-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWLpm7K6JW/D1mtq2kdDa9r+s+mdqyLjJxIu3t1dZADSTCJ8K/TAao+8tytJvmjz v9L4VeaO/zqdoLEUkD1F1g== /in/edgar/work/20000814/0000891092-00-000700/0000891092-00-000700.txt : 20000921 0000891092-00-000700.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891092-00-000700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELCOTEL INC CENTRAL INDEX KEY: 0000801448 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 592518405 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15205 FILM NUMBER: 697976 BUSINESS ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9417580389 MAIL ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 10-Q 1 0001.txt FORM 10Q 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. PART I - FINANCIAL INFORMATION Item 1. Financial Statements ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars, except per share amounts, in thousands)
June 30, March 31, 2000 2000 ----------- --------- (Unaudited) 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 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 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 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 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 4. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the three months ended June 30, 2000 are summarized as follows:
Accumulated Additional Other Common Paid-in Accumulated Comprehensive Treasury Stock Capital Deficit Income Stock Total -------- -------- ----------- ------------- --------- -------- 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 ======== ======== ======== ======== ======== ========
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 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 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:
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 ======== ======== ======== ========
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 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 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.
Percent Percent 2000 of Sales 1999 of Sales -------- -------- ------- -------- 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)
11 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:
Increase Percentage 2000 1999 (Decrease) Change -------- -------- ---------- --------- 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%) ====== ======= ======= ===
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 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:
Increase Percentage 2000 1999 (Decrease) Change ---- ---- ---------- ------ 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%) ====== ======= ======= ===
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 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. 14 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. 15 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 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 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. 18 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. 19 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 EX-10.1 2 0002.txt FOREBEARANCE AND MODIFICATION AGREEMENT Exhibit 10.1 Prepared By and Return to: Troy M. Lovell, Esq. Foley & Lardner P.O. Box 3391 Tampa, Florida 33601 SECOND FORBEARANCE AND MODIFICATION AGREEMENT THIS SECOND FORBEARANCE AND MODIFICATION AGREEMENT (the "Forbearance Agreement") is made effective the 31st day of July, 2000, (the "Effective Date") by and between Bank of America, N.A., d/b/a NationsBank, N.A., successor to NationsBank, N.A., f/k/a NationsBank, N.A. (South), as successor in interest to NationsBank of Florida, N.A. (the "Bank"); and Elcotel, Inc., a Delaware corporation ("Elcotel"); Elcotel Direct, Inc., a Delaware corporation; Technology Service Group, Inc., successor by merger with Elcotel Hospitality Services, Inc., a Delaware corporation; and all subsidiaries of any of them (collectively, the "Borrower"), jointly and severally. RECITALS WHEREAS, pursuant to a Restated Loan Agreement, the Borrower is indebted to the Bank pursuant to a Consolidation Promissory Note (the "Consolidated Note"), dated November 25, 1997, in the original principal amount of $15,000,000.00, which Consolidated Note consolidated and renewed prior indebtedness from the Borrower to the Bank; WHEREAS, the Consolidated Note was secured by certain personal property more particularly described in that certain Restated Security Agreement of even date therewith; WHEREAS, the Restated Loan Agreement was modified by that certain First Amendment to Loan Agreement and Security Agreement dated March 29, 1999 (as modified, the "Loan Agreement"); WHEREAS, Borrower is indebted to the Bank pursuant to a First Replacement Promissory Note ("Note 1") in the original principal amount of $10,000,000.00, dated March 29, 1999, which renewed and replaced a portion of the Consolidated Note; WHEREAS, Borrower is indebted to the Bank pursuant to a Promissory Note ("Note 2") in the original principal amount of $1,500,000.00, dated March 29, 1999; WHEREAS, Borrower is indebted to the Bank pursuant to a Second Replacement Promissory Note ("Note 3") in the original principal amount of $4,000,000.00, dated March 29, 1999, which renewed and replaced a portion of the Consolidated Note; -1- WHEREAS, Elcotel is indebted to the Bank pursuant to a Consolidated Promissory Note ("Note 4") in the original principal amount of $1,920,000.00, dated November 25, 1997; WHEREAS, Note 4 is secured by that certain Mortgage (as modified, the "Mortgage") by Elcotel in favor of Carl G. Santangelo, as Trustee encumbering certain real property located in Manatee County, Florida, as more particularly described on Exhibit A (the "Mortgaged Property") recorded in Official Records Book 1416, beginning at Page 5745, which was assigned to the Bank by an assignment recorded in Official Records Book 1435, beginning at Page 4451, and which was modified by instruments recorded in Official Records Book 1425, beginning at Page 6814, Official Records Book 1435, beginning at Page 4456, Official Records Book 1468, beginning at Page 2483, Official Records Book 1537, beginning at Page 2935, all of the public records of Manatee County, Florida; WHEREAS, the Notes went into default by virtue of a breach of the covenants contained in the Loan Agreement, more specifically, breach of the debt service coverage ratio required by the Loan Agreement (the "Existing Default"); WHEREAS, as a result of the Existing Default, Borrower requested a forbearance and modification of the terms and conditions of the Notes, which the Bank agreed to in a Forbearance and Modification Agreement dated April 12, 2000 (the "First Modification"); WHEREAS, pursuant to the First Modification, the Bank's forbearance expired and all sums due under the Notes became due and payable in full on July 31, 2000; and, WHEREAS, Borrower again desires to modify the terms of the Notes and other Loan Documents (the Notes, the Mortgage, the Consolidated Note, the Loan Agreement, First Modification, and all other documents executed in connection with the Notes and the loans evidenced thereby are collectively referred to as the "Loan Documents") and to have the Bank forbear enforcement of the Loan Documents and, notwithstanding the existing default, the Bank is willing to forbear enforcement and modify the Loan Documents, but only under the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Recitals. The foregoing recitals are true and correct and incorporated herein by reference. -2- 2. Maturity Date. The Maturity Date of this Forbearance Agreement, Note 1, Note 2, Note 3, and Note 4, is September 30, 2000, notwithstanding anything to the contrary contained in the Loan Documents. 3. Forbearance. Provided that no event of default occurs under this Forbearance Agreement, the Bank shall forbear from enforcing its rights and remedies under the Loan Documents up to and including the Maturity Date. In the event of a default under this Forbearance Agreement, the Bank shall charge and Borrower shall pay interest at a default rate from the date of such default, but not prior to that date. The Existing Default shall not be considered a default under this Forbearance Agreement for the purposes of this paragraph. 