UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6428 Parkland Drive, Sarasota, Florida 34243
(Address of principal executive offices) (Zip Code)
(941) 758-0389
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of August 10, 2000, there were 13,779,991 shares of the Registrant's Common
Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars, except per share amounts, in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 145 $ 1,153
Accounts and notes receivable, less allowance for credit
losses of $1,960 and $1,593 7,616 8,073
Inventories 7,694 8,768
Refundable income taxes 82 82
Prepaid expenses and other current assets 844 997
-------- --------
Total current assets 16,381 19,073
Property, plant and equipment, net 5,720 5,867
Notes receivable, less allowance for credit losses
of $26 and $272 184 395
Identified intangible assets, net of accumulated amortization
of $2,864 and $2,665 6,334 6,610
Capitalized software, net of accumulated amortization
of $669 and $505 5,041 4,786
Goodwill, net of accumulated amortization
of $1,739 and $1,567 22,231 22,403
Other assets 597 575
-------- --------
$ 56,488 $ 59,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,189 $ 4,868
Accrued expenses and other current liabilities 2,873 3,123
Notes, debt and capital lease obligations payable - current 11,495 11,611
-------- --------
Total current liabilities 18,557 19,602
Notes, debt and capital lease obligations payable - noncurrent 266 208
-------- --------
18,823 19,810
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized,
13,794,391 and 13,794,391 shares issued, respectively 138 138
Additional paid-in capital 47,492 47,423
Accumulated deficit (9,642) (7,508)
Holding (loss) gain on marketable securities (146) 23
Less - cost of 52,000 shares of common stock in treasury (177) (177)
-------- --------
Total stockholders' equity 37,665 39,899
-------- --------
$ 56,488 $ 59,709
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE LOSS
(Dollars, except per share amounts, in thousands)
Three Months Ended
June 30,
------------------
2000 1999
-------- -------
Revenues and net sales:
Product sales $ 7,113 $ 9,835
Services 2,158 2,923
------- -------
9,271 12,758
------- -------
Cost of revenues and sales:
Cost of products sold 5,238 6,320
Cost of services 1,983 2,452
------- -------
7,221 8,772
------- -------
Gross profit 2,050 3,986
------- -------
Other costs and expenses:
Selling, general and administrative 2,161 2,544
Engineering, research and development 1,094 1,333
Amortization 509 525
Interest expense, net 420 137
------- -------
4,184 4,539
------- -------
Loss before income tax benefit (2,134) (553)
Income tax benefit -- 203
------- -------
Net loss (2,134) (350)
Other comprehensive loss, net of tax:
Holding loss on marketable securities (169) --
------- -------
Comprehensive loss $(2,303) $ (350)
======= =======
Loss per common and common equivalent share:
Basic $ (0.16) $ (0.03)
======= =======
Diluted $ (0.16) $ (0.03)
======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic 13,742 13,500
======= =======
Diluted 13,742 13,500
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
June 30,
-------------------
2000 1999
-------- --------
Cash flows from operating activities
Net loss $(2,134) $ (350)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Depreciation and amortization 1,128 863
Provision for credit losses 95 71
Provisions for obsolescence and warranty
expense 190 320
Stock option compensation 22 15
Value of services received in return for
issuance of common stock purchase warrants 24 --
Deferred tax benefit -- (148)
Changes in operating assets and liabilities:
Accounts and notes receivable 573 316
Inventories 979 650
Refundable income taxes -- (32)
Prepaid expenses and other current assets 29 (244)
Other assets (180) 73
Accounts payable (679) (349)
Accrued expenses and other current liabilities (367) (274)
------- -------
Net cash (used for) provided by operating activities (320) 911
------- -------
Cash flows from investing activities
Capital expenditures (71) (302)
Capitalized software (419) (863)
------- -------
Net cash used for investing activities (490) (1,165)
------- -------
Cash flows from financing activities
Net proceeds under revolving credit
lines -- 1,149
Decrease in bank overdraft -- (695)
Principle payments (198) (196)
------- -------
Net cash (used for) provided by financing
activities (198) 258
------- -------
(Decrease) increase in cash (1,008) 4
Cash, beginning of period 1,153 16
------- -------
Cash, end of period $ 145 $ 20
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, except per share amounts, in thousands)
1. GENERAL
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 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 has just begun to generate revenues.
