UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 9, 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>
September 30, March 31,
2000 2000
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,482 $ 1,153
Accounts and notes receivable, less allowance for credit
losses of $1,948 and $1,593 7,269 8,073
Inventories 8,309 8,768
Refundable income taxes 72 82
Prepaid expenses and other current assets 844 997
-------- --------
Total current assets 17,976 19,073
Property, plant and equipment, net 5,401 5,867
Notes receivable, less allowance for credit losses
of $15 and $272 63 395
Identified intangible assets, net of accumulated amortization
of $3,141 and $2,665 6,057 6,610
Capitalized software, net of accumulated amortization
of $835 and $505 5,123 4,786
Goodwill, net of accumulated amortization
of $1,911 and $1,567 22,059 22,403
Other assets 634 575
-------- --------
$ 57,313 $ 59,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,138 $ 4,868
Accrued expenses and other current liabilities 3,869 3,123
Notes, debt and capital lease obligations payable - current 11,391 11,611
-------- --------
Total current liabilities 21,398 19,602
Notes, debt and capital lease obligations payable - noncurrent 219 208
-------- --------
21,617 19,810
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized,
13,831,991 and 13,794,391 shares issued, respectively 138 138
Additional paid-in capital 47,564 47,423
Accumulated deficit (11,671) (7,508)
Accumulated other comprehensive (loss) income (158) 23
Less - cost of 52,000 shares of common stock in treasury (177) (177)
-------- --------
Total stockholders' equity 35,696 39,899
-------- --------
$ 57,313 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------- -------- --------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues and net sales:
Product sales $ 5,355 $ 9,465 $ 12,468 $ 19,300
Services 1,737 3,986 3,895 6,909
-------- -------- -------- --------
7,092 13,451 16,363 26,209
-------- -------- -------- --------
Cost of revenues and sales:
Cost of products sold 4,206 7,115 9,444 13,435
Cost of services 1,640 3,687 3,623 6,139
-------- -------- -------- --------
5,846 10,802 13,067 19,574
-------- -------- -------- --------
Gross profit 1,246 2,649 3,296 6,635
-------- -------- -------- --------
Other costs and expenses:
Selling, general and administrative 1,658 2,790 3,819 5,336
Engineering, research and development 792 1,547 1,886 2,877
Amortization 500 524 1,009 1,049
Interest expense, net 325 174 745 311
-------- -------- -------- --------
3,275 5,035 7,459 9,573
-------- -------- -------- --------
Loss before income tax benefit (2,029) (2,386) (4,163) (2,938)
Income tax benefit -- 812 -- 1,015
-------- -------- -------- --------
Net loss (2,029) (1,574) (4,163) (1,923)
Other comprehensive loss, net of tax:
Holding loss on marketable securities (12) (49) (181) (49)
-------- -------- -------- --------
Comprehensive loss $ (2,041) $ (1,623) $ (4,344) $ (1,972)
======== ======== ======== ========
Loss per common and common
equivalent share:
Basic $ (0.15) $ (0.12) $ (0.30) $ (0.14)
======== ======== ======== ========
Diluted $ (0.15) $ (0.12) $ (0.30) $ (0.14)
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Basic 13,773 13,500 13,758 13,500
======== ======== ======== ========
Diluted 13,773 13,500 13,758 13,500
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
September 30,
-------------------
2000 1999
-------- --------
Cash flows from operating activities
Net loss $(4,163) $(1,923)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Depreciation and amortization 2,145 1,750
Provision for credit losses 164 314
Provisions for obsolescence and warranty
expense 330 1,313
Stock option compensation 96 31
Value of services received in return for
issuance of common stock purchase warrants 24 --
Deferred tax benefit -- (1,015)
Changes in operating assets and liabilities:
Accounts and notes receivable 972 1,046
Inventories 294 1,966
Refundable income taxes 10 2
Prepaid expenses and other current assets 17 276
Other assets (268) (176)
Accounts payable 1,270 142
Accrued expenses and other current liabilities 495 (931)
------- -------
Net cash provided by operating activities 1,386 2,795
------- -------
Cash flows from investing activities
Capital expenditures (103) (1,157)
Capitalized software (667) (1,926)
------- -------
Net cash (used for) investing activities (770) (3,083)
------- -------
Cash flows from financing activities
Net proceeds under revolving credit
lines -- 1,563
Decrease in bank overdraft -- (867)
Principle payments (349) (398)
Proceeds from exercise of common stock
options 62 --
------- -------
Net cash (used for) provided by financing
activities (287) 298
------- -------
Increase in cash 329 10
Cash, beginning of period 1,153 16
------- -------
Cash, end of period $ 1,482 $ 26
======= =======
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,
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
September 30, 2000 and the unaudited consolidated statements of operations and
other comprehensive loss for the three months and six months ended September 30,
2000 and 1999 and of cash flows for the six months ended September 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 September 30, 2000, and for all periods presented, have been
made. The Company's unaudited consolidated financial statements for the three
months and six months ended September 30, 1999 have been reclassified to conform
with the presentation at and for the three months and six months ended September
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 and six months ended September 30, 2000 are not necessarily
indicative of the results for the full fiscal year.