4. Overadvance. The Bank will not require a cure of any overadvance up to a limit of $2,800,000 beyond the amount permitted by the Borrowing Base formula set forth in the Loan Documents, from the Effective Date of this Forbearance Agreement through the Maturity Date. Borrower shall not be entitled to future advances while exceeding the Borrowing Base formula limit. 5. Financial Conditions. For purposes of calculating the consolidated ratio of Current Assets to Current Liabilities (as defined in the Loan Documents), the balance of Note 3 and Note 4 shall not be included as Current Liabilities. 6. Interest Rate. a. Note 1 and Note 2 shall accrue, and Borrower shall pay, interest at a fluctuating rate equal to the "Prime Rate" of the Bank plus 3.0% per annum from the Effective Date up to and including payment in full or the occurrence of an event of default other then the Existing Default. The "Prime Rate" is the fluctuating rate of interest established by Bank from time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index and may or may not at any time be the best or lowest rate charged by Bank on any loan. b. Note 3 and Note 4 shall accrue, and Borrower shall pay, interest at a fixed rate equal to the "Prime Rate" of the Bank as of the Effective Date plus 3.0% per annum from the Effective Date up to and including payment in full or the occurrence of an event of default other than the Existing Default. c If an event of default occurs under this Forbearance Agreement, the Notes shall accrue, and Borrower and Guarantors shall pay, interest at the maximum rate permitted by Florida law. 7. Extension Fee. Concurrent with the execution of this Forbearance Agreement, Borrower shall pay to the Bank a commitment fee equal to one-fourth of one percent (0.25%) of the combined outstanding balance of the Notes. On the -3- Maturity Date, Borrower shall pay an additional commitment fee equal to one-quarter of one percent (0.25%) of the combined outstanding balance of the Notes as of the Maturity Date. 8. Expenses. Borrower shall pay all costs and expenses incurred by the Bank in connection with the Existing Default, negotiating, drafting and closing this Forbearance Agreement and related documents, including, but not limited to, documentary stamp taxes, intangibles taxes, any other transactional taxes, recording fees, the Bank's attorneys fees, and title insurance premiums and search costs. All such expenses shall be due and payable at the time of the closing of this Forbearance Agreement, and shall be secured by the collateral of the Notes. 9. Waiver and Release. To induce the Bank to enter into this Forbearance Agreement, Borrower, for themselves, and their agents, attorneys, successors and assigns, do hereby release the Bank and its predecessors, successors, assigns, officers, managers, directors, shareholders, employees, agents, attorneys, representatives, parent corporations, subsidiaries, and affiliates (collectively referred to as "Affiliates"), jointly and severally from any and all claims, counterclaims, demands, damages, debts, agreements, covenants, suits, contracts, obligations, liabilities, accounts, offsets, rights, actions and causes of action for contribution and indemnity, whether arising at law or in equity (including without limitation, claims of fraud, duress, mistake, tortious interference, usury, or control), whether presently possessed or possessed in the future, whether known or unknown, whether liability be direct or indirect, liquidated or unliquidated, whether presently accrued or to accrue hereafter, whether absolute or contingent, foreseen or unforeseen, and whether or not heretofore asserted, for or because of or as a result of any act, omission, communication, transaction, occurrence, representation, promise, damage, breach of contract, fraud, violation of any statute or law, commission or of any tort, or any other matter whatsoever or thing done, omitted or suffered to be done by Lender or any of its Affiliates, insofar as the same arise out of or relate to the Loans, the Loan Documents, the collateral securing the Loans, the debtor-creditor relationship between the parties, and all communications or contacts between the parties related to any of the foregoing, including this Forbearance Agreement, which has occurred in whole or in part, or was initiated at any time from the beginning of time up to and immediately preceding the moment of the execution of this Agreement. The rights and defenses being waived and released hereunder include without limitation any claim or defense based on the Bank having charged or collected interest at a rate greater than that allowed to be contracted for by applicable law as changed from time to time; provided, however, in no event shall such waiver and release be deemed to change or modify the terms of the Loan Documents or the Loans which provide that sums paid or received in excess of the maximum rate of -4- interest allowed to be contracted for by applicable law, as changed from time to time, reduce the principal sum due, said provision to be in full force and effect. 12. Acknowledgement of Default. Borrower acknowledges that the Notes are currently in default because of the Existing Default. Nothing contained herein or in any document executed concurrently herewith shall constitute or be construed as a waiver of such default. Except to the extent specifically set forth herein, the Bank retains all of its rights and remedies with respect to the Notes and the Loan Documents. 11. WAIVER OF JURY TRIAL. THE PARTIES HERETO KNOWINGLY, IRREVOCABLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM, DEFENSE, DISPUTE OR LITIGATION BETWEEN OR AMONG ANY OF THE PARTIES HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS DOCUMENT. 12. Modification of Loan Documents. The terms of the Loan Documents are hereby modified to incorporate and reflect the terms and conditions of this Forbearance Agreement. In the event of any conflict between this Forbearance Agreement and the Loan Documents, the terms of this Forbearance Agreement shall prevail. 13. Ratification of Loan Documents. Borrower hereby ratifies and confirms all of the terms, warranties, representations, covenants and conditions set forth in the Loan Documents and this Forbearance Agreement and hereby acknowledges the Loan Documents as modified constitute valid and binding obligations of Borrower. Without limiting the foregoing, Borrower hereby ratifies and confirms the grant and conveyance to the Bank of the collateral set forth in the Loan Documents as security for the repayment of the Notes and all mortgages, security agreements, and financing statements, wherever filed, or unfiled. Borrower further acknowledges and agrees the Loan Documents as modified are enforceable in accordance with their terms and free from claims of defense, setoff or recoupment against the Bank or any other party. Without in any way limiting the applicability of the foregoing, Borrower hereby agrees, confirms and ratifies that all collateral securing any of the Notes shall serve as collateral for each of the Notes, and to the extent necessary to do so, hereby re-assigns all collateral to the Bank as security for each of the Notes. 14. Events of Default and Remedies. The failure to pay any sum required hereunder when due, the breach of any representation or warranty contained herein or in any of the Loan Documents, and the breach of any of the Loan Documents, other than the Existing Default, shall constitute an event of default under this Forbearance Agreement, and the Bank shall be immediately entitled, -5- without notice or demand, to enforce its rights and remedies under the Loan Documents, this Forbearance Agreement, and law. An event of default under this Forbearance Agreement shall constitute an event of default under each of the Notes; an event of default under any of the Notes shall constitute an event of default under the other Notes and under this Forbearance Agreement. 