended March 31,
1996 and 1997 represent an impairment reserve with respect to notes
receivable due to the bankruptcy of one of our customers, legal
expenses related to the bankruptcy proceeding and adjustments
thereto related to the settlement of the proceeding. See Item 8 -
"Consolidated Financial Statements and Supplementary Data."
(3) At March 31, 2000, the Company recorded a valuation allowance
amounting to the entire balance of its deferred tax asset, which
increased the Company's net loss for the year then ended by $6,163.
(4) Earnings per share have been restated for the years ended March 31,
1997 and 1996 to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
41
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
notes thereto included in Item 8 - "Consolidated Financial Statements and
Supplementary Data". All dollar amounts set forth herein, except per share data,
are stated in thousands.
Results of Operations
On December 18, 1997, we acquired Technology Service Group, Inc. ("TSG")
pursuant to a merger for a total purchase price of $35,605, and on September 30,
1997, we acquired from Lucent Technologies Inc. ("Lucent") certain assets
related to Lucent's payphone manufacturing and component parts business (the
"Lucent Assets") for a total purchase price of $5,957 (the "fiscal 1998
acquisitions"). Our consolidated statements of operations and other
comprehensive income (loss) for the years ended March 31, 2000 and 1999 include
the operating results of TSG and the operating results from the Lucent Assets.
Our consolidated statement of operations and other comprehensive income (loss)
for the year ended March 31, 1998 includes the operating results of TSG and the
operating results from the Lucent Assets from their respective dates of
acquisition.
We incurred a net loss of $11,188, or ($.83) per diluted share, for the
year ended March 31, 2000 (fiscal 2000) as compared to net income of $361, or
$.03 per diluted share, for the year ended March 31, 1999 ("fiscal 1999") versus
net income of $1,757, or $.18 per diluted share, for the year ended March 31,
1998 ("fiscal 1998"). Our net loss for the year ended March 31, 2000 reflects
substantial expenditures to develop our public access Internet terminal
appliances and related service operations, charges related to the restructuring
of our core payphone business of $733, tax expense of $3,286 as a result of
recording a valuation allowance amounting to the entire deferred tax asset
balance because of an uncertainty as to whether the deferred tax asset is
realizable and declines in revenues and sales and gross profit margins as a
result of industry conditions beyond our control, including the contraction of
the installed base of public access terminals, the consolidation of domestic
public communications providers, and declining industry revenues resulting from
increasing usage of wireless services and increased volume of dial-around (toll
free and access code) calls. As a result of the prolonged continuance of these
industry conditions, we do not believe that revenues and net sales from our core
payphone products and services will improve in the foreseeable future. In fact,
revenues and net sales of our core payphone business are expected to continue to
decline in the foreseeable future. However, we believe that our revenues and
sales may begin to grow as we launch our non-PC Internet appliances and related
services, but that a certain period of growth will be required before new
sources of revenues from these products and services support the related
operations. However, there can be no assurance in that regard. Therefore, we
expect to continue to report operating losses for at least the next year as we
invest in the development and launch of our Internet appliance products and
services.
Our public access Internet terminal appliances are designed to provide,
among others, advertising, sponsored information and content and e-commerce
capabilities in addition to traditional payphone capabilities. We believe, but
cannot assure, that the revenues that may be generated from these capabilities
will be substantially greater than the revenues generated from traditional
payphone services. We are developing the services to implement these
capabilities through a server network environment with a strategy for us to
share in the new revenue streams generated by our customers. We believe, but
cannot assure, that our target customers will begin to deploy our new products
and services during the third and fourth quarters of calendar year 2000 after
they complete the initial lab and market trials, which began in January 2000.
However, there is no assurance that our public access Internet terminal
appliances
42
<PAGE>
will be successfully introduced or accepted by the marketplace, or if they are,
that revenues from such products and related services and revenues derived from
advertising, sponsored content and other sources would have a material favorable
impact on the revenues of our customers or on our sales and revenues in the
foreseeable future or at all. Our ability to implement this strategy and develop
revenues and profits from the relatively new and evolving market for Internet
appliances, content and services is subject to substantial risks. See "The
Company's Business - Risk Factors." These risks include, but are not limited to
the following:
o uncertain acceptance of our public access Internet appliance
products by our customers and the public;
o uncertain acceptance of our public access Internet appliance
products as a new advertising media;
o our ability and the ability of our customers to attract and retain
advertisers;
o our ability to develop, deliver, enhance, maintain and support the
technology;
o our ability to attract and retain content providers and the cost and
availability of content;
o an evolving and unpredictable business model;
o the overall level of demand for content and e-commerce services in a
public access setting;
o seasonal trends in advertising placements;
o the amount and timing of increased expenditures for expansion of
operations, including the hiring of personnel, capital expenditures
and related costs;
o the result of litigation that may be filed against us in the future;
o our ability to attract and retain qualified personnel;
o the introduction of new or enhanced products and services by
competitors;
o technical difficulties, system downtime and system failures;
o political or economic events and governmental actions affecting
Internet operations or content; and
o general economic conditions and economic conditions specific to the
Internet and advertising industries.
The decline in net income for fiscal 1999 as compared to fiscal 1998 is
attributable to a number of factors, including, among others: (i) a reduction in
gross profit margin as a percentage of sales; (ii) an increase in costs and
expenses due to the fiscal 1998 acquisitions and integration of the operations
and assets acquired; (iii) expenses of $1,240 incurred in connection with
negotiations concerning a possible business combination that were terminated;
and (iv) a charge of $490 related to the reorganization of our sales and
marketing organization, all of which are more fully explained herein.
43
<PAGE>
Fiscal 2000 compared to Fiscal 1999
The following table shows certain line items in our consolidated
statements of operations and other comprehensive income (loss) for the year
ended March 31, 2000 and 1999 that are discussed below together with amounts
expressed as a percentage of sales.
<TABLE>
<CAPTION>
Percent Percent
2000 of Sales 1999 of Sales
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues and net sales $ 47,295 100% $ 65,263 100%
Cost of revenues and sales 35,180 74 43,635 67
Gross profit 12,115 26 21,628 33
Selling, general and administrative
expenses 9,984 21 10,560 16
Engineering, research and
development expenses 6,479 14 6,121 9
Other charges 733 2 1,772 3
Income tax expense 3,286 7 213 --
</TABLE>
Revenues and net sales by business segment and customer group for the
years ended March 31, 2000 and 1999 together with the increase or decrease and
with the increase or decrease expressed as a percentage change is set forth
below:
<TABLE>
<CAPTION>
Increase Percentage
2000 1999 (Decrease) Change
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Payphone Business:
Telephone companies $ 27,209 $ 32,507 $ (5,298) (16%)
Private operators 10,366 20,081 (9,715) (48)
Distributors 3,360 4,995 (1,635) (33)
International operators 6,282 7,680 (1,398) (18)
Internet Appliance Business:
International operators 78 -- 78 --
======== ======== ======== ========
$ 47,295 $ 65,263 $(17,968) (28%)
======== ======== ======== ========
</TABLE>
The decrease in revenues and net sales of our payphone business is
primarily attributable to a decrease in volume of product sales to all customer
groups partially offset by an increase in revenues from operator services and
from repair, refurbishment and upgrade services provided to telephone companies.
We believe that the fluctuations in domestic product sales and revenues from
repair, refurbishment and upgrade services are primarily attributable to the
contraction of the installed base of payphone terminals in the domestic market
and to declining revenues of payphone service providers caused by increasing
usage of wireless services and a higher volume of dial-around calls. In
addition, continuing downward pricing pressures contributed to the decline in
revenues and net sales to domestic customers. Revenues from operator services
increased by approximately $707 due to an increase in the number of PSPs using
the Company's services. The decrease in revenues and net sales of our payphone
business to international operators is primarily attributable to a decrease in
export volume of payphone terminals to customers in Latin America and Asia.
44
<PAGE>
We made our first commercial shipment of our Internet terminal appliances
at the end of the year under a contract with Canada Payphone Corporation.
Shipments of our Internet terminal appliances to domestic customers were made
under trial agreements, and did not generate any revenues during the year ended
March 31, 2000.
Revenues and net sales of products and services for the years ended March
31, 2000 and 1999 together with the increase or decrease and with the increase
or decrease expressed as a percentage change is set forth below:
<TABLE>
<CAPTION>
Increase Percentage
2000 1999 (Decrease) Change
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 12,896 $ 23,758 $(10,862) (46%)
Internet terminal appliances 78 -- 78 --
Electronic modules and kits 15,056 18,790 (3,734) (20)
Components and other products 5,804 12,200 (6,396) (52)
Services:
Repair, refurbishment and upgrade services 12,363 9,895 2,468 25
Other payphone services 1,098 620 478 77
======== ======== ======== ========
$ 47,295 $ 65,263 $(17,968) (28%)
======== ======== ======== ========
</TABLE>
Cost of sales and gross profit as a percentage of net sales approximated
74% and 26%, respectively, for the year ended March 31, 2000 as compared to 67%
and 33%, respectively, for the year ended March 31, 1999. The decline in the
gross profit percentage between such periods is principally attributable to (i)
the decrease in sales volume of products; (ii) the increase in the percentage of
sales and revenues from telephone companies at margins lower than those achieved
from other customer groups; (iii) downward pricing pressures; (iv) an increase
in the provision for obsolescence and slow moving inventories of $995; and (v)
the increase in revenues from lower-margin repair, refurbishment and upgrade
services.