The accompanying unaudited consolidated balance sheet of the Company at
June 30, 2000 and the unaudited consolidated statements of operations and
of cash flows for the three months ended June 30, 2000 and 1999 have been
prepared without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows of the
Company at June 30, 2000, and for all periods presented, have been made.
The Company's unaudited consolidated financial statements for the three
months ended June 30, 1999 have been reclassified to conform with the
presentation at and for the three months ended June 30, 2000.
The consolidated balance sheet at March 31, 2000 has been derived from the
Company's audited consolidated financial statements as of and for the year
ended March 31, 2000.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these unaudited consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2000. The results of operations for the three months ended June 30,
2000 are not necessarily indicative of the results for the full fiscal
year.
5
<PAGE>
2. INVENTORIES
Inventories at June 30, 2000 and March 31, 2000 are summarized as follows:
June 30, March 31,
2000 2000
-------- --------
Finished products $ 1,396 $ 1,679
Work-in-process 1,414 1,068
Purchased components 6,794 7,835
------- -------
9,604 10,582
Reserve for obsolescence (1,910) (1,814)
------- -------
$ 7,694 $ 8,768
======= =======
3. NOTES AND DEBT OBLIGATIONS PAYABLE
Effective July 31, 2000, the Company entered into a Second Forbearance and
Modification Agreement (the "Agreement") that modified the terms of its
bank loan agreements (the "Loan Agreements"). Pursuant to the Agreement,
the maturity date of indebtedness outstanding under the Loan Agreements
was extended to September 30, 2000 and the annual interest rates under
outstanding notes were increased to three percentage points above the
bank's prime interest rate. In addition, the permitted overadvance, based
on the value of collateral consisting of eligible accounts receivable and
inventories, under a $10,000 working capital revolving credit line and a
$4,000 installment note was increased to $2,800.
The Company is continuing its efforts to secure other sources of financing
and raise additional equity capital in order to refinance and/or
restructure its bank debt. The Company is presently evaluating various
proposals with respect thereto, and believes that its efforts to raise
additional capital and/or other financing will be successful, and that it
will ultimately be able to refinance and/or restructure its outstanding
bank indebtedness. However, there is no assurance that the Company's
efforts will be successful, or if successful, that such financing and/or
capital would be provided on terms that are not onerous. In addition, 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. If the Company's efforts to
raise additional equity capital and/or other financing are not successful,
it will not be able to pay its outstanding bank indebtedness on September
30, 2000 and may be unable to continue normal operations, except to the
extent permitted by its bank.
6
<PAGE>
4. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the three months ended June 30, 2000
are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit Income Stock Total
-------- -------- ----------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 $ 138 $ 47,423 $ (7,508) $ 23 $ (177) $ 39,899
Issuance of common stock
purchase warrants 69 69
Holding loss on marketable
securities, net of tax (169) (169)
Net loss for the period (2,134) (2,134)
-------- -------- -------- -------- -------- --------
Balance at June 30, 2000 $ 138 $ 47,492 $ (9,642) $ (146) $ (177) $ 37,665
======== ======== ======== ======== ======== ========
</TABLE>
On May 1, 2000, the Company issued warrants to purchase 53,827 shares of
its common stock at a purchase price of $2.40 per share, as a retainer for
services valued at $49 to be rendered to the Company over a two-year
period ending May 1, 2002. The warrants are exercisable in whole or in
part during the two-year period ending May 1, 2002 at which time they
expire. The warrants contain anti-dilution provisions providing for
adjustments of the number of shares purchasable and the exercise price
under certain circumstances. The fair value of the warrants (based on the
Black-Scholes Option pricing method assuming an expected life of two
years, a risk free interest rate of 6.6% and volatility of 77%) is being
charged to operations over the life of the warrant.
On May 22, 2000, the Company issued warrants to purchase 18,938 shares of
its common stock at a purchase price of $2.475 per share in return for
services rendered to the Company valued at $20 (based on the Black-Scholes
Option pricing method assuming an expected life of three years, a risk
free interest rate of 6.6% and volatility of 77%). The warrants are
exercisable in whole or in part during the five-year period ending May 22,
2005 at which time they expire. The warrants contain anti-dilution
provisions providing for adjustments of the number of shares purchasable
and the exercise price under certain circumstances. The fair value of the
warrants was expensed during the three months ended June 30, 2000.