15. Indemnity. Borrower hereby agrees to indemnify and hold harmless (including payment of attorneys fees and costs) the Bank from and against any loss, cost or expense resulting from any claim by Florida taxing authorities regarding the Loans or this Forbearance Agreement. This obligation to indemnify the Bank shall survive payment of the Notes, and the satisfaction of any Loan Document, this Forbearance Agreement or other instrument securing the Loans. 16. Anti-Novation. It is the intent of the parties that this instrument shall not constitute a novation and shall in no way adversely affect the lien priority of the Loan Documents referred to above. 17. Future Cooperation. Borrower agrees to cooperate with the Bank in giving effect to the purposes and terms of this Forbearance Agreement, including, but not limited to, the execution of additional documents deemed necessary or desirable by the Bank to document or perfect the Bank's rights under the Loan Documents and this Forbearance Agreement. 18. Representations. Borrower acknowledges, represents, warrants, and confirms the following: a. Review of Agreement. Borrower has carefully read and understands the effect of this Forbearance Agreement. Borrower has had the assistance or the opportunity to seek the assistance of separate legal counsel in carefully reviewing, discussing and considering all terms of this Forbearance Agreement; b. Reliance Only on Representations Herein. The execution of this Forbearance Agreement by Borrower is not based upon reliance upon any representation, understanding or agreement not expressly set forth herein. The Bank has not made any representations to Borrower not expressly set forth herein; c. Residency. Borrower is subject to the personal jurisdiction of courts of the State of Florida; d. Authority and Compliance. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of each. Each of Borrower are corporations in good standing in the State -6- of Delaware and authorized to do business in Florida. Each of Borrower shall provide a current incumbency certificate and corporate resolution authorizing the entry into this Forbearance Agreement. No additional consent or approval of any court, public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which each is subject; e. Litigation. There is no proceeding against Borrower pending or, to the knowledge of each, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to the Bank in writing and acknowledged by the Bank prior to the date of this Forbearance Agreement; f. Ownership of Assets. Borrower has good title to their respective assets, and such assets are free and clear of liens, except those granted to the Bank, except for purchase money security interests in chattels, including leases, and as disclosed to the Bank in writing prior to the date of this Forbearance Agreement; g. Taxes. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings, and each has filed all tax returns which it is required to file; h. Voluntary Act. Borrower executes this Forbearance Agreement as a free and voluntary act, without any duress, coercion or undue influence exerted by or on behalf of the Bank or any other party; i. Representations True and Correct. All of the warranties and representations made in this Forbearance Agreement and all other Loan Documents, are materially true and correct as of the date hereof and that Borrower is not in default of any of the foregoing nor aware of any default with respect thereto; j. Ownership of Claims. Borrower is the sole owner of the claims or causes of action being released herein and has not conveyed or assigned any interest in any such claims or causes of action to any person or entity not a party hereto; and k. Binding Agreement. This Forbearance Agreement does not violate any law, rule, regulation, contract or agreement otherwise enforceable by or against Borrower. -7- 19. Miscellaneous. a. Paragraph headings used herein are for convenience only and shall not be construed as controlling the scope of any provision hereof. b. This Forbearance Agreement shall be governed by and construed in accordance with the laws of the State of Florida and of the United States of America and the rules and regulations promulgated under the authority thereof. The parties hereto acknowledge that this Forbearance Agreement affects interstate commerce. c. Time is of the essence of this Forbearance Agreement. d. As used herein, the neuter gender shall include the masculine and feminine genders, and vice versa, and the singular the plural, and vice versa, as the context demands. e. All costs incurred by the Bank in enforcing this Forbearance Agreement and in collection of sums due the Bank from Borrower, to include, without limitation, reasonable attorney's fees through all mediation and arbitration proceedings, trials, appeals and proceedings, to include, without limitation, any proceedings pursuant to the bankruptcy laws of the United States, shall be paid by Borrower. f. This Forbearance Agreement shall inure to the benefit of and be binding upon the parties hereto as well as their successors and assigns, heirs and personal representatives. 20. Counterparts. This Forbearance Agreement may be executed in a number of multiple identical counterparts which, when taken together, shall constitute collectively one (1) agreement, but in making proof of this agreement it shall not be necessary to produce or account for more than one such counterpart executed by the party to be charged. Facsimile signatures may be deemed originals for all purposes. 21. Final Agreement. THIS FORBEARANCE AGREEMENT REPRESENTS THE ENTIRE AND FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT WRITTEN OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS FORBEARANCE AGREEMENT CONSTITUTES THE FINAL AND COMPLETE RELEASE OF THE BANK AND ITS AFFILIATES OF THOSE MATTERS SET FORTH HEREIN. -8- IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement to be executed the date first above written, effective as of the Effective Date. WITNESSES ELCOTEL, INC., a Delaware corporation ________________________ Print Name:_____________ By: /s/ William H. Thompson -------------------------------- Print Name: William H. Thompson ________________________ ------------------------- Print Name:_____________ Title: Senior Vice President ----------------------------- ELCOTEL DIRECT, INC., a Delaware _________________________ corporation Print Name:______________ By: /s/ William H. Thompson -------------------------------- _________________________ Print Name: William H. Thompson -------------------------- Print Name:______________ Title: Vice President ------------------------------ TECHNOLOGY SERVICE GROUP, INC. successor by merger with Elcotel Hospitality Services, Inc., a Delaware _________________________ corporation Print Name:______________ By: /s/ William H. Thompson -------------------------------- _________________________ Print Name: William H. Thompson -------------------------- Print Name:______________ Title: Vice President ------------------------------ BANK OF AMERICA, N.A., d/b/a NationsBank, N.A. _________________________ Print Name:______________ By:______________________________ _________________________ Print Name:_______________________ -9- Print Name:______________________ Title:_____________________________ STATE OF _____________________ COUNTY OF ___________________ The foregoing Forbearance Agreement was acknowledged before me, the undersigned authority, this ___ day of ___________, 2000, by _______________________________ as ______________________________ of Elcotel, Inc., a Delaware corporation, ___ who is personally known to me or ___ who produced ____________________ as identification. _______________________________________ Notary Public, State of _______________ Print Name:____________________________ My Commission Expires:_________________ [SEAL] STATE