5
<PAGE>
2. INVENTORIES
Inventories at September 30, 2000 and March 31, 2000 are summarized as follows:
September 30, March 31,
2000 2000
------------- ---------
Finished products $ 2,937 $ 1,679
Work-in-process 856 1,068
Purchased components 6,500 7,835
-------- --------
10,293 10,582
Reserve for obsolescence (1,984) (1,814)
-------- --------
$ 8,309 $ 8,768
======== ========
3. NOTES AND DEBT OBLIGATIONS PAYABLE
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 revolving credit
lines, an installment note and a mortgage note was accelerated to July 31, 2000.
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 floating prime interest rate
(11.5% at April 12, 2000). In addition, the availability of additional funds
under a $2,000 export revolving credit line (none of which was outstanding) and
a $1,500 equipment revolving credit line ($281 of which was outstanding) was
cancelled. Further, the Forbearance Agreement permitted an overadvance of
indebtedness outstanding under the Company's working capital revolving credit
line and installment note of $2,800 through June 30, 2000 and $1,500 for the
remainder of its term.
Effective July 31, 2000, the Company entered into a Second Forbearance and
Modification Agreement (the "Second Forbearance Agreement"). Pursuant to the
Second Forbearance Agreement, the maturity date of indebtedness outstanding
under the Loan Agreements was extended to September 30, 2000 and the fixed and
floating interest rates of outstanding notes were increased to three percentage
points above the bank's prime interest rate (12.5% at July 31, 2000). In
addition, the permitted overadvance under the working capital revolving credit
line and installment note was increased to $2,800.
The Second Forbearance Agreement expired on September 30, 2000, and accordingly,
all obligations outstanding under the Loan Agreements became due and payable.
The Company is presently attempting to negotiate the terms of a third
forbearance agreement and/or restructure the bank indebtedness. The Company is
also continuing its efforts to raise additional equity capital and secure other
sources of financing to facilitate the restructuring of its bank indebtedness.
However, there can be no assurance that a third forbearance agreement will be
entered into or that the Company will be able to secure other sources of
financing, raise additional equity capital or restructure its bank indebtedness.
Accordingly, there is no assurance that the Company will be able to continue
normal operations.
6
<PAGE>
In addition, even if the Company's efforts to raise additional financing and/or
capital are successful, there is no assurance that any such additional financing
and/or capital would be provided on terms that are not onerous or that the
percentage ownership of the Company's current stockholders will be not be
reduced substantially.
4. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended September 30, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit Income (Loss) Stock Total
------ ---------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 $ 138 $ 47,423 $ (7,508) $ 23 $ (177) $ 39,899
Exercise of stock options 72 72
Issuance of common stock
purchase warrants 69 69
Holding loss on marketable
securities, net of tax (181) (181)
Net loss for the period (4,163) (4,163)
----- -------- ---------- ------- ------- ---------
Balance at September 30, 2000 $ 138 $ 47,564 $ (11,671) $ (158) $ (177) $ 35,696
===== ======== ========== ======= ======= =========
</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 charged to operations during the six months
ended September 30, 2000.