The decrease in selling, general and administrative expenses is primarily
attributable to the decline in revenues and net sales, cost reductions and the
restructuring discussed below, offset by an increase in the estimated provision
for credit losses of $428, retirement compensation to our former president and
chief executive of $160 and recruiting expenses of $143. As a result of the
restructuring, we began to shift our marketing and selling resources to the
introduction of our public access Internet terminal appliances rather than
increasing overall spending. We began to realize the cost and expense reductions
from the restructuring during the third quarter of fiscal 2000.
During fiscal 2000, we made significant investments in the development of
our public access Internet terminal appliances and back office management
software which resulted in an increase in engineering, research and development
expenditures, including capitalized software development costs, of $3,337, or
approximately 49%, to $10,097 versus $6,760 for the year ended March 31, 1999.
Capitalized software development costs approximated $3,618 during the year ended
March 31, 2000 as compared to $639 during the year ended March 31, 1999. During
the year ended March 31, 2000, we abandoned a software development project
related to certain activities discontinued as part of the restructuring
discussed below, and recognized an impairment loss of $140. The impairment loss
is included in engineering, research and development expenses for the year ended
March 31, 2000. In May 2000, we began to reduce and realign our research and
development resources to reflect estimated resources to develop planned
application requirements over the next year.
45
<PAGE>
During the year ended March 31, 2000, we implemented a restructuring plan
to close our Sarasota, Florida manufacturing facility and consolidate
manufacturing operations, resize our core payphone business operations, reorient
our distribution strategy and begin to build support operations to introduce our
public access Internet terminal appliances to the market and provide the
services related thereto. In connection with this restructuring, we 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 $8 related to closed facilities. We believe, but cannot
assure, that the restructuring will have the impact of reducing costs and
expenses in all functional areas of the business by approximately $2,000
annually, net of increases in expenses to support our Internet appliance
business. We expect to begin to realize the full impact of the anticipated cost
and expense reductions from the restructuring during the quarter ending June 30,
2000. Other charges for the year ended March 31, 1999 related primarily to
expenses incurred with respect to an aborted business combination as further
discussed below.
During the year ended March 31, 2000, the Company recorded a valuation
allowance amounting to the entire balance of its deferred tax asset. The
increase in the valuation allowance of $6,163 resulted in a net tax expense of
$3,286 on a pre-tax loss of $7,902 during the year ended March 31, 2000 versus
an effective tax rate of 37% on pre-tax income of $574 for the year ended March
31, 1999.
Fiscal 1999 compared to Fiscal 1998
The following table shows certain line items in our consolidated
statements of operations and other comprehensive income (loss) for fiscal 1999
and fiscal 1998 that are discussed below together with amounts expressed as a
percentage of sales and with the change in the line item from period to period
expressed as a percentage increase or (decrease).
<TABLE>
<CAPTION>
Fiscal Percent Fiscal Percent Percentage
1999 of Sales 1998 of Sales Change
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 65,263 100% $ 46,250 100% 41%
Cost of goods sold 43,635 67 28,645 62 52
Gross profit 21,628 33 17,605 38 23
Selling, general and administrative
expenses 10,560 16 9,930 21 6
Engineering, research and
development expenses 6,121 9 4,514 10 36
Amortization 2,084 3 654 1 219
Interest (income) expense 517 1 (103) -- (602)
Other charges 1,772 3 -- -- --
Income tax expense 213 -- 853 2 (75)
</TABLE>
46
<PAGE>
We did not generate any revenues from our Internet appliance business
during the years ended March 31, 1999 and 1998. Revenues and net sales of our
payphone business by customer group for the years ended March 31, 1999 and 1998
together with the increase or decrease and with the increase or decrease
expressed as a percentage change is set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Telephone companies $ 32,507 $ 15,999 $ 16,508 103%
Private operators 20,081 18,684 1,397 7
Distributors 4,995 2,368 2,627 111
International operators 7,680 9,199 (1,519) (17)
-------- -------- --------- ----------
$ 65,263 $ 46,250 $ 19,013 41%
======== ======== ========= ==========
</TABLE>
As a result of the industry conditions discussed above, the revenues and
net sales of our payphone business, particularly with respect to telephone
companies, began to erode during the latter part of fiscal 1999. However, as a
result of the fiscal 1998 acquisitions and strong demand by private operators
and distributors, our revenues and net sales increased by 41% as compared to
fiscal 1998. The increase in our revenue and net sales is primarily due to an
increase in domestic volume, a substantial portion of which is attributable to
business with telephone companies acquired in connection with the fiscal 1998
acquisitions, offset by a slight decline in average selling prices and a decline
export volume.
Revenues and net sales of products and services for the years ended March
31, 1999 and 1998 together with the increase or decrease and with the increase
or decrease expressed as a percentage change is set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 23,758 $ 22,920 $ 838 4%
Electronic modules and kits 18,790 10,436 8,354 80
Components and other products 12,200 10,070 2,130 21
Services:
Repair, refurbishment and upgrade services 9,895 2,285 7,610 333
Other services 620 539 81 15
-------- -------- -------- -------
$ 65,263 $ 46,250 $ 19,013 41%
======== ======== ======== =======
</TABLE>
The growth in revenues and net sales of electronic modules and kits is
primarily attributable to the fiscal 1998 acquisitions and strong demand from
private operators and distributors. The growth in net sales of components and
other products and revenues from repair, refurbishment and upgrade services is
primarily attributable to the fiscal 1998 acquisitions. The decline in export
volume substantially offset an increase in net sales of payphone terminals to
private operators.
Cost of sales as a percentage of revenues and net sales increased to 67%
during fiscal 1999 from 62% during fiscal 1998 as a result of several factors,
including: (i) the increase in the percentage of sales to domestic telephone
companies and revenues from repair, refurbishment and upgrade services at
margins lower than those achieved from other products and services; (ii) a
slight reduction in average
47
<PAGE>
selling prices, primarily to large private operators and distributors; and (iii)
the introduction of new products, including our Eclipse(TM) payphone terminal.
The increase in selling, general and administrative expenses is primarily
attributable to inclusion of operations related to the fiscal 1998 acquisitions
for a full year versus a part of the year in fiscal 1998, and an increase in
sales commissions related to the 41% increase in sales, offset significantly by
reductions in personnel and facilities costs from the integration of the fiscal
1998 acquisitions and from the restructuring of the our selling and marketing
organization. In addition, the provision for credit losses, which in fiscal 1998
included significant reserves related to the impairment of certain international
notes, declined from $1,352 in fiscal 1998 to $117 in fiscal 1999.
The increase in engineering, research and development expenses is
primarily attributable to the expansion of our engineering resources to develop
advanced digital microprocessor based technology and an advanced open
architecture network management software system that would enable the
integration of our technologies in advanced video, information and internet
terminal applications for various vertical markets, and the inclusion of
development activities related to the fiscal 1998 acquisitions for a full year
versus a part of the year in fiscal 1998. In addition, capitalized software
development costs approximated $639 during fiscal 1999 as compared to
approximately $100 in fiscal 1998.
The increase in amortization is primarily attributable to amortization of
goodwill and identifiable intangible assets recorded in connection with the
fiscal 1998 acquisitions for an entire year as compared to part of the year in
fiscal 1998.
We incurred net interest expense during fiscal 1999 of $517 as compared to
net interest income of $103 during fiscal 1998 primarily as a result of an
increase in average outstanding indebtedness related to the fiscal 1998
acquisitions and capital expenditures, including capitalized software, of
$2,148.
Other charges during fiscal 1999 include $1,240 of expenses, consisting
primarily of legal, accounting and consulting fees incurred in connection with
negotiations concerning a possible business combination that were terminated by
the Company in April 1999 and $490 of charges related to the reorganization of
the Company's sales and marketing organization.
Our effective tax rate increased to 37% in fiscal 1999 from 33% in fiscal
1998 primarily due to an increase in nondeductible expenses consisting primarily
of amortization of goodwill.
Impact of Inflation
Our primary costs, inventory and labor, increase with inflation. However,
we do not believe that inflation and changing prices have had a material impact
on our business.