7
<PAGE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the
three months ended June 30, 2000 and 1999 is as follows:
2000 1999
---- ----
Cash paid during the period for:
Interest $332 $240
Income taxes -- --
Non-cash investing and financing activities:
Equipment acquired under capital lease
obligations 140 --
Increase in prepaid expenses and stockholders'
equity upon issuance of common stock
purchase warrants 45 --
6. LOSS PER SHARE
Loss per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 requires disclosure of basic earnings (loss) per share and
diluted earnings (loss) per share. Basic earnings (loss) per share is
computed by dividing net income by the weighted average number of shares
of common stock outstanding during the period. Diluted earnings (loss) per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding and potential dilutive common shares
outstanding during the period.
The weighted average number of shares of common stock outstanding used to
compute basic loss per share for the three months ended June 30, 2000 and
1999 was 13,742,391 shares and 13,499,693 shares, respectively. There were
no potential dilutive common shares outstanding during the three months
ended June 30, 2000 and 1999 for purposes of computing diluted loss per
share.
7. DISCLOSURE 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's customers include private payphone
operators and telephone companies in the United States and certain foreign
countries and its distributors. The Company evaluates segment performance
based on gross profit and its overall performance based on profit or loss
from operations before income taxes. 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 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
8
<PAGE>
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 and gross profit. General operating expenses, including depreciation
on shared assets, amortization of goodwill and intangible assets 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 (loss) of each reportable segment for
the three months ended June 30, 2000 and 1999 is set forth below:
<TABLE>
<CAPTION>
2000 1999
-------------------- ---------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Payphone segment $ 8,352 $ 2,478 $ 12,758 $ 3,986
Internet appliance segment 919 (428) -- --
-------- -------- -------- --------
$ 9,271 $ 2,050 $ 12,758 $ 3,986
======== ======== ======== ========
</TABLE>
The sales revenue of each reportable segment by customer group for the
three months ended June 30, 2000 and 1999 is summarized as follows:
2000 1999
------- -------
Payphone segment:
Telephone companies $ 5,642 $ 7,447
Private operators and distributors 2,043 3,892
International operators 667 1,419
Internet appliance segment:
International operators 897 --
Telephone companies 5 --
Private operators and distributors 17 --
------- -------
$ 9,271 $12,758
======= =======
The Company does not allocate assets or other corporate expenses to
reportable segments. A reconciliation of segment gross profit information
to the Company's consolidated financial statements for the three months
ended June 30, 2000 and 1999 is as follows:
2000 1999
------- -------
Total gross profit of reportable segments $ 2,050 $ 3,986
Unallocated corporate expenses (4,184) (4,539)
------- -------
Loss before income taxes $(2,134) $ (553)
======= =======
9
<PAGE>
Information with respect to sales of products and services of the
Company's reportable segments during the three months ended June 30, 2000
and 1999 is set forth below:
2000 1999
------- -------
Payphone segment:
Payphone terminals $ 2,725 $ 3,538
Printed circuit board control modules and kits 2,894 4,622
Components, assemblies and other products 580 1,675
Repair, refurbishment and upgrade services 1,938 2,618
Other services 215 305
Internet appliance segment:
Internet appliance terminals 914 --
Service and advertising revenues 5 --
------- -------
$ 9,271 $12,758
======= =======
The Company markets its products and services in the United States and in
certain foreign countries. The Company's international business consists
of export sales, and the Company does not presently have any foreign
operations. Sales by geographic region for the three months ended June 30,
2000 and 1999 were as follows:
2000 1999
------- -------
United States $ 7,706 $11,338
Canada 959 608
Latin America 606 771
Europe, Middle East and Africa -- 11
Asia Pacific -- 30
------- -------
$ 9,271 $12,758
======= =======
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts, except per share data, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are stated in
thousands.
Forward Looking Statements
The statements contained in this report which are not historical facts contain
forward looking information regarding the Company's financial position, business
strategy, plans, projections and future performance based on the beliefs,
expectations, estimates, intentions or anticipations of management as well as
assumptions made by and information currently available to management. Such
statements reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various factors that
could cause our actual results to differ materially from those expected by us,
including competitive factors, customer relations, the risk of obsolescence of
our products, relationships with suppliers, the risk of adverse regulatory
action affecting our business or the business of our 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 we are a party, and other uncertainties detailed
in this report and in our other filings with the Securities and Exchange
Commission.