OF _____________________ COUNTY OF ____________________ The foregoing Forbearance Agreement was acknowledged before me, the undersigned authority, this ___ day of ___________, 2000, by _______________________________ as ______________________________ of Elcotel Direct, Inc., a Delaware corporation, ___ who is personally known to me or ___ who produced ____________________ as identification. _______________________________________ Notary Public, State of _______________ Print Name:____________________________ My Commission Expires:_________________ [SEAL] -10- STATE OF _____________________ COUNTY OF ___________________ The foregoing Forbearance Agreement was acknowledged before me, the undersigned authority, this ___ day of _______, 2000, by _______________________________ as ______________________________ of Technology Service Group, Inc., successor by merger with Elcotel Hospitality Services, Inc., a Delaware corporation, ___ who is personally known to me or ___ who produced ____________________ as identification. _______________________________________ Notary Public, State of _______________ Print Name:____________________________ My Commission Expires:_________________ [SEAL] STATE OF _____________________ COUNTY OF ___________________ The foregoing Forbearance Agreement was acknowledged before me, the undersigned authority, this ___ day of __________, 2000, by ____________________ as ______________ of Bank of America, N.A. d/b/a NationsBank, N.A., ___ who is personally known to me or ___ who produced ____________________ as identification. _______________________________________ Notary Public, State of _______________ Print Name:____________________________ My Commission Expires:_________________ [SEAL] -11- EX-10.2 3 0003.txt WARRANT TO PURCHASE SHARES OF COMMON STOCK Exhibit 10.2 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TOWARD DISTRIBUTION OR RESALE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR APPLICABLE STATE LAW. ELCOTEL, INC. WARRANT TO PURCHASE SHARES OF COMMON STOCK Warrant No. W-1 No. of Shares - 53,827 This certifies that, for valued received, id8 Group Holdings, Inc. ("Holder"), or its registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, at or prior to 5:00 p.m., Sarasota, Florida time, on May 1, 2002, but not thereafter, to purchase 53,827 shares of Common Stock ("Common Stock"), par value $.01 per share, of Elcotel, Inc., a Delaware corporation (hereinafter called the "Company"). The purchase price payable upon the exercise of this Warrant (the "Warrant Price") shall be $2.40625 per share. Upon delivery of this Warrant with the subscription notice duly executed, together with payment of the Warrant Price, by certified or cashier's check payable to the Company, for the shares of Common Stock thereby purchased, at the principal office of the Company, 6428 Parkland Drive, Sarasota, Florida 34243, or at such other address as the Company may designate by notice in writing to the Holder, the Holder of this Warrant shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. All shares of Common Stock which may be issued upon the exercise of this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect thereto. This Warrant is subject to the following terms and conditions: 1. Exercise of Warrant. Except as otherwise provided in this paragraph 1, this Warrant may be exercised in whole at any time, or in part from time to time, at or prior to 5:00 p.m., Sarasota, Florida time, on May 1, 2002, but not thereafter, as to all or any part of the number of whole shares of Common Stock then subject hereto so long as for any partial exercise the number of shares of Common Stock purchased is at least 100 shares. In case of any partial exercise of this Warrant, the Company shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Common Stock purchasable hereunder or appropriate notation may be made on this Warrant which shall then be returned to the Holder. 2. Adjustment of Warrant Price and Number of Shares Purchasable Hereunder. The Warrant Price and the number of shares purchasable hereunder shall be subject to adjustment from time to time in accordance with the following provisions: 1 (a) In the event of any payment of any cash dividend or distribution of property by the Company otherwise than out of earned surplus, either tangible or intangible (other than distributions of the Common Stock), to the holders of the Common Stock, the Warrant Price for the shares of Common Stock then subject to this Warrant shall be reduced by the per share amount of such dividend or distribution unless and until the Warrant Price is equal to the then par value of the Common Stock. If and when the Warrant Price is equal to the then par value of the Common Stock, the registered holder of this Warrant shall be entitled to receive, concurrently with the holders of the Common Stock then outstanding, the per share amount of any such dividend or distribution with respect to the number of shares of Common Stock then purchasable upon exercise of this Warrant in the same manner and to the same extent as if the registered holder of this Warrant were then the registered owner of the shares of Common Stock then subject hereto. For purposes of this subparagraph (a), the per share amount of any distribution of property shall be the fair market value thereof as determined by the Board of Directors in good faith in the resolutions authorizing any such distribution. (b) In case the Company shall at any time subdivide the outstanding shares of its Common Stock, the Warrant Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of its Common Stock, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, effective from and after the record date of such subdivision or combination, as the case may be. Upon any adjustment in the Warrant Price per share pursuant to this subparagraph (b), the Holder of this Warrant shall thereafter be entitled to purchase, at the adjusted Warrant Price, the number of shares of Common Stock, calculated to the nearest full share obtained by (X) multiplying the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment by the Warrant Price in effect immediately prior to such adjustment, and (Y) by dividing the product thereof by the Warrant Price resulting from such adjustment. No such adjustment in the number of shares that may be purchased upon exercise of this Warrant shall be required in the event of an adjustment in the Warrant Price per share pursuant to subparagraph (a). (c) In the event of the issuance of additional shares of Common Stock of the Company as a dividend on the Common Stock, from and after the day that is the record date for the determination of stockholders entitled to such dividend the Holder of this Warrant shall (until another adjustment) be entitled to purchase the number of shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of shares of Common Stock purchasable hereunder immediately prior to said record date by the percentage which the number of additional shares constituting any such dividend is of the total number of shares of Common Stock outstanding immediately prior to said record date plus the number of shares of Common Stock issuable upon conversion of the outstanding convertible securities or upon exercise of any outstanding warrants, options or rights (including those with respect to convertible securities) and adding the result so obtained to the number of shares of Common Stock purchasable hereunder immediately prior to said record date. 2 Upon each adjustment pursuant to this subparagraph (c), the Warrant Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing (X) the product obtained by multiplying such Warrant Price by the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment by (Y) the number of shares of Common Stock purchasable hereunder immediately following such adjustment. 