Liquidity and Capital Resources
Liquidity. As of March 31, 2000, we were in default of certain financial
covenants contained in our bank loan agreements (our "Loan Agreements"), and as
a result, the bank had the right to accelerate the maturity of outstanding
indebtedness. We entered into a Forbearance and Modification Agreement (the
"Forbearance Agreement") with our bank on April 12, 2000 that modified the terms
of our Loan Agreements. Under the terms of the Forbearance Agreement, the
maturity date of all indebtedness outstanding under the Loan Agreements,
including indebtedness outstanding under our revolving credit lines, an
installment note and a 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%, the annual interest rate under the revolving credit
lines was increased from one and one-half percentage point over the bank's
48
<PAGE>
floating 30 day Libor rate (7.63% at March 31, 2000) to two and one-half
percentage points above the bank's floating 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) and a $1,500 equipment
revolving credit line ($281 of which is outstanding at March 31, 2000) was
cancelled. In addition, the Forbearance Agreement permits an overadvance of
indebtedness outstanding under a $10,000 working capital revolving credit line
and a $4,000 installment note of $2,800 through June 30, 2000 and $1,500
thereafter based on the value of collateral consisting of eligible accounts
receivable and inventories. However, we are only able to borrow additional funds
under the working capital revolving credit line to the extent of any repayments
made to remain in compliance with the overadvance provisions of the Forbearance
Agreement. In accordance with the terms of the Forbearance Agreement,
outstanding bank debt in the aggregate amount of $11,460 at March 31, 2000 is
classified as a current liability.
During the year ended March 31, 2000, we used $7,700 of cash to fund
operating losses, net of non-cash charges and credits, and investing activities
related primarily to our Internet appliance business. These cash requirements
were financed from cash flows and reductions in net operating assets of our
payphone business. We believe that the operating, working capital and capital
expenditure requirements of our Internet appliance business will continue to be
significant during the next year, but that our payphone business will not be
able to support the anticipated requirements.
Accordingly, we are attempting to secure an asset based financing line,
additional equity capital and/or other sources of funding to refinance the
outstanding indebtedness under our Loan Agreements and to provide the capital to
fund our operating, working capital and capital expenditure requirements for the
next twelve months. We have received proposals with respect thereto and believe
that our efforts will be successful. However, there is no assurance that our
efforts will be successful, or if successful, that such financing would not be
available only on onerous terms. In addition, there is no assurance that any
such financing would provide the funding required to refinance outstanding
indebtedness and fund continued net operating losses and other liquidity
requirements. If our efforts to secure additional capital and other sources of
financing are not successful, we may be forced to further reduce our product
development efforts, slow down the launch of our public access Internet
appliances and take other actions that may adversely affect our growth potential
and future prospects. Further, if our efforts to raise additional capital and
other sources of financing are not successful, we will be unable to repay our
bank indebtedness and will experience further difficulties meeting all of our
obligations. Accordingly, there is no assurance that our cash resources will be
sufficient to meet our anticipated cash needs for operations, working capital
and capital expenditures for an extended period of time or for the next twelve
months unless we are able to successfully raise sufficient additional capital
and/or financing on satisfactory terms.
Financing Activities. We fund our operations, working capital requirements
and capital expenditures from internally generated cash flows and funds, if any,
available under bank credit lines. We borrow funds under our bank credit lines
to finance capital expenditures, increases in accounts and notes receivable and
inventories and decreases in bank overdrafts (as drafts clear), accounts payable
and accrued liability obligations to the extent that we are permitted when such
requirements exceed cash provided by operations, if any. We also use the
financing available under bank credit lines to fund operations and payments on
long-term debt when necessary. We measure our liquidity based upon the amount of
funds we are able to borrow under our bank credit lines, which varies based upon
operating performance and the value of collateral. At March 31, 2000, we are
unable to borrow any additional funds under the terms of our credit lines as a
result of the default discussed above, and have accumulated approximately $1,153
of cash.
At March 31, 2000 and 1999, outstanding debt under our $10,000 working
capital line was $6,095 and $5,185, respectively, and outstanding debt under our
$4,000 installment note was $3,322 and $4,000, respectively. Our bank will only
permit us to borrow additional funds under our $10,000
49
<PAGE>
revolving credit line to the extent we repay debt outstanding on the date of the
Forbearance Agreement and we are then in compliance with the terms of the
Forbearance Agreement. Outstanding indebtedness under our mortgage note was
$1,762 and $1,833 at March 31, 2000 and 1999, respectively. We also had
outstanding indebtedness of $281 under our capital equipment credit line at
March 31, 2000. During the year ended March 31, 2000, net proceeds under our
bank lines aggregated $1,191 before our default and the curtailment of our
ability to borrow funds under the Loan Agreements.
On March 29, 1999, we entered into an amendment (the "Amendment") that
modified the terms of our Loan Agreements. Pursuant to the Amendment: (i) our
working capital revolving credit line was reduced from $15,000 to $10,000; (ii)
we borrowed $4,000 under the terms of an installment note payable in sixty (60)
equal monthly installments, including interest at an annual interest rate of
7.55%; (iii) we established a $1,500 revolving credit line to finance our
capital expenditures; and (iv) we established a $2,000 revolving credit line to
finance our export activities. The proceeds from the term note were used to
reduce our then outstanding indebtedness under our former $15,000 working
capital revolving credit line, and net payments under our working capital
revolving credit lines amounted to $2,460 during the year ended March 31, 1999.
During the year ended March 31, 1998, proceeds from bank notes payable
aggregated $8,770 and consisted of $3,050 under an installment note due on
October 2, 2004, $3,800 under term notes due on March 31, 1998 and $1,920 under
a mortgage note. The proceeds under the installment and term notes were used to
finance the purchase of the Lucent assets and for other general corporate
purposes. The proceeds under the mortgage note were used for general corporate
purposes and to retire our then outstanding mortgage note with a principal
balance of $315.
In addition, during the year ended March 31, 1998, we secured a $15,000
working capital revolving credit line from our bank. The initial financing
proceeds drawn under this $15,000 working capital revolving credit line were
used to refinance and retire our then outstanding debt under a $2,000 working
capital line of credit, the installment and term notes incurred to finance the
purchase of the Lucent assets and outstanding bank indebtedness of TSG at the
date of acquisition of $3,970. Net proceeds under our working capital revolving
credit lines during the year ended March 31, 1998 were $3,675.
Aggregate principal payments under notes payable and capital lease
obligations during the years ended March 31, 2000, 1999 and 1998 were $829, $66
and $7,302, respectively.
Indebtedness outstanding under our Loan Agreements is collateralized by
substantially all of our assets. Our Loan Agreements, as modified by the
Forbearance Agreement, contain covenants that prohibit or restrict us from
engaging in certain transactions without the consent of the bank, including
mergers or consolidations and disposition of assets, among others. Additionally,
our Loan Agreements, as modified by the Forbearance Agreement, require us to
comply with specific financial covenants, including covenants with respect to
working capital and net worth. Noncompliance with any of these covenants or the
occurrence of an event of default, if not waived, could accelerate the maturity
of the indebtedness outstanding under the Loan Agreements.
Bank overdrafts related to outstanding drafts increased by $1,428 during
the year ended March 31, 1999 and declined by a corresponding amount during the
year ended March 31, 2000.
During the years ended March 31, 2000, 1999 and 1998, the net proceeds
from the exercise of common stock options amounted to $642, $285 and $295,
respectively.
50
<PAGE>
Operating Activities. Cash flows provided by (used in) operating
activities for the years ended March 31, 2000, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $(11,188) $ 361 $ 1,757
Non-cash charges and credits, net 8,937 4,876 3,176
-------- -------- --------
(2,251) 5,237 4,933
-------- -------- --------
Changes in operating assets and liabilities:
Accounts and notes receivable 3,807 (1,471) (2,695)
Inventories 3,809 (5,296) 3,112
Accounts payable, accrued expenses and
other current liabilities (282) 33 (1,785)
Refundable taxes and other operating assets 1,927 (1,189) (864)
-------- -------- --------
9,261 (7,923) (2,232)
-------- -------- --------
$ 7,010 $ (2,686) $ 2,701
======== ======== ========
</TABLE>
Our operating cash flow is primarily dependent upon operating results,
sales levels and related credit terms extended to customers and inventory
purchases, and the changes in operating assets and liabilities related thereto.
During the year ended March 31, 2000, we used $2,251 in cash to fund operating
losses net of non-cash charges and credits. During the years ended March 31,
1999 and 1998, we generated $5,237 and $4,933 in cash, respectively, from
earnings plus non-cash charges and credits. However, during the year ended March
31, 2000, we generated $9,261 of cash from changes in operating assets and
liabilities as compared to the years ended March 31, 1999 and 1998, when we used
$7,923 and $2,232 of cash, respectively, to fund net increases in operating
assets and liabilities.
Our operating assets and liabilities are comprised principally of accounts
and notes receivable, inventories, accounts payable, accrued expenses and other
current liabilities. During the year ended March 31, 2000, we generated $3,807
and $3,809 of cash through reductions in accounts and notes receivable and
inventories, respectively. We also generated $1,645 of cash from changes in
other operating assets and liabilities during the year ended March 31, 2000. In
comparison, during the year ended March 31, 1999, we used $1,471 and $5,296 of
cash to fund increases in accounts and notes receivable and inventories,
respectively, and $1,156 of cash to fund changes in other operating assets and
liabilities, and during the year March 31, 1998, we generated $3,112 in cash
from a reduction of inventories and used $2,695 and $2,649 of cash to fund an
increase in accounts and notes receivable and to fund changes in other operating
assets and liabilities, respectively. Cash used to pay restructuring and
reorganization obligations accrued and acquired during the years ended March 31,
2000, 1999 and 1998
51
<PAGE>
was $782, $923 and $152, respectively. Outstanding restructuring and
reorganization obligations that will affect future operating cash flows
aggregated $440 at March 31, 2000.