7
<PAGE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the six months
ended September 30, 2000 and 1999 is as follows:
2000 1999
-------- -------
Cash paid (received) during the period for:
Interest $ 574 $ 473
Income taxes (10) (2)
Non-cash investing and financing activities:
Equipment acquired under capital lease
obligations 140 --
Unrealized (gain) loss on marketable securities
resulting in an (increase) decrease in
stockholders' equity and other current assets 181 (23)
Compensation related to exercised stock options
resulting in an increase in stockholders's equity
and a decrease in accrued expenses 10 --
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 September 30, 2000 and
1999 was 13,773,362 shares and 13,499,693 shares, respectively. The weighted
average number of shares of common stock outstanding used to compute basic loss
per share for the six months ended September 30, 2000 and 1999 was 13,757,877
shares and 13,499,693 shares, respectively. There were no potential dilutive
common shares outstanding during the three months and six months ended September
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
8
<PAGE>
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 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 September 30, 2000 and 1999 is set forth below:
2000 1999
-------------------- --------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
-------- -------- -------- ---------
Payphone segment $ 6,888 $ 1,737 $ 13,451 $ 2,649
Internet appliance segment 204 (491) -- --
-------- -------- -------- --------
$ 7,092 $ 1,246 $ 13,451 $ 2,649
======== ======== ======== ========
The sales revenue and gross profit (loss) of each reportable segment for the six
months ended September 30, 2000 and 1999 is set forth below:
2000 1999
-------------------- --------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
-------- -------- -------- ---------
Payphone segment $ 15,240 $ 4,215 $ 26,209 $ 6,635
Internet appliance segment 1,123 (919) -- --
-------- -------- -------- --------
$ 16,363 $ 3,296 $ 26,209 $ 6,635
======== ======== ======== ========
9
<PAGE>
The sales revenue of each reportable segment by customer group for the three
months and six months ended September 30, 2000 and 1999 is summarized as
follows:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- ---------
Payphone segment:
Telephone companies $ 4,859 $ 7,946 $10,501 $15,393
Private operators and distributors 1,260 2,998 3,303 6,890
International operators 769 2,507 1,436 3,926
Internet appliance segment:
International operators 98 -- 995 --
Telephone companies 100 -- 105 --
Private operators and distributors 6 -- 23 --
------- ------- ------- -------
$ 7,092 $13,451 $16,363 $26,209
======= ======= ======= =======
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 and six months ended
September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Total gross profit of reportable segments $ 1,246 $ 2,649 $ 3,296 $ 6,635
Unallocated corporate expenses (3,275) (5,035) (7,459) (9,573)
------- ------- ------- -------
Loss before income taxes $(2,029) $(2,386) $(4,163) $(2,938)
======= ======= ======= =======
</TABLE>
Information with respect to sales of products and services of the Company's
reportable segments during the three months and six months ended September 30,
2000 and 1999 is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Payphone segment:
Payphone terminals $ 1,861 $ 4,470 $ 4,586 $ 8,008
Printed circuit board control modules and kits 2,382 3,321 5,276 7,943
Components, assemblies and other products 914 1,674 1,494 3,349
Repair, refurbishment and upgrade services 1,637 3,758 3,575 6,437
Other services 94 228 309 472
Internet appliance segment:
Internet appliance terminals 198 -- 1,112 --
Service and advertising revenues 6 -- 11 --
------- ------- ------- -------
$ 7,092 $13,451 $16,363 $26,209
======= ======= ======= =======
</TABLE>
10
<PAGE>
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 and six months ended September
30, 2000 and 1999 were as follows:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
United States $ 6,216 $10,944 $13,922 $22,282
Canada 250 1,238 1,209 1,846
Latin America 498 848 1,104 1,619
Europe, Middle East and Africa -- 400 -- 411
Asia Pacific 128 21 128 51
------- ------- ------- -------
$ 7,092 $13,451 $16,363 $26,209
======= ======= ======= =======
8. SUBSEQUENT EVENTS
Effective October 31, 2000, the Company restructured its business and terminated
the employment of approximately 40 employees to reduce its costs and expenses.
The Company did not recognize any restructuring charges as a result the
restructuring. The restructuring is expected to result in cost and expense
reductions of approximately $1,600 annually.
In addition, on October 31, 2000, the Company granted options under its 1991
Stock Option Plan to employees, including officers, to purchase 757,500 shares
of the Company's common stock at an exercise price of $.75 per share. The
options were granted as an incentive to remain in the employ of the Company, and
are exercisable on a pro rata basis over the succeeding twenty-four (24) months.