3. Reorganization, Reclassification, Consolidation or Merger. If at any time while this Warrant is outstanding there shall be any reorganization or reclassification of the Common Stock of the Company (other than a subdivision or combination of shares provided for in paragraph 2 above), any consolidation or merger of the Company with another corporation or any sale of all or substantially all of its assets to another corporation effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or property with respect to or in exchange for Common Stock, the Holder of this Warrant shall thereafter be entitled to receive, during the term hereof and upon payment of the Warrant Price, the number of shares of stock or other securities or property of the Company or of the successor corporation resulting from such consolidation, merger or sale of assets, as the case may be, to which a holder of the Common Stock of the Company, deliverable upon the exercise of this Warrant, would have been entitled upon such reorganization, reclassification, consolidation, merger or sale of assets if this Warrant had been exercised immediately prior to such reorganization, reclassification, consolidation, merger or sale of assets; and in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the Holder of this Warrant to the end that the provisions set forth herein (including the adjustment of the Warrant Price and the number of shares issuable upon the exercise of this Warrant) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof. 4. Notice of Adjustments. Upon any adjustment of the Warrant Price and any increase or decrease in the number of shares of Common Stock purchasable upon the exercise of this Warrant, then, and in each such case, the Company, within thirty days after a Holder's request, shall give written notice thereof to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, which notice shall state the Warrant Price as adjusted and the increased or decreased number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation of each. 5. Charges, Taxes and Expenses. The issuance of certificates for shares of Common Stock upon any exercise of this Warrant shall be made without charge to the Holder hereof for any tax or other expense in respect to the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of, or in such name or names as may be directed by, the Holder of this Warrant; provided, however, that in the event that certificates for shares of Common Stock are to be issued in a name other than the name of the Holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by an instrument of transfer in form satisfactory to the Company, duly executed by the Holder hereof in person or by an attorney duly authorized in writing and the Holder shall pay all stock transfer taxes payable upon issuance of such stock certificate. 3 6. Certain Obligations of the Company. The Company agrees that it will not establish or increase the par value of the shares of any Common Stock which are at the time issuable upon exercise of this Warrant above the then prevailing Warrant Price hereunder and that, before taking any action which would cause an adjustment reducing the Warrant Price hereunder below the then par value, if any, of the shares of any Common Stock issuable upon exercise hereof, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock at the Warrant Price as so adjusted. 7. Restrictions on Exercise and Transfer. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable and the related shares of Common Stock shall not be transferable except upon the conditions specified in this paragraph 7, which conditions are intended, among other things, to insure compliance with the provisions of the Act in respect of the exercise or transfer of the Warrant or transfer of the related shares of Common Stock. The Holder represents and warrants that the language contained in the legend on the first page hereof is true and correct. The Holder of this Warrant, by acceptance hereof, agrees that it will not (a) exercise this Warrant except in compliance with the applicable securities laws or (b) transfer this Warrant or the related shares of Common Stock except (i) pursuant to an effective registration statement covering such securities under the Act and any applicable state securities laws, (ii) in a transaction permitted by Rule 144 promulgated under the Act and as to which the Company has received reasonably satisfactory evidence of compliance with the provisions of Rule 144, or (iii) upon receipt of a legal opinion rendered by counsel reasonably satisfactory to the Company to the effect that the transaction does not require registration under the Act and any applicable state securities laws. 8. Miscellaneous. (a) The Company covenants that it will at all times reserve and keep available, solely for the purpose of issue upon the exercise hereof, a sufficient number of shares of Common Stock to permit the exercise hereof in full. (b) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors or assigns of the Company and of the Holder or Holders hereof. (c) No Holder of this Warrant, as such, shall be entitled to vote, receive dividends (except as provided in paragraph 2(a) hereof), receive notice in respect of meetings of stockholders or any other matter whatsoever as a stockholder of the Company or be deemed to be a stockholder of the Company for any purpose. (d) This Warrant may be divided into separate Warrants covering at least one hundred shares of the Common Stock for the total number of shares of Common Stock then subject to this Warrant at any time, or from time to time, upon the request of the Holder of this Warrant and the surrender of the same to the Company for such purpose. Such subdivided Warrants shall be issued promptly by the Company following any such request and shall be of the same form and tenor as this Warrant, except for any requested change in the name of the Holder stated herein. 4 (e) Except as otherwise provided herein, this Warrant and all rights hereunder are transferable by the Holder hereof in person or by duly authorized attorney on the books of the Company upon surrender of this Warrant, with the attached assignment properly endorsed, to the Company. The Company may deem and treat the registered Holder of this Warrant at any time as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary. (f) Notwithstanding any provision herein to the contrary, the Holder hereof may not exercise, sell, transfer or otherwise assign this Warrant unless the Company is provided with an opinion of counsel satisfactory in form and substance to the Company, to the effect that such exercise, sale, transfer or assignment does not violate the Securities Act of 1933 or applicable state securities laws. (g) This Warrant contains the entire agreement between the Holder hereof and the Company with respect to the purchase of shares of Common Stock of the Company and supersedes all prior arrangements or understandings with respect thereto. (h) This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. (i) Any term or provision of this Warrant may be waived at any time by the party which is entitled to the benefits thereof and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the Holder of this Warrant and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with any term or condition of this Warrant. (j) Any notice or other document required or permitted to be given or delivered to the Holder of this Warrant shall be delivered personally, or sent by certified or registered mail, to each such Holder at the last address shown on the books of the Company for the registration of, and the registration of transfer of, the Warrant or at any more recent address of which the Holder of this Warrant shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company, shall be delivered at, or sent by certified or registered mail to, the office of the Company at 6428 Parkland Drive, Sarasota, Florida 34243, Attention: Chief Executive Officer, or such other address within the United States of America as shall have been furnished by the Company to the Holder of the Warrant. 