Our current ratio declined to .97 to 1 at March 31, 2000 as compared to
2.95 to 1 at March 31, 1999 primarily due to our loss for the year ended March
31, 2000, the classification of all outstanding bank indebtedness as a current
liability, the increase in the deferred tax valuation allowance of $6,196 and
the capital asset and capitalized software expenditures discussed below. During
the year ended March 31, 2000, our current assets decreased by $12,254 (39%) and
current liabilities increased by $8,968 (84%). Working capital decreased to a
deficit of $529 at March 31, 2000 from $20,693 at March 31, 1999. Extension of
credit to customers and inventory purchases represent our principal working
capital requirements, and material increases in accounts and notes receivable
and/or inventories could have a significant effect on our liquidity. Accounts
and notes receivable and inventories represented in the aggregate 88% and 84% of
our current assets at March 31, 2000 and 1999, respectively. We experience
varying accounts receivable collection periods from our four customer groups,
and believe that credit losses will not have a significant effect on future
liquidity as a significant portion of our accounts and notes receivable are due
from customers with substantial financial resources. The level of our
inventories is dependent on a number of factors, including delivery requirements
of customers, availability and lead-time of components and our ability to
estimate and plan the volume of our business.
Investing Activities. Net cash used for investing activities during the
years ended March 31, 2000, 1999 and 1998 amounted to $5,449, $2,140 and $7,493,
respectively. The Company's capital expenditures consist primarily of
manufacturing tooling and equipment, computer equipment and building
improvements required for the support of operations and capitalized software,
including new product software development costs. Cash used for capital
expenditures aggregated $1,831, $1,468 and $960 during the years ended March 31,
2000, 1999 and 1998, respectively. During the years ended March 31, 2000, 1999
and 1998, cash used to acquire software and capitalized software development
costs aggregated $3,618, $680 and $129, respectively. In addition, cash used for
the acquisitions of TSG and the Lucent assets aggregated $447 and $5,957,
respectively, during the year ended March 31, 1998. As of March 31, 2000, we
have not entered into any significant commitments for the purchase of capital
assets.
Year 2000 Discussion
We have completed our efforts to assess the risks and impact of Year 2000
on our business and address Year 2000 issues resulting from computer programs
designed to use two-digit date codes rather than four digits to define the
applicable year. We assessed Year 2000 compliance of products and systems that
we presently sell and support, performed appropriate compliance testing and
modified and/or upgraded non-compliant product software related to such products
and systems. In some cases, we identified that certain of our products and
systems were Year 2000 compliant with issues, which means that they will operate
properly if programmed and configured in accordance with our published
guidelines. We also assessed Year 2000 compliance of our business and management
information systems and related computer equipment, performed compliance testing
and upgraded non-compliant software and equipment where necessary. In addition,
we assessed the readiness of third parties, particularly critical suppliers and
other third parties that have material relationships with us, to identify and
mitigate the risks to our business and operations in the event they experienced
Year 2000 problems and difficulties.
Based on Year 2000 inquiries that we have received from our customers
after December 31, 1999 and our investigations thereof, we are not aware of any
significant Year 2000 noncompliance issues related to the products and systems
that we presently sell and support. In addition, based on our Year 2000
compliance testing and remediation activities, the only products that we have
historically sold that
52
<PAGE>
are not Year 2000 compliant or compliant with issues are products that we have
discontinued to manufacture and that are no longer supported by the Company. We
have previously notified our customers that we do not intend to bring these
discontinued, non-compliant products into compliance and that they should
upgraded accordingly. We do not believe that we have an obligation to bring
these discontinued products into compliance or an obligation to replace these
products under our warranties since they were last sold more than five years
ago. Accordingly, we have not recorded any liability related to these products
in our financial statements.
The risks associated with the failure of our products to be Year 2000
compliant include: (1) loss of data or an adverse impact on the reliability of
data generated by our products; (2) loss of functionality; (3) failure to
communicate with other applications used by our customers that may not be Year
2000 compliant; and (4) potential litigation by customers with respect to
products and services no longer supported by us. However, based on Year 2000
inquiries received from our customers after December 31, 1999 and our
investigations thereof, we do not believe that these risks are significant or
that Year 2000 issues related to our products and systems will have a material
adverse impact on our business or operating results.
We have not experienced any material interruptions or operational problems
as a result of Year 2000 issues related to our business and management
information systems or from the failure of third parties, including critical
suppliers and other third parties that have material relationships with us, to
be Year 2000 compliant.
Principally, our existing engineering and information technology personnel
undertook our Year 2000 efforts. We have not separately tracked the costs
incurred for such efforts, but such costs consisted primarily of compensation
costs for the personnel assessing and mitigating the risk of Year 2000 on our
business. In addition, the costs incurred to upgrade or acquire new Year 2000
compliant software and equipment have not been material, and we do not believe
that any increases in administrative costs related to Year 2000 issues will be
material in the future. Further, we believe, but cannot assure, that we will not
incur any significant costs and expenses related to future Year 2000 remediation
activities or claims that may be filed against us related to Year 2000
noncompliance issues.
Selected Quarterly Data
The following sets forth a summary of selected unaudited statements of
operations and other comprehensive income (loss) data for the quarters ended
June 30, 1999, September 30, 1999, December 31, 1999 and March 31, 2000:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 (1) 1999 (2) 2000 (3)
-------- ------------- ------------ ---------
Unaudited
<S> <C> <C> <C> <C>
Revenues and net sales $ 12,758 $ 13,451 $ 12,669 $ 8,417
Gross profit $ 3,986 $ 2,649 $ 3,495 $ 1,985
Net loss $ (350) $ (1,574) $ (1,484) $ (7,780)
Comprehensive loss $ (350) $ (1,623) $ (1,507) $ (7,685)
Loss per common and
common equivalent share:
Basic $ (0.03) $ (0.12) $ (0.11) $ (0.57)
Diluted $ (0.03) $ (0.12) $ (0.11) $ (0.57)
</TABLE>
53
<PAGE>
(1) During the quarter ended September 30, 1999, the Company recorded
additional impairment reserves related to slow moving inventories of
approximately $821 as a result of the continued contraction of
revenues and net sales of its payphone business.
(2) During the quarters ended December 31, 1999 and March 31, 2000, the
Company recorded restructuring charges of $700 and $33,
respectively, in connection with the planned closure of its
Sarasota, Florida manufacturing facility and other restructuring
plans.
(3) During the quarter ended March 31, 2000, the Company recorded income
tax expense of $5,154 as a result of recording a valuation allowance
amounting to the entire deferred tax asset balance because of an
uncertainty as to whether the deferred tax asset is realizable.
54
<PAGE>
The following sets forth a summary of selected unaudited statements of
operations and other comprehensive income (loss) data for the quarters ended
June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999 (1)
--------- ------------- ----------- ---------
Unaudited
<S> <C> <C> <C> <C>
Net sales $ 15,636 $ 18,808 $ 16,859 $ 13,960
Gross profit $ 5,408 $ 6,617 $ 5,611 $ 3,992
Net income (loss) $ 237 $ 865 $ 779 $ (1,520)
Comprehensive income (loss) $ 237 $ 865 $ 779 $ (1,520)
Earnings (loss) per common and
common equivalent share:
Basic $ 0.02 $ 0.06 $ 0.06 $ (0.11)
Diluted $ 0.02 $ 0.06 $ 0.06 $ (0.11)
</TABLE>
(1) During the quarter ended March 31, 1999, the Company recorded other
charges of $1,772, including expenses of $1,240 incurred in
connection with negotiations concerning a possible business
combination that were terminated by the Company and $490 of charges
related to the reorganization of the Company's sales and marketing
activities.
Effects of New Accounting Standards
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.
During the year ended March 31, 2000, the Company adopted Statement of
Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1") issued by the American Institute of Certified
Public Accountants (the "AICPA"). SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use and new
cost recognition principles and identifies the characteristics of internal use
software. The adoption of SOP 98-1 did not have a material impact on the
Company's results of operations, financial position or cash flows.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risk, including changes in interest rates,
foreign currency exchange rate risks and market risk with respect to our
investment in the marketable securities of Canada Payphone Corporation. Other
than our investment in marketable securities of Canada Payphone Corporation with
a market value of $325 at March 31, 2000, we do not hold any material financial
instruments for trading purposes or any investments in cash equivalents. We
believe that our primary market risk exposure
55
<PAGE>
relates to the effects that changes in interest rates have on outstanding debt
obligations that do not have fixed rates of interest. As a result of the
Forbearance Agreement effective April 12, 2000, the annual interest rates of our
bank indebtedness were increased by approximately 400 basis points. Based on the
outstanding balance of our debt obligations at March 31, 2000, an increase in
interest rates of 400 basis points (4%) will result in additional interest
expense of approximately $473 annually. In addition, changes in interest rates
impact the fair value of our notes receivable and debt obligations. Additional
information relating to the fair value of certain of our financial assets and
liabilities is included in Note 1 to our consolidated financial statements
included in Item 8 - "Consolidated Financial Statements and Supplementary Data."