Results of Operations
We reported a net loss of $2,134, or $.16 per diluted share, for the three
months ended June 30, 2000 on net sales and revenues of $9,271 as compared to a
net loss of $350, or $.03 per diluted share, on net sales and revenues of
$12,758 for the three months ended June 30, 1999. Operating results for the
three months ended June 30, 2000 as compared to the three months ended June 30,
1999 reflect a decline in sales of 27%, a decline in gross profit of 49% and a
decline in other costs and expenses of 8%. However, sales and revenues of our
payphone business were comparable to sales and revenues for the immediately
preceding quarter, which may be an indication of a stabilization of the revenue
declines experienced by us over the last six quarters, although there can be no
assurance in that regard.
The following table shows certain line items in the accompanying unaudited
consolidated statements of operations and other comprehensive loss for the three
months ended June 30, 2000 (first quarter of fiscal 2001) and 1999 (first
quarter of fiscal 2000) 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>
Net sales $ 9,271 100% $ 12,758 100%
Cost of goods sold 7,221 78 8,772 69
Gross profit 2,050 22 3,986 31
Selling, general and administrative
expenses 2,161 23 2,544 20
Engineering, research and
development expenses 1,094 12 1,333 10
Interest expense 420 5 137 1
Income tax (benefit) -- -- (203) (2)
</TABLE>
11
<PAGE>
Revenues and net sales by business segment and customer group for the three
months ended June 30, 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 $5,642 $ 7,447 $(1,805) (24%)
Private operators and distributors 2,043 3,892 (1,849) (48)
International operators 667 1,419 (752) (53)
Internet Appliance Business:
International operators 897 -- 897 --
Telephone companies 5 -- 5 --
Private operators and distributors 17 -- 17 --
------ ------- ------- ---
$9,271 $12,758 $(3,487) (27%)
====== ======= ======= ===
</TABLE>
The decrease in revenues and net sales of our payphone business is primarily
attributable to a decrease in volume of product sales and services provided to
all customer groups. We believe that the fluctuations in domestic product sales
and service revenues 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. 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 Canada,
partially attributable to the introduction of our Internet terminal appliances.
We began commercial shipments of our Internet terminal appliances (the
Grapevine(TM) terminals) at the end of fiscal year 2000 under a contract with
Canada Payphone Corporation. During the three months ended June 30, 2000,
shipments of Grapevine terminals to Canada Payphone Corporation accounted for
100% of revenues and net sales of our Internet appliance business to
international operators. We also made initial evaluation shipments of Grapevine
terminals to distributors and private operators during the three months ended
June 30, 2000. Shipments of Grapevine terminals to telephone companies were made
under trial agreements, and did not generate any revenues during the three
months ended June 30, 2000. Revenues from telephone company customers of our
Internet appliance business for the three months ended June 30, 2000 represent
advertising revenues earned during the initial trial deployments, which are
still underway.
12
<PAGE>
Revenues and net sales of products and services for the three months ended June
30, 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 $2,725 $ 3,538 $ (813) (23%)
Internet terminal appliances 914 -- 914 --
Printed circuit board control modules and kits 2,894 4,622 (1,728) (37)
Components, assemblies and other products 580 1,675 (1,095) (65)
Services:
Repair, refurbishment and upgrade services 1,938 2,618 (680) (26)
Other services 220 305 (85) (28)
------ ------- ------- ---
$9,271 $12,758 $(3,487) (27%)
====== ======= ======= ===
</TABLE>
Cost of sales and gross profit margins as a percentage of net sales and revenues
approximated 78% and 22%, respectively, for the first quarter of fiscal 2001 as
compared to 69% and 31%, respectively, for the first quarter of fiscal 2000.
Gross profit from product sales declined to approximately 26% of sales during
the three months ended June 30, 2000 from 36% of sales for the three months
ended June 30, 1999 primarily due to: (i) the decrease in the percentage of
sales of high-margin printed circuit board modules; (ii) start-up manufacturing
costs related to Grapevine terminals; and (iii) lower average prices on sales to
private operators and distributors, which were partially offset by cost
reductions from the restructuring of operations during the later part of fiscal
2000. Gross profit from services decreased to approximately 8% of sales for the
first quarter of fiscal 2001 from approximately 16% of sales for the first
quarter of fiscal 2000 primarily due to the establishment of our Grapevine
back-office management operations, the impact of which was partially offset by
improved margins from repair and refurbishment services due primarily to
pricing.