11
<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, usually containing the words "believe", "estimate",
"expect" or similar expressions, 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
Three Months Ended September 30, 2000 Compared
to the Three Months Ended September 30, 1999
We reported a net loss of $2,029, or $.15 per diluted share, for the three
months ended September 30, 2000 on net sales and revenues of $7,092 as compared
to a net loss of $1,574 ($2,386 before income tax benefits, as compared to
recognizing no income tax benefits during the three months ended September 30,
2000), or $.12 per diluted share, on net sales and revenues of $13,451 for the
three months ended September 30, 1999. Operating results for the three months
ended September 30, 2000 as compared to the three months ended September 30,
1999 reflect a decline in sales of 47%, a decline in gross profit of 53% and a
decline in other costs and expenses of 35%.
The following table shows certain line items in the accompanying unaudited
consolidated statements of operations and other comprehensive loss for the three
months ended September 30, 2000 (second quarter of fiscal 2001) and 1999 (second
quarter of fiscal 2000) that are discussed below together with amounts expressed
as a percentage of sales.
Percent Percent
2000 of Sales 1999 of Sales
-------- -------- -------- --------
Net sales $ 7,092 100% $ 13,451 100%
Cost of goods sold 5,846 82 10,802 80
Gross profit 1,246 18 2,649 20
Selling, general and administrative
expenses 1,658 23 2,790 21
Engineering, research and
development expenses 792 11 1,547 12
Interest expense 325 5 174 1
Income tax (benefit) -- -- (812) (6)
12
<PAGE>
Revenues and net sales by business segment and customer group for the three
months ended September 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 $ 4,859 $ 7,946 $ (3,087) (39%)
Private operators and distributors 1,260 2,998 (1,738) (58)
International operators 769 2,507 (1,738) (69)
Internet Appliance Business:
International operators 98 -- 98 --
Telephone companies 100 -- 100 --
Private operators and distributors 6 -- 6 --
-------- -------- -------- ---
$ 7,092 $ 13,451 $ (6,359) (47%)
======== ======== ======== ===
</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 decreases 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, Africa and Canada, which we
believe is attributable to changing customer requirements, the timing of
generating new business opportunities and the introduction of our Internet
terminal appliances.
We began commercial shipments of our Internet terminal appliances (the
GrapevineTM terminals) at the end of fiscal year 2000 under a contract with
Canada Payphone Corporation. During the three months ended September 30, 2000,
sales of Grapevine terminals to Canada Payphone Corporation, which accounted for
the majority of revenues and net sales of our Internet appliance business to
international operators were limited because of our program to incorporate
design changes and enhancements suggested by field trials and initial
deployments of Grapevine terminals, which delayed field deployments. Sales of
Grapevine terminals to telephone companies during the second quarter of fiscal
2001 were made under a market trial agreement with a major inter-exchange
carrier. Other shipments under a trial agreement with one of the regional
telephone companies and to private operators and distributors have not generated
any significant revenues.
13
<PAGE>
Revenues and net sales of products and services for the three months ended
September 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 $ 1,861 $ 4,470 $ (2,609) (58%)
Internet terminal appliances 198 -- 198 --
Printed circuit board control modules and kits 2,382 3,321 (939) (28)
Components, assemblies and other products 914 1,674 (760) (45)
Services:
Repair, refurbishment and upgrade services 1,637 3,758 (2,121) (56)
Other services 100 228 (128) (56)
-------- -------- -------- ---
$ 7,092 $ 13,451 $ (6,359) (47%)
======== ======== ======== ===
</TABLE>
Cost of sales and gross profit margins as a percentage of net sales and revenues
approximated 82% and 18%, respectively, for the second quarter of fiscal 2001 as
compared to 80% and 20%, respectively, for the second quarter of fiscal 2000.
Gross profit from product sales declined to approximately 21% of sales during
the three months ended September 30, 2000 from 25% of sales for the three months
ended September 30, 1999 primarily due to: (i) fixed manufacturing costs related
to the start-up of manufacturing Grapevine terminals; (ii) the decrease in
volume; and (iii) lower average prices, which was partially offset by cost
reductions from the restructuring of operations during the latter part of fiscal
2000 and a decrease in obsolescence provisions of $505. Gross profit from
services decreased to approximately 6% of revenues for the second quarter of
fiscal 2001 from approximately 8% of revenues for the second quarter of fiscal
2000 primarily due to the establishment of our Grapevine back-office management
operations, partially offset by a decrease in obsolescence provisions of $246
related to refurbishment operations. We believe that our product and services
gross profit margins will improve as the manufacturing volume and installed base
of Grapevine terminals increases. However, there can be no assurance that our
Grapevine volume and the installed base of Grapevine terminals will increase,
and or that our gross profit margins will improve.