5 IN WITNESS WHEREOF, the Company and the Holder have caused this Warrant to be signed by their duly authorized officers. Dated: May 1, 2000 ELCOTEL, INC. By: /s/ Michael J. Boyle ------------------------------------------ Michael J. Boyle, Chief Executive Officer ID8 GROUP HOLDINGS, INC. By: /s/ Blake Krikorian ------------------------------------------ Blake Krikorian, Chief Executive Officer 6 SUBSCRIPTION NOTICE Elcotel, Inc. The undersigned, the holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by said Warrant for, and to purchase thereunder, ________ shares of the Common Stock covered by said Warrant and herewith makes payment in full therefor of $_______ by certified or cashier's check payable to the order of the Company, and requests (a) that certificates for such shares (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to ______________ whose address is _________________________________ and (b) if such shares shall not include all of the shares issuable as provided in said Warrant, that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned or that appropriate notation be made on the Warrant which shall be returned to the undersigned. _______________________________ Signature Guaranteed: Dated: 7 ASSIGNMENT (To be Executed by the Registered Holder to effect a transfer of the foregoing Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, and assigns and transfers unto ______________________________________________ the foregoing Warrant and the rights represented thereby to purchase shares of Common Stock of the Company in accordance with the terms and conditions thereof, and does hereby irrevocably constitute and appoint _________________________ Attorney to transfer the said Warrant on the books of the Company, with full power of substitution. Holder: _____________________________ _____________________________ Address Dated: _____________________, 20__ In the presence of: ____________________________________ 8 EX-10.3 4 0004.txt WARRANT TO PURCHASE SHARES OF COMMON STOCK Exhibit 10.3 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TOWARD DISTRIBUTION OR RESALE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR APPLICABLE STATE LAW. ELCOTEL, INC. WARRANT TO PURCHASE SHARES OF COMMON STOCK Warrant No. W-2 No. of Shares - 18,938 This certifies that, for valued received, Greyhawke Capital Advisors LLC ("Holder"), or its registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, at or prior to 5:00 p.m., Sarasota, Florida time, on May 22, 2005, but not thereafter, to purchase 18,938 shares of Common Stock ("Common Stock"), par value $.01 per share, of Elcotel, Inc., a Delaware corporation (hereinafter called the "Company"). The purchase price payable upon the exercise of this Warrant (the "Warrant Price") shall be $2.475 per share. Upon delivery of this Warrant with the subscription notice duly executed, together with payment of the Warrant Price, by certified or cashier's check payable to the Company, for the shares of Common Stock thereby purchased, at the principal office of the Company, 6428 Parkland Drive, Sarasota, Florida 34243, or at such other address as the Company may designate by notice in writing to the Holder, the Holder of this Warrant shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. All shares of Common Stock which may be issued upon the exercise of this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect thereto. This Warrant is subject to the following terms and conditions: 1. Exercise of Warrant. Except as otherwise provided in this paragraph 1, this Warrant may be exercised in whole at any time, or in part from time to time, at or prior to 5:00 p.m., Sarasota, Florida time, on May 22, 2005, but not thereafter, as to all or any part of the number of whole shares of Common Stock then subject hereto so long as for any partial exercise the number of shares of Common Stock purchased is at least 100 shares. In case of any partial exercise of this Warrant, the Company shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Common Stock purchasable hereunder or appropriate notation may be made on this Warrant which shall then be returned to the Holder. 2. Adjustment of Warrant Price and Number of Shares Purchasable Hereunder. The Warrant Price and the number of shares purchasable hereunder shall be subject to adjustment from time to time in accordance with the following provisions: (a) In the event of any payment of any cash dividend or distribution of property by the Company otherwise than out of earned surplus, either tangible or intangible (other than distributions of the Common Stock), to the holders of the Common Stock, the Warrant Price for the shares of Common Stock then subject to this Warrant shall be reduced by the per share amount of such dividend or distribution unless and until the Warrant Price is equal to the then par value of the Common Stock. If and when the Warrant Price is equal to the then par value of the Common Stock, the registered holder of this Warrant shall be entitled to receive, concurrently with the holders of the Common Stock then outstanding, the per share amount of any such dividend or distribution with respect to the number of shares of Common Stock then purchasable upon exercise of this Warrant in the same manner and to the same extent as if the registered holder of this Warrant were then the registered owner of the shares of Common Stock then subject hereto. For purposes of this subparagraph (a), the per share amount of any distribution of property shall be the fair market value thereof as determined by the Board of Directors in good faith in the resolutions authorizing any such distribution. (b) In case the Company shall at any time subdivide the outstanding shares of its Common Stock, the Warrant Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of its Common Stock, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, effective from and after the record date of such subdivision or combination, as the case may be. Upon any adjustment in the Warrant Price per share pursuant to this subparagraph (b), the Holder of this Warrant shall thereafter be entitled to purchase, at the adjusted Warrant Price, the number of shares of Common Stock, calculated to the nearest full share obtained by (X) multiplying the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment by the Warrant Price in effect immediately prior to such adjustment, and (Y) by dividing the product thereof by the Warrant Price resulting from such adjustment. No such adjustment in the number of shares that may be purchased upon exercise of this Warrant shall be required in the event of an adjustment in the Warrant Price per share pursuant to subparagraph (a). (c) In the event of the issuance of additional shares of Common Stock of the Company as a dividend on the Common Stock, from and after the day that is the record date for the determination of stockholders entitled to such dividend the Holder of this Warrant shall (until another adjustment) be entitled to purchase the number of shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of shares of Common Stock purchasable hereunder immediately prior to said record date by the percentage which the number of additional shares constituting any such dividend is of the total number of shares of Common Stock outstanding immediately prior to said record date plus the number of shares of Common Stock issuable upon conversion of the outstanding convertible securities or upon exercise of any outstanding warrants, options or rights (including those with respect to convertible securities) and adding the result so obtained to the number of shares of Common Stock purchasable hereunder immediately prior to said record date. Upon each adjustment pursuant to this subparagraph (c), the Warrant Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing (X) the product obtained by multiplying such Warrant Price by the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment by (Y) the number of shares of Common Stock purchasable hereunder immediately following such adjustment. (d) If the Company, at any time subsequent to the date on which this Warrant has been issued, shall issue any additional shares