Sales and gross profit (loss) of each reportable segment for the three months
ended June 30, 2000 and 1999 is set forth below:
2000 1999
----------------- -------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
------ ------ ------- ------
Payphone segment $8,352 $2,478 $12,758 $3,986
Internet appliance segment 919 (428) -- --
------ ------ ------- ------
$9,271 $2,050 $12,758 $3,986
------ ------ ------- ------
Gross profit from our payphone business declined to approximately 30% of sales
and revenues for the three months ended June 30, 2000 from approximately 31% of
sales and revenues for the three months ended June 30, 1999 as lower product
margins were primarily offset by improved margins from repair and refurbishment
services and cost reductions from the restructuring of operations during the
latter part of fiscal 2000. During the three months ended June 30, 2000, we
incurred a negative gross profit in our Internet appliance business primarily as
a result of the establishment of our back-office management operations and
start-up production costs of Grapevine terminals.
13
<PAGE>
Selling, general and administrative expenses decreased by $383, or approximately
15%, during the first quarter of fiscal 2001 as compared to the first quarter of
fiscal 2000, and represented 23% of net sales and revenues versus 20% of net
sales and revenues in the first quarter of fiscal 2000. The decrease in selling,
general and administrative expenses is primarily attributable to a reduction in
personnel and other operating expenses as a result of the restructuring of our
payphone business during the latter part of fiscal 2000 and a decline in
variable selling expenses, which is related to the decline in sales.
Engineering, research and development expenses decreased by $239, or
approximately 18%, during the first quarter of fiscal 2001 as compared to the
first quarter of fiscal 2000 as a result of a reduction in resources devoted to
the development of our e-Prism back-office management system and our Grapevine
terminals released to the market at the end of fiscal 2000. In addition,
software development costs capitalized during the first quarter of fiscal 2001
declined by 51% to $419 from $863 for the first quarter of fiscal 2000.
The increase in net interest expense during the first quarter of fiscal 2001 as
compared to the same quarter last year is primarily attributable to an increase
in the amortization of debt issuance expenses of $135 and an increase in the
interest rates under our bank notes payable as a result of the modification of
our bank loan agreements, as further described below under "Liquidity and
Capital Resources."
During the first quarter of fiscal 2000, we recognized tax benefits of $203 on a
pre-tax loss of $553. Tax benefits for the first quarter of fiscal 2001 were
offset by an increase in the valuation allowance against deferred tax assets
because of the uncertainty as to whether we will be able to realize the tax
benefits.
Impact of Inflation
The Company's primary costs, inventory and labor, increase with inflation.
However, the Company does not believe that inflation and changing prices have
had a material impact on its business.
Liquidity and Capital Resources
Liquidity. Under the terms of our bank loan agreements as amended pursuant to a
Forbearance and Modification Agreement dated April 12, 2000 and as further
amended by a Second Forbearance and Modification Agreement effective July 31,
2000 (the "Loan Agreements"), our outstanding bank debt, including indebtedness
outstanding under our revolving credit lines, an installment note and a mortgage
note, which aggregates $11,302 at June 30, 2000, becomes due on September 30,
2000. In addition, the annual interest rates under the installment note and
mortgage note were increased to 11.5% on April 12, 2000 and to 12% on July 31,
2000, the annual interest rate under our 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 floating prime interest rate on April 12, 2000 (11.5%) and to three
percentage points above the bank's floating prime interest rate on July 31, 2000
(12.5%), 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 June 30, 2000 and March
31, 2000) was cancelled. In addition, the Loan Agreements permit an overadvance
of $2,800 of indebtedness outstanding under a $10,000 working capital revolving
credit line and a $4,000 installment note 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 Loan Agreements. In accordance with the terms of
the Loan Agreements, outstanding bank debt in the aggregate amount of $11,302
and $11,460 at June 30, 2000 and March 31, 2000, respectively, is classified as
a current liability.