Our international business consists of export sales, and we do not
presently have any foreign operations. Our export sales to date have been
denominated in U.S. dollars and as a result, no losses related to foreign
currency exchange rate fluctuations have been incurred. There is no assurance,
however, that we will be able to continue to export our products in U.S. dollar
denominations or that our business will not become subject to significant
exposure to foreign currency exchange rate risks. Certain foreign manufacturers
produce payphones and payphone assemblies for us, and related purchases have
been denominated in U.S. dollars. Fluctuations in foreign exchange rates may
affect the cost of these products. However, changes in purchase prices related
to foreign exchange rate fluctuations to date have not been material. We have
not entered into foreign currency exchange forward contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.
----------
56
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 58
Consolidated Balance Sheets at March 31, 2000 and 1999 59
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the years ended
March 31, 2000, 1999 and 1998 60
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998 61
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 2000, 1999 and 1998 62
Notes to Consolidated Financial Statements 63
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
----------
57
<PAGE>
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 the years
then ended 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
Certified Public Accountants
Tampa, Florida
June 20, 2000
58
<PAGE>
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.
59
<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.
60
<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.
61
<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.
62
<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.
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<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.
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<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."
65
<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.
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<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
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<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.
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<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
======= ======= =======
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<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
====== ======
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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
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<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
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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.
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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
======= ======= =======
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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
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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.
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<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
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<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.
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<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.
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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.
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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.
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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
======= =======
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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.
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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
======== ======== ========
85
<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
86
<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.
87
<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.
88
<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.
89
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name and age of each director and executive
officer of the Company, their positions and offices with the Company, their
period of service with the Company and their business experience for at least
the last five years, and with respect to directors, their principal occupation
and other directorships held in public companies.
Directors
Directors are elected to serve for a one-year term and until their
successors are elected and qualified. Directors of the Company who were serving
as such at the end of fiscal 2000 are as follows:
Name Age Director Since
Michael J. Boyle 54 1999
Joseph M. Jacobs 47 1998
Charles H. Moore 70 1993
Thomas E. Patton 59 1989
Mark L. Plaumann 44 1997
Michael J. Boyle has served as President and Chief Executive Officer of
the Company since October 1999. He became Chairman of the Company in February
2000. Prior to joining Elcotel Mr. Boyle was the President and CEO of Phoenix
Wireless Group ("Phoenix"), a venture capital funded software development and
services company serving the wireless and IP industry. Phoenix developed
advanced software based features and services designed to integrate the
converging networks in voice, data and wireless. Mr. Boyle was with Phoenix from
January 1998 until its sale to Lucent Technologies Inc. in June of 1999. From
May of 1991 to January 1998, Mr. Boyle served as Senior Vice President, General
Manager of Operations for Fujitsu Business Communications Systems (a wholly
owned subsidiary of Fujitsu Limited), a provider of wireless and wireline
telecommunications equipment and software for enterprise customers and backbone
networks. From June 1989 to May 1991, he served as Division President of Bell +
Howell Corporation and a senior member of a management led privatization of this
public corporation. From May 1982 to June 1989, Mr. Boyle served as Vice
President and General Manager at ROLM/IBM. Previously, Mr. Boyle held a variety
of sales and management roles for the Xerox Corporation and in his own business.
Mr. Boyle holds a Masters in Management degree from Northwestern University
Kellogg School of Management.
Mr. Jacobs was appointed a director of the Company in February 1998 and
resigned as a director in June 2000. Mr. Jacobs has been President of Wexford
Management LLC, a manager of several private investment partnerships including
Wexford Partners Fund L.P., since its inception in January 1996. From May 1994
to January 1996, he was President and sole shareholder of Concurrency Management
Corporation, the predecessor to Wexford Management LLC. From 1982 to May 1994,
Mr. Jacobs was employed by, and since 1988 was the President of, Bear Stearns
Real Estate Group, Inc.
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<PAGE>
Mr. Moore has been a director of the Company since December 1993. Mr.
Moore has served as Deputy to the Chairman of the Committee to Encourage
Corporate Philanthropy since November 1999. Mr. Moore was the Director of
Athletics for Cornell University from November 1994 to September 1999. From
November 1992 to October 1994, Mr. Moore was Vice Chairman of Advisory Capital
Partners, Inc., an investment advisory firm. From July 1988 to October 1992, Mr.
Moore served as President and Chief Executive Officer of Ransburg Corporation, a
producer of industrial coating systems and equipment, and from August 1991 to
October 1992 as Executive Vice President of Illinois Tool Works, Inc., a
multinational manufacturer of highly engineered components and systems. Mr.
Moore is currently a director of The Sports Authority and is Chairman of the
Audit Committee of the United States Olympic Committee.
Mr. Patton has been a director of the Company since July 1989. Mr. Patton
has been a partner in the Washington, D.C. law firm of Tighe, Patton, Tabackman
& Babbin, engaged in civil and criminal business litigation, securities law
enforcement matters, corporate finance and corporate compliance, since August
1994. From 1979 until July 1994, Mr. Patton was a partner in the Washington,
D.C. law office of Schnader, Harrison, Segal & Lewis, LLP, engaged in civil and
criminal securities litigation and general business litigation. Mr. Patton also
serves on the board of directors of Information Exchange, Inc., a financial
services marketing database company.
Mr. Plaumann became a director of the Company in December 1997. Mr.
Plaumann has been a Managing Director of Greyhawke Capital Advisors LLC, an
investment firm, since June 1998, and a consultant to Wexford Management LLC
since March 1998. From January 1996 to March 1998, Mr. Plaumann was Senior Vice
President of Wexford Management LLC, a manager of several private investment
partnerships. From February 1995 to January 1996, Mr. Plaumann was a Vice
President or director of the predecessor entities of Wexford Management LLC.
From 1990 to January 1995, Mr. Plaumann was a managing director of Alvarez &
Marsal, Inc., a crisis management consulting firm. From 1985 to 1990, he served
in several capacities with American Healthcare Management, Inc., an owner and
operator of hospitals, most recently as its President. From 1974 to 1985, Mr.
Plaumann was with Ernst & Young LLP in several capacities in its auditing and
consulting divisions. Mr. Plaumann is a director of Vivax Medical Corporation, a
manufacturer of specialty beds and wound care products. Mr. Plaumann was a
director of TSG prior to the acquisition of TSG in December 1997.
Executive Officers
Executive officers are elected by the Board of Directors and serve until
they resign or are removed by the Board. The Company's executive officers that
were serving as such at the end of fiscal 2000 are as follows:
Name Age Positions and Offices
Michael J. Boyle 54 President, Chief Executive Officer
and Chairman of the Board
Daniel S. Fragen 41 Senior Vice President, Worldwide
Sales and Marketing
David F. Hemmings 53 Senior Vice President, Business
Development and Technology/Systems
Development
Kenneth W. Noack 62 Vice President, Operations
William H. Thompson 47 Senior Vice President, Administration
& Finance, Chief Financial Officer
and Secretary
91
<PAGE>
The business experience of Mr. Boyle is set forth above under the listing
of directors of the Company.
Mr. Fragen joined the Company as Senior Vice President of Worldwide Sales
and Marketing in March 2000. From October 1997 to March 2000, Mr. Fragen was
Vice President of Sales and most recently President of the U.S. and Canada Sales
Division of Perle Systems, Inc., which developed, manufactured, and sold data
communications products aimed at the remote access marketplace. From April 1989
to October 1997, he held various executive positions including Regional
Vice-President/General Manager and General Manager of National Distribution of
Fujitsu Business Communications Systems, Inc. Prior to that, between 1980 and
1999, Mr. Fragen held various sales positions with Pitney Bowes Corp., Automatic
Data Processing, Inc., ITT Business Communications Corp. and Merorex Telex, Inc.
Mr. Fragen holds a Masters in Management degree from Northwestern University
Kellogg School of Management.
Mr. Hemmings joined the Company in June 1998 as Senior Vice President,
Business Development and Technology/Systems Development. From June 1997 until
May 1998, he was President of NetInvest, LLC, a company developing satellite and
cellular network operations in developing countries worldwide. From July 1993
until May 1997, Mr. Hemmings was Executive Vice President of the worldwide
network and business systems groups for Brite Voice Systems, Inc., a publicly
held voice processing supplier. From 1991 to June 1993, he was Senior Vice
President of Boston Technology, Inc., a publicly held voice mail supplier. His
previous employment included management positions with such organizations as
Sprint and Harris Corporation.
Mr. Noack joined the Company in July 1992 as Director of Operations and
has served as Vice President of Operations since January 1993. From 1973 to
1992, Mr. Noack held various management and executive positions, including Vice
President of Manufacturing and Vice President of Operations Planning and
Materials, with AT&T Paradyne Corporation in Largo, Florida. Prior to his
employment with AT&T Paradyne Corporation, he held various management positions
with a division of Universal Oil Products and a division of Sunbeam Corporation.