of Common Stock at a price per share less than the lesser of the (i) Warrant Price and (ii) Current Market Price (as defined below), including, for purposes of this subparagraph (d) any shares of Common Stock that may be issued upon the exercise of conversion or other rights with respect to any security of the Company issued by the Company subsequent to the date on which this Warrant has been issued that is convertible into or exchangeable for Common Stock, other than additional shares of Common Stock issued in transactions described in subparagraphs (b) or (c) of this paragraph 2, the number of shares of Common Stock thereafter purchasable upon exercise of this Warrant (calculated to the nearest full share) shall be adjusted by multiplying the number of shares of Common Stock purchasable upon exercise of this Warrant prior to such issuance by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale (assuming exercise of all outstanding options and warrants and conversion of all outstanding convertible securities) plus (B) the number of such additional shares of Common Stock so issued and (ii) the denominator of which shall be (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale (assuming exercise of all outstanding options and warrants and conversion of all outstanding convertible securities) plus (B) the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of additional shares of Common Stock so issued would purchase at the lower of the (i) Warrant Price and (ii) Current Market Price. "Current Market Price" shall mean the closing sales price of the Common Stock on the NASDAQ National Market System or the principal securities exchange on which the Common Stock is then listed or admitted to trading, or if not so reported, the mean between the highest and lowest quoted selling prices of the Common Stock, or the mean between the highest asked price and the lowest bid price as the case may be, as reported on the National Association of Securities Dealers Automated Quotation System as of the close of business on the last full day of trading prior to the issue or sale of such Common Stock by the Company. If the Common Stock shall not be so traded, the Current Market Price shall be determined by the Board of Directors taking into account all relevant facts and circumstances. For the purposes of the subparagraph (d), the issuance of any warrants, options or other subscription rights with respect to Common Stock and the issuance of any securities convertible into or exchangeable for Common Stock (or the issuance of any warrants, options or any rights with respect to such securities) shall be deemed an issuance at such time of Common Stock. No adjustment of the number of shares of Common Stock purchasable hereunder shall be made under this subparagraph (d) upon the subsequent issuance of any additional shares of Common Stock pursuant to the exercise of such warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities. On the expiration or termination of any warrants, options or other subscription rights with respect to Common Stock, or on the expiration or termination of any conversion or exchange rights with respect to securities convertible into Common Stock (or warrants, options or any rights therefor), the number of shares of Common Stock then purchasable hereunder shall forthwith be decreased to the number of shares of Common Stock which would have been purchasable hereunder at the time of such expiration or termination if such warrants, options or other subscription rights, or such conversion or exchange rights (or warrants, options or any rights therefor), to the extent outstanding immediately prior to such expiration or termination, had never been issued. For the purpose of this subparagraph (d), in the case of the issue of shares of Common Stock for a consideration other than cash, the consideration received by the Company therefore shall be deemed to be the fair value of such consideration as determined in good faith by its Board of Directors. This subparagraph (d) shall not apply to the issuance by the Company of (i) Common Stock pursuant to the exercise of warrants, options or other rights to purchase Common Stock outstanding on the date hereof or (ii) Common Stock, warrants, options or other subscription rights with respect to Common Stock or securities convertible into or exchangeable for Common Stock (or the issuance of any warrants, options or any rights with respect to such securities) pursuant to a private placement completed on or before December 31, 2000. Upon each adjustment pursuant to this subparagraph (d), the Warrant Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing (X) the product obtained by multiplying such Warrant Price by the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment by (Y) the number of shares of Common Stock purchasable hereunder immediately following such adjustment. 3. Reorganization, Reclassification, Consolidation or Merger. If at any time while this Warrant is outstanding there shall be any reorganization or reclassification of the Common Stock of the Company (other than a subdivision or combination of shares provided for in paragraph 2 above), any consolidation or merger of the Company with another corporation or any sale of all or substantially all of its assets to another corporation effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or property with respect to or in exchange for Common Stock, the Holder of this Warrant shall thereafter be entitled to receive, during the term hereof and upon payment of the Warrant Price, the number of shares of stock or other securities or property of the Company or of the successor corporation resulting from such consolidation, merger or sale of assets, as the case may be, to which a holder of the Common Stock of the Company, deliverable upon the exercise of this Warrant, would have been entitled upon such reorganization, reclassification, consolidation, merger or sale of assets if this Warrant had been exercised immediately prior to such reorganization, reclassification, consolidation, merger or sale of assets; and in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the Holder of this Warrant to the end that the provisions set forth herein (including the adjustment of the Warrant Price and the number of shares issuable upon the exercise of this Warrant) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof. 4. Net Issue Exercise. In lieu of exercising this Warrant or any part thereof, Holder may elect to receive shares of Common Stock equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with written notice stating (i) that the Holder elects to receive Common Stock by exercise of its net issue exercise right pursuant to this paragraph 4 and (ii) the number of Warrants the Holder desires to surrender, in which event the Company shall issue to Holder that number of shares of Common Stock computed using the following formula: X=Y(A-B) A Where: X= the number of shares of Common Stock to be issued to Holder Y= the number of shares of Common Stock being purchased under this Warrant A= the Current Market Price (as defined in paragraph 2(d)) of one share of Common Stock B= the Warrant Price (as adjusted to the date of such calculations) 5. Notice of Adjustments. Upon any adjustment of the Warrant Price and any increase or decrease in the number of shares of Common Stock purchasable upon the exercise of this Warrant, then, and in each such case, the Company, within thirty days after a Holder's request, shall give written notice thereof to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, which notice shall state the Warrant Price as adjusted and the increased or decreased number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation of each. 6. Charges, Taxes and Expenses. The issuance of certificates for shares of Common Stock upon any exercise of this Warrant shall be made without charge to the Holder hereof for any tax or other expense in respect to the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of, or in such name or names as may be directed by, the Holder of this Warrant; provided, however, that in the event that certificates for shares of Common Stock are to be issued in a name other than the name of the Holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by an instrument of transfer in form satisfactory to the Company, duly executed by the Holder hereof in person or by an attorney duly authorized in writing and the Holder shall pay all stock transfer taxes payable upon issuance of such stock certificate. 