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During the three months ended June 30, 2000, we used $1,165 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 additional sources of financing and
additional equity capital to refinance and/or restructure 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 the terms of such financing would not
be onerous. In addition, there is no assurance that any such financing would
provide the funding required to refinance and/or restructure outstanding
indebtedness and fund continued net operating losses and other liquidity
requirements. 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. 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, will experience
difficulties meeting all of our obligations and may be unable to continue normal
operations, except to the extent permitted by our bank. 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 June 30, 2000, we were
unable to borrow any additional funds under the terms of our credit lines.
At June 30, 2000 and March 31, 2000, outstanding debt under our $10,000 working
capital line was $6,095, and outstanding debt under our $4,000 installment note
was $3,173 and $3,322, respectively. Our bank will only permit us to borrow
additional funds under our $10,000 revolving credit line to the extent we repay
outstanding debt to remain in compliance with the Loan Agreements and we are
then in compliance with the terms of the Loan Agreements. Outstanding
indebtedness under our mortgage note was $1,754 and $1,762 at June 30, 2000 and
March 31, 2000, respectively. We also had outstanding indebtedness of $281 under
our capital equipment credit line at June 30, 2000 and March 31, 2000. During
the three months ended June 30, 1999, net proceeds under our bank lines
aggregated $1,149. During the three months ended June 30, 2000, we were unable
to borrow any funds under our bank lines.
Aggregate principal payments under notes payable and capital lease obligations
during the three months ended June 30, 2000 and 1999 were $198 and $196,
respectively. Also, during the three months ended June 30, 1999 we reduced our
bank overdraft by $695.
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Indebtedness outstanding under our Loan Agreements is collateralized by
substantially all of our assets. Our Loan Agreements 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 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.
Operating Activities. Cash flows (used in) provided by operating activities for
the three months ended June 30, 2000 and 1999 are summarized as follows:
2000 1999
-------- -------
Net loss $(2,134) $ (350)
Non-cash charges and credits, net 1,459 1,121
------- -------
(675) 771
------- -------
Changes in operating assets and liabilities:
Accounts and notes receivable 573 316
Inventories 979 650
Accounts payable, accrued expenses and
other current liabilities (1,046) (623)
Other operating assets (151) (203)
------- -------
355 140
------- -------
$ (320) $ 911
======= =======
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
three months ended June 30, 2000, we used $675 in cash to fund operating losses
net of non-cash charges and credits. During the three months ended June 30,
1999, we generated $771 in cash from earnings plus non-cash charges and credits.
Also, during the three months ended June 30, 2000 and 1999, we generated $355
and $140 of cash from changes 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 three months ended June 30, 2000, we generated
$573 and $979 of cash through reductions in accounts and notes receivable and
inventories, respectively, and we used $1,197 of cash to fund changes in other
operating assets and liabilities. In comparison, during the three months ended
June 30, 1999, we generated $316 and $650 of cash through reductions in accounts
and notes receivable and inventories, respectively, and used $826 of cash to
fund changes in other operating assets and liabilities. Cash used to pay
restructuring and reorganization obligations during the three months ended June
30, 2000 and 1999 aggregated $114 and $115, respectively. Outstanding
restructuring and reorganization obligations that will affect future operating
cash flows aggregated $326 at June 30, 2000.
Our current ratio declined to .88 to 1 at June 30, 2000 as compared to .97 to 1
at March 31, 2000 primarily due to our loss for the three months ended June 30,
2000 and the capital asset and capitalized software expenditures discussed
below. 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
16
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represented in the aggregate 93% and 88% of our current assets at June 30, 2000
and March 31, 2000, respectively. We experience varying accounts receivable
collection periods from our 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 three
months ended June 30, 2000 and 1999 amounted to $490 and $1,165, respectively.
The Company's capital expenditures consist primarily of manufacturing tooling
and equipment and computer equipment required for the support of operations and
capitalized software, including new product software development costs. Cash
used for capital expenditures aggregated $71 and $302 during the three months
ended June 30, 2000 and 1999, respectively. During the three months ended June
30, 2000 and 1999, capitalized software development costs aggregated $419 and
$863, respectively.
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 (later amended by SFAS 138), which will be
effective on April 1, 2001 for the Company. SFAS 133 establishes standards for
accounting of derivative instruments including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 requires, among
other things, that all derivatives be recognized in the consolidated financial
statements as either assets or liabilities and measured at fair value. The
corresponding gains and losses should be reported based upon the hedged
relationship, if such relationship exists. Changes in the fair value of
derivatives that are not designated as hedges or that do not meet the hedge
accounting criteria in SFAS 133 are required to be reported in income. The
Company is in the process of quantifying the impact of SFAS 133 on its
consolidated financial statements.