Mr. Noack holds a Bachelors degree in Operations Management from the University
of Wisconsin, Milwaukee.
Mr. Thompson joined the Company as Senior Vice President of
Administration/Finance in December 1997, was elected Secretary in February 1998,
and became the Chief Financial Officer in December 1998. From February 1994 to
December 1997, Mr. Thompson served as Vice President of Finance, Chief Financial
Officer and Secretary of Technology Service Group, Inc., and from 1990 to 1994,
he served as its Vice President of Finance. From 1983 to 1990, Mr. Thompson held
various financial executive positions with Cardiac Control Systems, Inc., a
publicly held medical device manufacturer. From 1974 to 1983, Mr. Thompson held
various positions, most recently as Audit Manager, with PriceWaterhouseCoopers
LLP, certified public accountants. Mr. Thompson holds a Bachelors of Science
degree in Accountancy from Florida State University and is a Certified Public
Accountant in the State of Florida.
----------
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<PAGE>
Item 11. EXECUTIVE COMPENSATION
This item contains information about compensation, stock options and
employment arrangements and other information concerning certain of our
executive officers.
Summary Compensation Table
The following table sets forth the compensation earned for services
rendered during the fiscal years indicated by each of the persons who served as
our Chief Executive Officer during the year ended March 31, 2000 and our four
most highly compensated executive officers other than the Chief Executive
Officer whose salary and bonus exceeded $100,000 during the year ended March 31,
2000, three of whom were serving as executive officers as of March 31, 2000 and
one of whom that was not serving as an executive officer as of March 31, 2000
("named executive officers").
<TABLE>
<CAPTION>
Long Term
Compen-
sation
Annual Compensation Awards
----------------------------------------- ------------
(a) (b) (c) (d) (e) (g) (i)
Other Securities
Annual Underlying All Other
Compen- Option/ Compen-
Name and Principal sation SARs sation
Position Year Salary ($) Bonus ($) ($) (1) (#) (2) ($)
-------------------------- ------ ----------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Boyle (3) 2000 105,894 47,414 (4) 5,949 539,988 28 (5)
Chairman, President and 1999 -- -- -- -- --
Chief Executive Officer 1998 -- -- -- -- --
C. Shelton James (6) 2000 143,335 -- -- 76,750 75,854 (7)
Chairman, Acting President 1999 94,250 -- -- 50,000 2,117
& Chief Executive Officer 1998 90,613 34,995 -- 34,000 2,066
Tracey L. Gray (8) 2000 92,339 -- -- -- 48,141 (9)
President and Chief 1999 195,635 -- -- 50,000 5,168
Executive Officer 1998 162,396 65,710 -- 41,000 4,621
Eduardo Gandarilla (10) 2000 186,824 18,000 -- 65,000 4,020 (11)
Executive Vice President 1999 215,600 7,500 19,868 35,000 4,371
1998 184,753 17,665 -- 10,000 4,338
David F. Hemmings (12) 2000 157,788 -- 231 65,000 5,095 (13)
Senior Vice President 1999 118,519 15,000 15,480 50,000 4,054
1998 -- -- -- -- --
Kenneth W. Noack 2000 108,904 -- -- 55,000 2,689 (14)
Vice President 1999 105,250 6,000 -- 25,000 2,802
1998 97,467 16,387 -- 8,000 2,580
William H. Thompson (15) 2000 134,385 -- 8,273 70,000 3,013 (16)
Senior Vice President 1999 124,532 12,000 17,221 25,000 1,592
1998 35,551 3,725 -- 30,000 281
</TABLE>
----------
93
<PAGE>
Footnotes to Summary Compensation Table
(1) Other annual compensation with respect to Mr. Boyle, Mr. Gandarilla and
Mr. Thompson represents reimbursements of relocation expenses and/or
related income taxes. Other annual compensation with respect to Mr.
Hemmings includes reimbursement of relocation expenses and an
employment-signing bonus of $15,000 in 1999.
(2) Represents the number of shares of common stock underlying options granted
under our 1991 Stock Option Plan, except with respect to Mr. Boyle whose
stock options were granted under our 1999 Stock Option Plan.
(3) Mr. Boyle joined the Company on October 15, 2000 as its President and
Chief Executive Officer and was appointed as our Chairman on February 15,
2000.
(4) Includes bonus compensation of $47,414 accrued but not paid under the
terms of Mr. Boyle's employment agreement.
(5) Represents the taxable portion of Company paid group term life insurance.
(6) Mr. James served as our Chairman until he resigned on February 15, 2000
and served as our acting President and Chief Executive Officer from June
10, 1999 to October 15, 1999.
(7) Includes the taxable portion of Company paid group term life insurance of
$396 and matching contributions of $3,343 that we made to our 401(k)
savings plan for the account of the executive. Also includes severance
payments of $72,115 under the terms of the employment agreement between
the Company and Mr. James.
(8) Mr. Gray served as our President and Chief Executive Officer until he
retired in June 1999.
(9) Includes the taxable portion of Company paid group term life insurance of
$457 and matching contributions of $615 that we made to our 401(k) savings
plan for the account of the executive. Also includes payments of $47,069
under the terms of the retirement agreement between the Company and Mr.
Gray.
(10) Mr. Gandarilla resigned from his position as Executive Vice President of
Sales and Marketing on March 22, 2000. The salary of Mr. Gandarilla
includes sales commissions paid to Mr. Gandarilla under his sales
compensation plan.
(11) Includes the taxable portion of Company paid group term life insurance of
$138 and matching contributions of $3,882 that we made to our 401(k)
savings plan for the account of the executive.
(12) Mr. Hemmings joined the Company on June 1, 1998 as its Senior Vice
President of Business Development and Technology/Systems Development.
(13) Includes the taxable portion of Company paid group term life insurance of
$138 and matching contributions of $3,380 that we made to our 401(k)
savings plan for the account of the executive. Also includes $1,577
related to additional life insurance premiums paid by the Company.
(14) Includes the taxable portion of Company paid group term life insurance of
$396 and matching contributions of $2,293 that we made to our 401(k)
savings plan for the account of the executive.
(15) Mr. Thompson joined the Company on December 18, 1997 as its Senior Vice
President of Administration and Finance upon the acquisition of Technology
Service Group, Inc.
(16) Includes the taxable portion of Company paid group term life insurance of
$90 and matching contributions of $2,923 that we made to our 401(k)
savings plan for the account of the executive.
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<PAGE>
Stock Option Grants in the Last Fiscal Year
The following table sets forth certain information with respect to stock
options to purchase shares of our common stock that were granted to each of the
named executive officers during the year ended March 31, 2000.
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (4)
-------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number Options
of Granted to
Securities Employees Exercise
Underlying in Fiscal Price Expiration
Name Options Year ($/Share) Date 5% 10%
------------------ ---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Boyle 539,998 (1) 40.1% $ 1.6700 10/15/04 $ 519,992 $ 892,321
C. Shelton James 6,250 (2) 0.5% $ 6.1875 02/20/01 -- --
20,500 (2) 1.5% $ 6.0000 05/22/02 -- --
50,000 (2) 3.7% $ 4.5625 02/15/00 -- --
Eduardo Gandarilla 30,000 (3) 2.2% $ 1.8750 07/16/04 14,354 32,843
35,000 (3) 2.6% $ 5.3440 02/25/05 48,884 110,667
David F. Hemmings 30,000 (3) 2.2% $ 1.8750 07/16/04 14,354 32,843
35,000 (3) 2.6% $ 5.3440 02/25/05 48,884 110,667
Kenneth W. Noack 20,000 (3) 1.5% $ 1.8750 07/16/04 9,569 21,896
35,000 (3) 2.6% $ 5.3440 02/25/05 48,884 110,667
William H. Thompson 30,000 (3) 2.2% $ 1.8750 07/16/04 14,354 32,843
40,000 (3) 3.0% $ 5.3440 02/25/05 55,867 126,476
</TABLE>
----------
(1) These options were granted under the 1999 Stock Option Plan pursuant to
the terms of an employment agreement effective October 15, 1999 at an
exercise price less than the per share market value of our common stock on
the grant date, which was $1.938 per share. The options become exercisable
in increments of 15,000 shares at the end of each month during the first
twenty-four (24) months after the date of grant and in increments of
14,999 shares at the end of each month during the succeeding twelve
months.
(2) These options were granted under the 1991 Stock Option Plan pursuant to
the terms of an employment agreement effective June 10, 1999 at exercise
prices that were above the per share market value of our common stock on
the date of grant. Options to purchase 12,791 shares of common stock
became exercisable on the 10th of each of the months beginning in July
1999 and ending in November 1999 and the remaining options to purchase
12,975 shares became exercisable on December 10, 1999.
(3) These options were granted at an exercise price equal to the per share
market value of our common stock on the grant date. The options become
exercisable twenty-five percent each year beginning one year after the
date of grant.