Sales and gross profit (loss) of each reportable segment for the three months
ended September 30, 2000 and 1999 is set forth below:
2000 1999
------------------- -------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
-------- -------- -------- --------
Payphone segment $ 6,888 $ 1,737 $ 13,451 $ 2,649
Internet appliance segment 204 (491) -- --
-------- -------- -------- --------
$ 7,092 $ 1,246 $ 13,451 $ 2,649
======== ======== ======== ========
Gross profit from our payphone business increased to approximately 25% of net
sales and revenues for the three months ended September 30, 2000 from
approximately 20% of sales and revenues for the three months ended September 30,
1999 primarily due to the increase in the percentage of sales of printed circuit
board control modules and kits, improved margins from repair and refurbishment
services, the decrease in obsolescence provisions referred to above and cost
reductions from the restructuring of operations during the
14
<PAGE>
latter part of fiscal 2000, which were partially offset by the impact of lower
volume and average selling prices. During the three months ended September 30,
2000, we incurred a negative gross profit in our Internet appliance business
primarily because of the establishment of our back-office management operations
and the start-up of manufacturing Grapevine terminals. Attaining a gross profit
in our Internet appliance business is primarily dependent upon our ability to
increase sales volume and achieve a volume of terminal installations sufficient
to generate recurring service revenues in excess of the fixed operating costs of
our back-office management operations.
Selling, general and administrative expenses decreased by $1,132, or
approximately 41%, during the second quarter of fiscal 2001 as compared to the
second quarter of fiscal 2000, and represented 23% of net sales and revenues
versus 21% of net sales and revenues in the second 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, current year cost control initiatives and a decline in variable
selling expenses, which is related to the decline in sales.
Engineering, research and development expenses decreased by $755, or
approximately 49%, during the second quarter of fiscal 2001 as compared to the
second 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 and a restructuring
of these activities during the first quarter of fiscal 2001. In addition,
software development costs capitalized during the second quarter of fiscal 2001
declined by $815 to $248 from $1,063 for the second quarter of fiscal 2000.
The increase in net interest expense during the second quarter of fiscal 2001 as
compared to the same quarter last year is primarily attributable to an increase
in the interest rates under our bank notes payable as a result of the
modifications to our bank loan agreements, as further described below under
"Liquidity and Capital Resources," and an increase in the amortization of debt
issuance expenses of $21.
During the second quarter of fiscal 2000, we recognized tax benefits of $812 on
a pre-tax loss of $2,386. Tax benefits for the second 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.
Six Months Ended September 30, 2000 Compared
to the Six Months Ended September 30, 1999
We reported a net loss of $4,163, or $.30 per diluted share, for the six months
ended September 30, 2000 on net sales and revenues of $16,363 as compared to a
net loss of $1,923 ($2,938 before income tax benefits, as compared to
recognizing no income tax benefits during the six months ended September 30,
2000), or $.14 per diluted share, on net sales and revenues of $26,209 for the
six months ended September 30, 1999. Operating results for the six months ended
September 30, 2000 as compared to the six months ended September 30, 1999
reflect a decline in sales of 38%, a decline in gross profit of 50% and a
decline in other costs and expenses of 22%.
15
<PAGE>
The following table shows certain line items in the accompanying unaudited
consolidated statements of operations and other comprehensive loss for the six
months ended September 30, 2000 (first six months of fiscal 2001) and 1999
(first six months of fiscal 2000) that are discussed below together with amounts
expressed as a percentage of sales.