Item 3. 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 $156 and $325 at June 30, 2000 and March 31, 2000, respectively, 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 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 amendments to our Loan Agreements, the annual interest rates of
our bank indebtedness were increased by approximately 400 basis points on April
12, 2000 and by another 50 basis points on July 31, 2000. Based on the
outstanding balance of our debt obligations at June 30, 2000, an increase in
interest rates of 450 basis points (4.5%) will result in additional interest
expense of approximately $525 annually. In addition, changes in interest rates
impact the fair value of our notes receivable and debt obligations.
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
17
<PAGE>
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants. San
Diego Superior Court Case No. 691635.
As previously reported, this putative class action was filed in 1995 in the
Superior Court of the State of California for the County of San Diego alleging
that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that
filed for bankruptcy, conspired with its own officers and professionals, and
with various telephone suppliers (including the Company) to defraud investors in
Amtel by operating a Ponzi scheme. See Item 3, Legal Proceedings of Part I of
the Company's Form 10-KSB for the fiscal year ended March 31, 1996 and Item 1,
Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended
September 30, 1996.
On September 28, 1998, the Court granted the Company's Motion for Summary
Judgment and 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. Since
the time period for the plaintiff's appeal has expired, this matter is now
terminated.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On May 1, 2000, the Company issued warrants to purchase 53,827 shares of its
common stock, $.01 par value ("Common Stock"), with an exercise price of $2.40
per share to id8 Group Holdings, Inc. as a retainer for services to be rendered
to the Company. The warrants are exercisable in whole or in part during the
two-year period ending May 1, 2002 at which time they expire. The warrants
contain anti-dilution provisions providing for adjustments of the number of
shares purchasable and the exercise price under certain circumstances.
On May 22, 2000, the Company issued warrants to purchase 18,938 shares of its
Common Stock with an exercise price of $2.475 per share to Greyhawke Capital
Advisors LLC in return for services rendered to the Company. The warrants are
exercisable in whole or in part during the five-year period ending May 22, 2005
at which time they expire. The warrants contain anti-dilution provisions
providing for adjustments of the number of shares purchasable and the exercise
price under certain circumstances.
The foregoing transactions were exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Regulation D promulgated
thereunder. The recipients in each transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the warrant certificates issued in the transactions. The recipients had
adequate access, through their relationships with the Company, to information
about the Company.
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Item 5. Other Information
Effective July 31, 2000, the Company entered into a Second Forbearance and
Modification Agreement (the "Agreement") that modified the terms of its bank
loan agreements (the "Loan Agreements"). Pursuant to the Agreement, the maturity
date of indebtedness outstanding under the Loan Agreements was extended to
September 30, 2000 and the annual interest rates under outstanding notes were
increased to three percentage points above the bank's prime interest rate. In
addition, the permitted overadvance, based on the value of collateral consisting
of eligible accounts receivable and inventories, under a $10,000,000 working
capital revolving credit line and a $4,000,000 installment note was increased to
$2,800,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith as part of this report:
Exhibit
No. Description of Exhibit
------- ----------------------
10.1 Forbearance and Modification Agreement between Elcotel, Inc.
and Bank of America, N.A. effective July 31, 2000
10.2 Warrant to Purchase Shares of Common Stock dated May 1, 2000
10.3 Warrant to Purchase Shares of Common Stock dated May 22, 2000
27 Financial Data Schedule (Edgar Filing only)
(b) Reports on Form 8-K:
During the quarter ended June 30, 2000, the Company filed a Form 8-K
Current Report dated May 1, 2000 reporting that the Company had entered
into a Forbearance and Modification Agreement dated April 12, 2000 that
modified the terms of the loan agreements between the Company and its
bank.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Elcotel, Inc.
--------------------------------------
(Registrant)
Date: August 14, 2000 By: /s/ William H. Thompson
--------------------------------------
William H. Thompson
Senior Vice President, Administration
and Finance (Principal Financial
Officer)
By: /s/ Scott M. Klein
--------------------------------------
Scott M. Klein
Controller (Principal Accounting
Officer)
20