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<PAGE>
(4) The potential realizable value is calculated based on the term of the
option (five years) at its date of grant. It is calculated by assuming
that our stock price on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option;
however, the named executives will not actually realize any benefit from
the option unless the market value of our stock in fact increases over the
option exercise price. The potential realizable value of the options
granted to Mr. Boyle assuming that our stock price appreciates at 0% for
the term of the option was $144,719.
Aggregated Stock Option Exercises in the Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth for each of the named executive officers
certain information with respect to stock options exercised during the year
ended March 31, 2000 and the number and value of exercisable and unexercisable
options held by named executive officers as of March 31, 2000. The "Value
Realized" on "Shares Acquired on Exercise" during the year ended March 31, 2000
is based on the difference between the closing market price of our common stock
on the exercise date and the option exercise price per share. The "Value of
Unexercised In-the-Money Options at Fiscal Year End" is based on the difference
between the closing market price of our common stock on March 31, 2000 ($3.156
per share) and the option exercise price per share.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Fiscal
Acquired Year-End Year-End
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
----------------------------- -------- -------- --------------- ----------------
<S> <C> <C> <C> <C>
Michael J. Boyle -- -- 90,000/499,988 133,740/668,682
C. Shelton James 62,500 99,783 68,750/54,500 0/0
Tracey L. Gray -- -- 39,250/0 0/0
Eduardo Gandarilla 51,250 30,421 0/0 0/0
David F. Hemmings -- -- 12,500/102,500 0/38,430
Kenneth W. Noack -- -- 19,000/77,750 0/25,620
William H. Thompson -- -- 79,000/103,750 69,413/38,430
</TABLE>
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Mr. Michael J. Boyle. We entered into an employment agreement with Mr.
Boyle that became effective as of October 15, 1999. The employment agreement
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 $250,000 and an annual bonus of up to 50% of base compensation
at the discretion of the Board of Directors, subject to a minimum bonus 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, Mr. Boyle is
entitled to receive benefits made available to other executives of the Company
and reimbursement of relocation expenses of $40,000. Further, the agreement
provides for the payment of severance compensation if the Company terminates the
agreement without cause equal to $250,000
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unless the remaining term of the agreement is less than twelve (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.
Under the terms of the agreement, we granted options under our 1999 Stock Option
Plan to Mr. Boyle to purchase 539,988 shares of our common stock at an exercise
price of $1.67 per share.
Mr. C. Shelton James. Effective June 10, 1999, we entered into an
employment agreement with Mr. James, which superceded an employment agreement
that was effective as of October 20, 1998. The agreement, which contained
certain extension and renewal provisions, expired on December 10, 1999. Under
the terms of the agreement, Mr. James served as our acting President and Chief
Executive Officer (until October 15, 1999) and as Chairman of our Board of
Directors, and was paid a salary on an annual basis of $250,000. Mr. James also
received reimbursement of reasonable business expenses, a non-accountable
expense allowance of $2,000 monthly, the same benefits as made available to the
other senior executives on the same terms as such executives and such bonus, if
any, as the Board of Directors determined. In addition, under the terms of the
agreement, options to purchase 6,250, 20,500 and 50,000 shares of our common
stock were granted to Mr. James at per share exercise prices of $6.1875, $6.00
and $4.5625, respectively. Options to purchase 12,791 shares of common stock
became exercisable on the 10th of each of the months beginning in July 1999 and
ending in November 1999 and the remaining options to purchase 12,975 shares
became exercisable on December 10, 1999. As a result of the expiration of the
employment agreement, options held by Mr. James continue in effect until their
expiration dates, which vary through July 13, 2003. Also, Mr. James received
compensation during a severance period of three months after expiration of the
agreement. In addition, the agreement provided that options held by Mr. James
would immediately vest in the event of a change in control of the Company. Under
the terms of the agreement, we indemnify Mr. James with respect to claims made
against him as a director, officer and/or employee of the Company or any of its
subsidiaries to the fullest extent permitted by our Certificate of
Incorporation, our Bylaws and Delaware corporation law.
Mr. Tracey L. Gray. Effective June 11, 1999, we entered into a retirement
agreement with Mr. Gray that superceded an employment agreement that was
effective as of October 20, 1998. Under the terms of the agreement, Mr. Gray
retired as our President and Chief Executive Officer and as an officer and
employee of our subsidiaries. Under the terms of the agreement, Mr. Gray became
a consultant to the Company effective June 14, 1999 for a period of 30 days,
which was subject to an extension of up to 30 days upon notice from our acting
President and Chief Executive Officer. During the consulting period, Mr. Gray
received compensation based on an annual salary rate of $200,000, reimbursement
of business expenses and other benefits, other than stock options and bonus
payments, that he was entitled to receive prior to his retirement. In addition,
we agreed to pay Mr. Gray compensation at a rate of $75,000 annually and to
reimburse the cost of his medical insurance under our employee medical plan for
a period of two years after the consulting period. Further, under the terms of
agreement all vested options to purchase shares of our common stock held by Mr.
Gray remain exercisable until their expiration dates. In addition, we indemnify
Mr. Gray with respect to claims made against him as a director, officer and/or
employee of the Company or any of our subsidiaries to the fullest extent
permitted by our Certificate of Incorporation, our Bylaws and Delaware
corporation law.
Other Executive Officers. Each of Messrs. Gandarilla, Hemmings, Noack and
Thompson (the "Officers") entered into employment agreements that became
effective as of December 10, 1998 and that continue in effect until either party
terminates the agreement with at least 60 days prior written notice, subject to
certain earlier termination provisions. The agreements provide for the payment
of base annual salaries of at least $155,000, $150,000, $105,000 and $125,000 to
Messrs. Gandarilla, Hemmings, Noack and Thompson, respectively, while employed
by the Company, and with respect to Mr. Gandarilla the payment of commissions on
the basis determined by the Company. The base salaries of the Officers are
subject to annual review for merit and other increases at the discretion of the
Board. The Officers are
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reimbursed (in accordance with Company policy from time to time in effect) for
all reasonable business expenses incurred by them in the performance of their
duties.
Under the terms of the agreements, the Officers are entitled to the same
benefits made available to other senior executives on the same terms and
conditions as such executives. The Officers are also entitled to receive an
annual incentive bonus, if any, as determined or approved by the Board or the
Compensation Committee under the Company's incentive compensation plan. Also,
under the terms of the agreements, the Officers will be granted such options to
purchase shares of our common stock as approved by the Compensation Committee.
In addition, the agreements provide that all outstanding options held by
the Officers immediately vest in the event of a change in control of the
Company, including the transfer, exchange or sale of substantially all of the
Company's assets to a non-affiliated third party, a merger or consolidation of
the Company pursuant to which the stockholders of the Company own less than 50%
of the surviving entity or the entity into which the common stock of the Company
is converted or if any person, other than Wexford Management LLC or its
affiliates or Fundamental Management Corporation or its affiliates, becomes the
owner directly or indirectly of securities of the Company or its successor
representing 35% or more of the combined voting power of the Company's or its
successor's securities then outstanding. Also, vested outstanding options held
by the Officers continue in effect in accordance with their terms, but not to
exceed one year from the date of termination of employment in the event their
employment is terminated other than for cause or upon death or disability. In
addition, if the 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.
Under the terms of the agreements, the Officers are indemnified with
respect to claims made against them as officers and/or employees of the Company
or any of its subsidiaries to the fullest extent permitted by our Certificate of
Incorporation, our Bylaws and Delaware corporation law.
On March 22, 2000, Mr. Gandarilla and the Company entered into an
employment termination agreement (the "Termination Agreement") that superceded
the agreement effective December 10, 1998. Under the terms of the Termination
Agreement, the Company agreed to pay Mr. Gandarilla severance compensation of
$80,000 over a period of six months.
Directors' Compensation
Directors who are not employees receive an annual retainer fee of $5,000
plus $1,500 for each Board meeting attended, and $500 for each Board committee
meeting attended. Directors are also reimbursed for expenses in attending Board
and Board committee meetings.
Non-employee directors automatically receive "formula" stock option grants
under our Directors' Stock Option Plan. Each non-employee director first elected
to the Board automatically receives an option to purchase 4,000 shares of common
stock on the date of his or her election to the Board. In addition, each
non-employee director then serving on a committee of the Board and each
non-employee director then serving as chairman of a committee of the Board
automatically receives on the last day of the fiscal year (March 31) an option
to purchase 1,000 shares of common stock with respect to each such committee and
each such chairmanship. In addition, on July 13, 1998, the Directors' Stock
Option Plan was amended to provide for the grant of stock options to
non-employee directors at the discretion of the Compensation and Stock Option
Committee.
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<PAGE>
On March 31, 2000, formula options to purchase 3,000 shares of common
stock were granted to each of Messrs. Jacobs, Moore, Patton and Plaumann under
the Directors' Stock Option Plan at an exercise price of $3.16 per share.
Options granted under the Directors' Stock Option Plan become fully exercisable
one year after the date of grant and expire five years from the date of grant.