Percent Percent
2000 of Sales 1999 of Sales
-------- -------- -------- ---------
Net sales $ 16,363 100% $ 26,209 100%
Cost of goods sold 13,067 80 19,574 75
Gross profit 3,296 20 6,635 25
Selling, general and administrative
expenses 3,819 23 5,336 20
Engineering, research and
development expenses 1,886 12 2,877 11
Interest expense 745 5 311 1
Income tax (benefit) -- -- (1,015) (4)
Revenues and net sales by business segment and customer group for the three
months ended September 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 $ 10,501 $ 15,393 $ (4,892) (32%)
Private operators and distributors 3,303 6,890 (3,587) (52)
International operators 1,436 3,926 (2,490) (63)
Internet Appliance Business:
International operators 995 -- 995 --
Telephone companies 105 -- 105 --
Private operators and distributors 23 -- 23 --
-------- -------- -------- ---
$ 16,363 $ 26,209 $ (9,846) (38%)
======== ======== ======== ===
</TABLE>
The decrease in revenues and net sales of our payphone business for the first
six months of fiscal 2001 as compared to the first six months of fiscal 2000 is
primarily attributable to a decrease in volume. We believe that the decreases
are primarily attributable to same industry factors that influenced our
performance for the second quarter of fiscal 2001 as compared to the second
quarter of fiscal 2000 as explained above.
During the six months ended September 30, 2000, sales of Grapevine terminals,
which were released to the market during the latter part of fiscal 2000, to
Canada Payphone Corporation accounted for the majority of revenues and net sales
of our Internet appliance business to international operators. Sales of
Grapevine terminals to telephone companies, private operators and distributors
were made under market trial agreements, including those with a major
inter-exchange carrier and one of the regional telephone companies, and have not
generated any significant revenues. Also, as previously explained, sales of
Grapevine terminals during the six months ended September 30, 2000 were
negatively affected by our program to incorporate design changes and
enhancements suggested by field trials and initial deployments of Grapevine
terminals, which delayed field deployments.
16
<PAGE>
Revenues and net sales of products and services for the six months ended
September 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 $ 4,586 $ 8,008 $ (3,422) (43%)
Internet terminal appliances 1,112 -- 1,112 --
Printed circuit board control modules and kits 5,276 7,943 (2,667) (34)
Components, assemblies and other products 1,494 3,349 (1,855) (55)
Services:
Repair, refurbishment and upgrade services 3,575 6,437 (2,862) (44)
Other services 320 472 (152) (32)
-------- -------- -------- ---
$ 16,363 $ 26,209 $ (9,846) (38%)
======== ======== ======== ===
</TABLE>
Cost of sales and gross profit margins as a percentage of net sales and revenues
approximated 80% and 20%, respectively, for the first six months of fiscal 2001
as compared to 75% and 25%, respectively, for the first six months of fiscal
2000. Gross profit from product sales declined to approximately 24% of sales
during the six months ended September 30, 2000 from 30% of sales for the six
months ended September 30, 1999 primarily due to: (i) the start-up of
manufacturing Grapevine terminals; (ii) the decrease in volume; and (iii) lower
average prices, which were partially offset by cost reductions from the
restructuring of operations during the latter part of fiscal 2000 and a decrease
in obsolescence provisions of $581. Gross profit from services decreased to
approximately 7% of revenues for the first six months of fiscal 2001 from
approximately 11% of sales for the first six months 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, including a decrease in obsolescence provisions of $247.
Sales and gross profit (loss) of each reportable segment for the six months
ended September 30, 2000 and 1999 is set forth below:
2000 1999
-------------------- -------------------
Gross
Profit Gross
Sales (Loss) Sales Profit
-------- -------- -------- --------
Payphone segment $ 15,240 $ 4,215 $ 26,209 $ 6,635
Internet appliance segment 1,123 (919) -- --
-------- -------- -------- --------
$ 16,363 $ 3,296 $ 26,209 $ 6,635
======== ======== ======== ========
Gross profit from our payphone business increased to approximately 28% of net
sales and revenues for the six months ended September 30, 2000 from
approximately 25% of net sales and revenues for the six months ended September
30, 1999 primarily due to the decrease in obsolescence provisions, improved
margins from repair and refurbishment services and cost reductions from the
restructuring of operations during the latter part of fiscal 2000, which were
partially offset by the impact of lower volume and average selling prices.
During the six months ended September 30, 2000, we incurred a negative gross
profit in our Internet appliance business primarily because of the establishment
of our back-office management operations and the start-up of manufacturing
Grapevine terminals.