7. Certain Obligations of the Company. The Company agrees that it will not establish or increase the par value of the shares of any Common Stock which are at the time issuable upon exercise of this Warrant above the then prevailing Warrant Price hereunder and that, before taking any action which would cause an adjustment reducing the Warrant Price hereunder below the then par value, if any, of the shares of any Common Stock issuable upon exercise hereof, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock at the Warrant Price as so adjusted. 8. Restrictions on Exercise and Transfer. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable and the related shares of Common Stock shall not be transferable except upon the conditions specified in this paragraph 7 8, which conditions are intended, among other things, to insure compliance with the provisions of the Act in respect of the exercise or transfer of the Warrant or transfer of the related shares of Common Stock. The Holder represents and warrants that the language contained in the legend on the first page hereof is true and correct. The Holder of this Warrant, by acceptance hereof, agrees that it will not (a) exercise this Warrant except in compliance with the applicable securities laws or (b) transfer this Warrant or the related shares of Common Stock except (i) pursuant to an effective registration statement covering such securities under the Act and any applicable state securities laws, (ii) in a transaction permitted by Rule 144 promulgated under the Act and as to which the Company has received reasonably satisfactory evidence of compliance with the provisions of Rule 144, or (iii) upon receipt of a legal opinion rendered by counsel reasonably satisfactory to the Company to the effect that the transaction does not require registration under the Act and any applicable state securities laws. 9. Miscellaneous. (a) The Company covenants that it will at all times reserve and keep available, solely for the purpose of issue upon the exercise hereof, a sufficient number of shares of Common Stock to permit the exercise hereof in full. (b) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors or assigns of the Company and of the Holder or Holders hereof. (c) No Holder of this Warrant, as such, shall be entitled to vote, receive dividends (except as provided in paragraph 2(a) hereof), receive notice in respect of meetings of stockholders or any other matter whatsoever as a stockholder of the Company or be deemed to be a stockholder of the Company for any purpose. (d) This Warrant may be divided into separate Warrants covering at least one hundred shares of the Common Stock for the total number of shares of Common Stock then subject to this Warrant at any time, or from time to time, upon the request of the Holder of this Warrant and the surrender of the same to the Company for such purpose. Such subdivided Warrants shall be issued promptly by the Company following any such request and shall be of the same form and tenor as this Warrant, except for any requested change in the name of the Holder stated herein. (e) Except as otherwise provided herein, this Warrant and all rights hereunder are transferable by the Holder hereof in person or by duly authorized attorney on the books of the Company upon surrender of this Warrant, with the attached assignment properly endorsed, to the Company. The Company may deem and treat the registered Holder of this Warrant at any time as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary. (f) Notwithstanding any provision herein to the contrary, the Holder hereof may not exercise, sell, transfer or otherwise assign this Warrant unless the Company is provided with an opinion of counsel satisfactory in form and substance to the Company, to the effect that such exercise, sale, transfer or assignment does not violate the Securities Act of 1933 or applicable state securities laws. (g) This Warrant contains the entire agreement between the Holder hereof and the Company with respect to the purchase of shares of Common Stock of the Company and supersedes all prior arrangements or understandings with respect thereto. (h) This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. (i) Any term or provision of this Warrant may be waived at any time by the party which is entitled to the benefits thereof and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the Holder of this Warrant and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with any term or condition of this Warrant. (j) Any notice or other document required or permitted to be given or delivered to the Holder of this Warrant shall be delivered personally, or sent by certified or registered mail, to each such Holder at the last address shown on the books of the Company for the registration of, and the registration of transfer of, the Warrant or at any more recent address of which the Holder of this Warrant shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company, shall be delivered at, or sent by certified or registered mail to, the office of the Company at 6428 Parkland Drive, Sarasota, Florida 34243, Attention: Chief Executive Officer, or such other address within the United States of America as shall have been furnished by the Company to the Holder of the Warrant. IN WITNESS WHEREOF, the Company and the Holder caused this Warrant to be signed by their duly authorized officers. Dated: May 22, 2000 ELCOTEL, INC. By: /s/ Michael J. Boyle ------------------------------------------ Michael J. Boyle, Chief Executive Officer GREYHAWKE CAPITAL ADVISORS LLC By: /s/ Mark L, Plaumann ----------------------------------------- Mark L. Plaumann, Managing Member SUBSCRIPTION NOTICE Elcotel, Inc. The undersigned, the holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by said Warrant for, and to purchase thereunder, ________ shares of the Common Stock covered by said Warrant and herewith makes payment in full therefor of $_______ by certified or cashier's check payable to the order of the Company, and requests (a) that certificates for such shares (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to ______________ whose address is _________________________________ and (b) if such shares shall not include all of the shares issuable as provided in said Warrant, that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned or that appropriate notation be made on the Warrant which shall be returned to the undersigned. _______________________________ Signature Guaranteed: Dated: ASSIGNMENT (To be Executed by the Registered Holder to effect a transfer of the foregoing Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, and assigns and transfers unto ______________________________________________ the foregoing Warrant and the rights represented thereby to purchase shares of Common Stock of the Company in accordance with the terms and conditions thereof, and does hereby irrevocably constitute and appoint _________________________ Attorney to transfer the said Warrant on the books of the Company, with full power of substitution. Holder: ________________________________ ________________________________ Address Dated: _____________________, 20__ In the presence of: _____________________________________ EX-27 5 0005.txt FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA. 1,000 3-MOS MAR-31-2001 JUN-30-2000 145 0 9,576 1,960 7,694 16,381 11,572 5,852 56,488 18,557 266 0 0 138 37,527 56,488 7,113 9,271 5,238 7,221 0 95 420 (2,134) 0 (2,134) 0 0 0 (2,134) (.16) (.16)
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