Also, the Board approved the payment of certain additional fees to members
of a Special Acquisition Committee established during the year ended March 31,
1999. Total fees paid to Messrs. Jacobs, Moore, Patton and Plaumann for the year
ended March 31, 2000, including additional fees paid to Messrs. Moore and Patton
as members of the Special Acquisition Committee, aggregated $11,250, $16,050,
$14,350 and $16,250, respectively.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board, which during the year ended March
31, 2000 consisted of Messrs. Jacobs and Plaumann, makes decisions concerning
executive compensation. Messrs. Jacobs and Plaumann are neither officers nor
employees of the Company or any of its subsidiaries. During the year ended March
31, 2000, none of our executive officers served as a member of the compensation
committee or as director of another entity of which any executive officers
thereof served as a director or member of our Compensation Committee.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following tables sets forth certain information regarding beneficial
ownership of our outstanding common stock at June 2, 2000 according to
information supplied to us by: (i) each person we know to own beneficially more
than 5% of our common stock; (ii) each of our directors; (iii) each of the named
executive officers; and (iv) all of our current directors and executive officers
as a group. Under rules adopted by the Securities and Exchange Commission, a
person is deemed to be a beneficial owner of common stock with respect to which
he has or shares voting power (which includes the power to vote or to direct the
voting of the security), or investment power (which includes the power to
dispose of, or to direct the disposition of, the security). A person is also
deemed to be the beneficial owner of shares with respect to which he could
obtain voting or investment power within 60 days, such as upon the exercise of
options or warrants. The numbers and percentages assume for each person or group
listed, the exercise of all warrants and stock options held by such person or
group that are exercisable within 60 days of June 2, 2000, but not the exercise
of such warrants and stock options owned by any other person. Except as
otherwise indicated in the footnotes, we believe that the beneficial owners of
our common stock listed below have sole investment and voting power with respect
to the shares of common stock shown as beneficially owned by them.
Security Ownership of Certain Beneficial Owners
Name and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned of Class
--------------------------------------------------------------------------------
Wexford Partners Fund L.P. 2,613,269 (1) 19.1%
411 West Putnam Avenue
Greenwich, Connecticut 06830
----------
(1) Includes 12,000 shares that may be purchased by Mr. Jacobs, a director,
and an affiliate of Wexford Partners Fund L.P., and 4,000 shares that may
be purchased by Mr. Plaumann, a director of the
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<PAGE>
Company, and a consultant to and former employee of Wexford Partners Fund
L.P., upon exercise of stock options within 60 days as to which Wexford
Partners Fund L.P. exercises shared voting or investment power.
Security Ownership of Management
<TABLE>
<CAPTION>
Number of Shares Percentage
Name Beneficially Owned of Class
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael J. Boyle 150,000 (1) *
Joseph M. Jacobs 2,609,269 (2) 18.9%
Charles H. Moore 18,100 (3) *
Thomas E. Patton 17,000 (4) *
Mark L. Plaumann 12,000 (5) *
Eduardo Gandarilla -- *
Tracey L. Gray 104,784 (6) *
David F. Hemmings 32,500 (7) *
C. Shelton James 157,018 (8) 1.1%
Kenneth W. Noack 56,910 (9) *
William H. Thompson 93,379 (10) *
All directors and executive officers as
as a group (9 persons) 2,989,158 (11) 21.1%
</TABLE>
* Less than 1%
----------
(1) Represents 150,000 shares that may be purchased upon exercise of
stock options within 60 days.
(2) Includes 2,597,269 shares held by Wexford Partners Fund L.P., as to
which shares Mr. Jacobs disclaims beneficial ownership, and 12,000
shares that may be purchased upon exercise of stock options within
60 days.
(3) Includes 75 shares held by Mr. Moore's wife and 25 shares held by
Mr. Moore's daughter. Also includes 17,000 shares that may be
purchased upon exercise of stock options within 60 days.
(4) Includes 500 shares held jointly with Mr. Patton's wife. Also
includes 16,000 shares that may be purchased upon exercise of stock
options within 60 days.
(5) Represents 12,000 shares that may be purchased upon exercise of
stock options within 60 days.
(6) Includes 39,250 shares that may be purchased upon exercise of stock
options within 60 days.
(7) Represents 32,500 shares that may be purchased upon exercise of
stock options within 60 days.
(8) Includes 89,750 shares that may be purchased upon exercise of stock
options within 60 days.
(9) Includes 32,250 shares that may be purchased upon exercise of stock
options within 60 days.
(10) Includes 92,750 shares that may be purchased upon exercise of stock
options within 60 days.
(11) Includes 2,597,269 shares held by Wexford Partners Fund L.P. and 600
shares held by family members as to which shares the respective
officers and directors disclaim beneficial ownership. Also includes
364,500 shares that may be purchased upon exercise of stock options
within 60 days.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 2, 2000, the Company engaged Greyhawke Capital Advisors LLC
("Greyhawke"), of which Mr. Plaumann serves as a Managing Member, to assist the
Company in the preparation of its business plan and to assist the Company to
raise capital. Under the terms of the agreement to assist the
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Company in the preparation of its business plan, the Company agreed to pay fees
equal to $175 per hour and to issue common stock purchase warrants providing
Greyhawke with the right to purchase a number of shares of the Company's common
stock equal to six times cash fees earned by Greyhawke divided by the per-share
exercise price of the warrants, which will equal 120% of the market price of the
Company's common stock on the date of issuance of the warrants. Under the terms
of the agreement to assist the Company to raise capital, the Company agreed to
pay fees equal to three (3) percent of gross financing proceeds received by the
Company as a result of the efforts of Greyhawke and to issue common stock
purchase warrants providing Greyhawke with the right to purchase a number of
shares of the Company's common stock equal to six (6) percent of the equity or
equity equivalents purchased by the investor with an exercise price equal to
120% of the per-share price of capital raised through the efforts of Greyhawke.
Warrants issued under the terms of the agreements will expire five years from
the date of issuance and will contain certain anti-dilution provisions. In
addition, the Company agreed to pay all reasonable out of pocket expenses
incurred by Greyhawke in the performance of services under the agreements and to
indemnify Greyhawke against certain losses, claims, damages, liabilities or
costs arising out of the performance of such services. Either party may
terminate the agreements by written notice at any time. As of March 31, 2000,
the Company has not incurred any fees or issued any warrants under the terms of
the agreements.
On March 1, 2000, the Company engaged Wexford Management LLC ("Wexford"),
of which Mr. Jacobs serves as President, to assist the Company in negotiations
with its bank, to raise equity capital and to perform other services requested
by the Company. Under the terms of the agreement the Company agreed to pay fees
equal to two (2) percent of the gross financing proceeds received by the Company
as a result of the efforts of Wexford and fees equal to $375 per hour for any
other services rendered to the Company. In addition, the Company agreed to pay
all reasonable out of pocket expenses incurred by Wexford in the performance of
services under the agreements and to indemnify Wexford against certain losses,
claims, damages, liabilities or costs arising out of the performance of such
services. Either party may terminate the agreements upon twenty four hours prior
written notice. As of March 31, 2000, the Company has not incurred any fees
under the terms of the agreement.
In connection with the acquisition of Technology Service Group, Inc., the
Company entered into a stockholders' agreement with Fundamental Management
Corporation and Wexford Partners Fund, L.P., each of which was then a beneficial
owner of over 5% of the Company's outstanding common stock. Pursuant to the
stockholders' agreement, the Company has agreed to file a registration statement
with respect to the Company's common stock owned by Wexford Partners Fund, L.P.
or Fundamental Management Corporation within 45 days after any request by such
persons. The Company would generally bear the expenses of such registration.
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<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)
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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 (filed herewith)
10.16 Mortgage and Security Agreement between Elcotel, Inc. and Bank of
America, N.A. dated April 12, 2000 (filed herewith)
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<PAGE>
10.17 Mortgage Modification Agreement between Elcotel, Inc. and Bank of
America, N.A. dated April 12, 2000 (filed herewith)
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)
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<PAGE>
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditor's Consent (filed herewith)
27 Financial Data Schedule (Edgar filing only)
* 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.
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<PAGE>
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 5th day of July 2000.
ELCOTEL, INC.
By: /s/Michael J. Boyle
--------------------------------------
Michael J. Boyle
President & Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints each of Michael J. Boyle and William H. Thompson
jointly and severally his true and lawful attorneys-in-fact and agent with full
powers of substitution for him and in his name, place and stead in any and all
capacities to sign on his behalf, individually and in each capacity stated below
and to file any and all amendments to this Annual Report on Form 10-K with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ Michael J. Boyle President & Chief Executive July 5, 2000
--------------------------- Officer, Director and
Michael J. Boyle Chairman of the Board
By: /s/ William H. Thompson Senior Vice President, July 5, 2000
--------------------------- Chief Financial Officer,
William H. Thompson Secretary (principal financial
officer)
By: /s/ Scott M. Klein Controller (principal July 5, 2000
--------------------------- accounting officer)
Scott M. Klein
By: /s/ Charles H. Moore Director July 5, 2000
---------------------------
Charles H. Moore
By: /s/ Thomas E. Patton Director July 5, 2000
---------------------------
Thomas E. Patton
By: /s/ Mark L. Plaumann Director July 5, 2000
---------------------------
Mark L. Plaumann
</TABLE>
106