17
<PAGE>
Selling, general and administrative expenses decreased by $1,517, or
approximately 28%, during the six months ended September 30, 2000 as compared to
the six months ended September 30, 1999, and represented 23% of net sales and
revenues versus 20% of net sales and revenues last year. 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,
current year cost reduction initiatives and a decline in variable selling
expenses, which is related to the decline in sales.
Engineering, research and development expenses decreased by $991, or
approximately 34%, during the first six months of fiscal 2001 as compared to the
first six months 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 and a
restructuring of these activities during the first quarter of fiscal 2001. In
addition, software development costs capitalized during the six months ended
September 30, 2000 declined by $1,259 to $667 from $1,926 for the six months
ended September 30, 1999.
The increase in net interest expense during the six months ended September 30,
2000 as compared to the same period last year is primarily attributable to an
increase in the interest rates under our bank notes payable as a result of the
modifications to our bank loan agreements, as further described below under
"Liquidity and Capital Resources," and an increase in the amortization of debt
issuance expenses of $155.
During the six months ended September 30, 1999, we recognized tax benefits of
$1,015 on a pre-tax loss of $2,938. Tax benefits for the six months ended
September 30, 2000 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 revolving credit lines, an installment note and a mortgage
note became due and payable on September 30, 2000. Accordingly, outstanding bank
debt in the aggregate amount of $11,198 and $11,460 at September 30, 2000 and
March 31, 2000, respectively, is classified as a current liability in the
accompanying consolidated financial statements.
We are presently attempting to negotiate the terms of a third forbearance
agreement and/or restructure the bank indebtedness. The Company is also
continuing its efforts to raise additional equity capital and secure other
sources of financing to facilitate the restructuring of its bank indebtedness.
However, there can be no assurance that a third forbearance agreement will be
entered into or that the Company will be able to secure other sources of
financing, raise additional equity capital or restructure its bank indebtedness.
Accordingly, there is no assurance that the Company will be able to continue
normal operations. In addition, even if the Company's efforts to raise
additional financing and/or capital are successful, there is no assurance that
any such additional financing and/or capital would be provided on terms that are
not onerous or that the percentage ownership of the Company's current
stockholders will be not be reduced substantially.
18
<PAGE>
In addition, during the six months ended September 30, 2000, we used an
aggregate of $2,174 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. To facilitate our
efforts to reach an agreement with our bank, we restructured the business
effective October 31, 2000 to reduce costs and expenses to a level we believe
will generate positive cash flows. However, there can be no assurance that the
cost reductions we effected will be sufficient to generate positive cash flows
since our cash flows are heavily dependent on the level of our sales and related
gross profit, and our ability to manage working capital requirements, including
our supplier obligations.
Accordingly, unless we are able to refinance and/or restructure the outstanding
indebtedness under our Loan Agreements and successfully raise sufficient
additional equity capital and/or financing on satisfactory terms, 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 any
extended period of time or that the Company will be able to continue to operate.
If our efforts to raise additional capital and other sources of financing are
not successful, we will experience difficulties meeting all of our obligations
and may be unable to continue normal operations.
Financing Activities. Historically, we have funded our operations, working
capital requirements and capital expenditures from internally generated cash
flows and funds, if any, available under bank credit lines. Our credit lines
have been used 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 permitted when
such requirements exceed cash provided by operations, if any. We have also used
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 our cash balances and funds we are able to borrow under our bank credit
lines. At September 30, 2000, our cash balances aggregated $1,482, but we were
unable to borrow any additional funds under the terms of our bank credit lines,
which became due on September 30, 2000.
At September 30, 2000 and March 31, 2000, outstanding bank debt under our
$10,000 working capital line was $6,095, and outstanding bank debt under our
$4,000 installment note was $3,072 and $3,322, respectively. Outstanding
indebtedness under our mortgage note was $1,750 and $1,762 at September 30, 2000
and March 31, 2000, respectively. We also had outstanding indebtedness of $281
under our capital equipment credit line at September 30, 2000 and March 31,
2000. As explained above under "Liquidity", our bank indebtedness became due and
payable on September 30, 2000.
Pursuant to the terms of the Loan Agreements, the annual interest rates under
the installment note and mortgage note were increased to 11.5% on April 12, 2000
and to 12.5% 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%). In addition, 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 September 30, 2000 and March 31, 2000) was cancelled. Further,
during the six months ended September 30, 2000, although the Loan Agreements
permitted an overadvance of indebtedness outstanding under our working capital
revolving credit line and installment note based on the value of collateral
consisting of eligible accounts receivable and inventories, we were not able to
borrow any additional funds under the Loan Agreements.
19
<PAGE>
Indebtedness outstanding under the Loan Agreements is collateralized by
substantially all of our assets. The 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, the Loan Agreements require us to comply
with specific financial covenants, including covenants with respect to working
capital and net worth. Under the terms of the Loan Agreements, upon the
occurrence of an event of default including noncompliance with covenants, the
bank has the right to accelerate the maturity of the indebtedness outstanding
under the Loan Agreements.
During the six months ended September 30, 1999, net proceeds under our bank
lines aggregated $1,563. During the six months ended September 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 six months ended September 30, 2000 and 1999 were $349 and $398,
respectively. Also, during the six months ended September 30, 1999 we reduced
our bank overdraft by $867.
Operating Activities. Cash flows (used in) provided by operating activities for
the six months ended September 30, 2000 and 1999 are summarized as follows:
2000 1999
-------- --------
Net loss $(4,163) $(1,923)
Non-cash charges and credits, net 2,759 2,393
------- -------
(1,404) 470
------- -------
Changes in operating assets and liabilities:
Accounts and notes receivable 972 1,046
Inventories 294 1,966
Accounts payable, accrued expenses and
other current liabilities 1,765 (789)
Other operating assets (241) 102
------- -------
2,790 2,325
------- -------
$ 1,386 $ 2,795
======= =======
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
six months ended September 30, 2000, we used $1,404 of cash to fund operating
losses net of non-cash charges and credits. During the six months ended
September 30, 1999, we generated $470 of cash from earnings plus non-cash
charges and credits. In addition, during the six months ended September 30, 2000
and 1999, we generated $2,790 and $2,325 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 six months ended September 30, 2000, we
generated $972 and $294 of cash through reductions in accounts and notes
receivable and inventories, respectively, and $1,524 of cash from a net increase
in accounts payable, accrued expenses, other current liabilities and other
operating assets. In comparison, during the six months ended September 30, 1999,
we generated $1,046 and $1,966 of cash through reductions in accounts and notes
receivable and inventories, respectively, and used $687 of cash to fund changes
in accounts payable, accrued expenses, other current liabilities and other
operating assets. Cash used to pay restructuring and reorganization obligations
included in accrued liabilities during the six months ended September 30, 2000
and 1999 aggregated $127 and $182, respectively. Outstanding restructuring and
reorganization obligations that will affect future
20
<PAGE>
operating cash flows aggregated $313 at September 30, 2000.
Our current ratio declined to .84 to 1 at September 30, 2000 as compared to .97
to 1 at March 31, 2000 primarily due to our net loss for the six months ended
September 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 represented in
the aggregate 87% and 88% of our current assets at September 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 six
months ended September 30, 2000 and 1999 amounted to $770 and $3,083,
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 $103 and $1,157
during the six months ended September 30, 2000 and 1999, respectively. During
the six months ended September 30, 2000 and 1999, capitalized software
development costs aggregated $667 and $1,926, respectively. As of September 30,
2000, we had no significant capital expenditure commitments, nor do we expect to
expend any significant funds on capital assets during the next twelve months. In
addition, we have reduced the resources devoted to software development and
expect capitalized software development costs to decline throughout the next
twelve months.
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 a 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 $144,000 and $325,000 at September 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
21
<PAGE>
obligations at September 30, 2000, an increase in interest rates of 450 basis
points (4.5%) will result in additional interest expense of approximately
$500,000 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 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 3. Defaults by the Company on its Senior Securities
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. This Agreement expired on September 30, 2000, and
accordingly, all obligations outstanding under the Loan Agreements became due
and payable. In addition, the Company defaulted with respect to the payment of
principal and interest due in September 2000. As of September 30, 2000, the
total principal balance outstanding under the Loan Agreements of $11,197,972 is
in arrears with respect to payment and interest of approximately $112,000 is in
arrears with respect to payment.
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
------- ----------------------
27 Financial Data Schedule (Edgar Filing only)
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Registrant during
the three months ended September 30, 2000.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Elcotel, Inc.
--------------------------------------
(Registrant)
Date: November 17, 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)
23
