-----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, Fga4nE2DuNInTEF96klFFKGECzvIokFC7pLIlHoja3xR+h19blmkTwVuwi7QdzQD igkqNUskU7WwlPa/id41fA== /in/edgar/work/20000901/0000891092-00-000784/0000891092-00-000784.txt : 20000922 0000891092-00-000784.hdr.sgml : 20000922 ACCESSION NUMBER: 0000891092-00-000784 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000901 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-K405/A SEC ACT: SEC FILE NUMBER: 000-15205 FILM NUMBER: 715597 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-K405/A 1 0001.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _________________ Commission file number 0-15205 ------- ELCOTEL, INC. (Exact name of registrant as specified in its charter) Delaware 59-2518405 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 6428 Parkland Drive Sarasota, Florida 34243 (Address of principal executive offices) (Zip Code) (941) 758-0389 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value, $.01 Per Share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting Common Stock held by non-affiliates of the Registrant at June 9, 2000, computed by reference to the closing price of the Registrant's Common Stock on such date as quoted by the National Market System of NASDAQ, was approximately $25,014,899. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. At June 17, 2000, there were 13,742,391 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None 1 AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2000 The undersigned registrant hereby amends Part II Item 8. Consolidated Financial Statements and Supplementary Data and Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K of its Annual Report on Form 10-K for the fiscal year ended March 31, 2000 for the sole purpose of filing a revised Independent Auditors' Report. 2 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 4 Consolidated Balance Sheets at March 31, 2000 and 1999 5 Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the years ended March 31, 2000, 1999 and 1998 6 Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998 7 Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31, 2000, 1999 and 1998 8 Notes to Consolidated Financial Statements 9 Financial Statement Schedules: All financial statement schedules are omitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto ---------- 3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Elcotel, Inc.: We have audited the accompanying consolidated balance sheets of Elcotel, Inc. and subsidiaries (the "Company") as of March 31, 2000 and 1999, and the related consolidated statements of operations and other comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7 to the consolidated financial statements, at March 31, 2000, the Company was in default of certain financial covenants contained in the Loan and Security Agreements (the "Loan Agreements") between the Company and its bank. The Company's difficulties in meeting the covenants of its Loan Agreements and its losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 16. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Certified Public Accountants Tampa, Florida June 20, 2000 4 ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
March 31, March 31, 2000 1999 --------- ---------- ASSETS Current assets: Cash $ 1,153 $ 16 Accounts and notes receivable, less allowances for credit losses of $1,593 and $1,970, respectively 8,073 12,209 Inventories 8,768 13,978 Refundable income taxes 82 1,997 Deferred tax asset - current portion -- 2,215 Prepaid expenses and other current assets 997 912 -------- -------- Total current assets 19,073 31,327 Property, plant and equipment, net 5,867 5,064 Notes receivable, less allowances for credit losses of $272 and $312, respectively 395 898 Identified intangible assets, net of accumulated amortization of $2,665 and $1,541, respectively 6,610 7,734 Capitalized software, net of accumulated amortization of $505 and $240, respectively 4,786 1,573 Goodwill, net of accumulated amortization of $1,567 and $878, respectively 22,403 23,218 Deferred tax asset -- 948 Other assets 575 533 -------- -------- $ 59,709 $ 71,295 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ -- $ 1,428 Accounts payable 4,868 4,186 Accrued expenses and other current liabilities 3,123 4,197 Notes, debt and capital lease obligations payable - current 11,611 823 -------- -------- Total current liablilities 19,602 10,634 Notes, debt and capital lease obligations payable - noncurrent 208 10,355 -------- -------- Total liabilities 19,810 20,989 -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value, 40,000,000 and 30,000,000 shares authorized, 13,794,391 and 13,551,693 shares issued, respectively 138 136 Additional paid-in capital 47,423 46,667 Retained earnings (deficit) (7,508) 3,680 Holding gain on marketable securities 23 -- Less - cost of 52,000 shares of common stock in treasury (177) (177) -------- -------- Total stockholders' equity 39,899 50,306 -------- -------- $ 59,709 $ 71,295 ======== ========
The accompanying notes are an integral part of these financial statements. 5 ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSVE INCOME (LOSS) (In thousands, except per share data)
Year Ended March 31, -------------------------------------------------- 2000 1999 1998 -------- -------- -------- Revenues and net sales: Product sales $ 33,834 $ 54,748 $ 43,426 Services 13,461 10,515 2,824 -------- -------- -------- 47,295 65,263 46,250 -------- -------- -------- Cost of revenues and sales: Cost of products sold 24,930 34,755 26,624 Cost of services 10,250 8,880 2,021 -------- -------- -------- 35,180 43,635 28,645 -------- -------- -------- Gross profit 12,115 21,628 17,605 -------- -------- -------- Other costs and expenses: Selling, general and administrative 9,984 10,560 9,930 Engineering, research and development 6,479 6,121 4,514 Amortization 2,263 2,084 654 Other charges 733 1,772 -- Interest expense (income) 558 517 (103) -------- -------- -------- 20,017 21,054 14,995 -------- -------- -------- (Loss) income before income tax expense (7,902) 574 2,610 Income tax expense (3,286) (213) (853) -------- -------- -------- Net (loss) income (11,188) 361 1,757 Other comprehensive income, net of tax: Holding gain on marketable securities 23 -- -- -------- -------- -------- Comprehensive (loss) income $(11,165) $ 361 $ 1,757 ======== ======== ======== (Loss) earnings per common and common equivalent share: Basic $ (0.83) $ 0.03 $ 0.18 ======== ======== ======== Diluted $ (0.83) $ 0.03 $ 0.18 ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 13,532 13,456 9,641 ======== ======== ======== Diluted 13,532 13,777 9,842 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 6 ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended March 31, -------------------------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from operating activities Net (loss) income $(11,188) $ 361 $ 1,757 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 3,558 3,247 1,299 Provisions for obsolescence and warranty expense 1,454 825 253 Provision for credit losses 545 117 1,352 Loss on impairment of assets 148 -- -- Loss on disposal of equipment 4 12 2 Deferred tax expense 3,247 563 270 Stock option compensation (credits) expense (19) 112 -- Changes in operating assets and liabilities (net of acquisition of Technology Service Group, Inc. and certain assets from Lucent Technologies Inc.): Accounts and notes receivable 3,807 (1,471) (2,695) Inventories 3,809 (5,296) 3,112 Refundable income taxes 1,915 (1,188) (110) Prepaid expenses and other current assets 239 112 (555) Other assets (227) (113) (199) Accounts payable 682 976 (1,695) Accrued liabilities and other current liabilities (964) (943) (90) -------- -------- -------- Net cash flow provided by (used in) operating activities 7,010 (2,686) 2,701 -------- -------- -------- Cash flows from inveating activities Net cash used for acquisition of Technology Service Group, Inc -- -- (447) Acquisition of certain assets of Lucent Technologies Inc. -- -- (5,957) Capital expenditures (1,831) (1,468) (960) Capitalized software (3,618) (680) (129) Proceeds from disposal of equipment -- 8 -- -------- -------- -------- Net cash flow used in investing activities (5,449) (2,140) (7,493) -------- -------- -------- Cash flows from financing activities Proceeds from exercise of common stock options 642 285 295 Net proceeds (payments) under revolving credit lines 1,191 (2,460) 3,675 (Decrease) increase in bank overdraft (1,428) 1,428 -- Proceeds from notes payable -- 4,000 8,770 Principal payments on notes payable (829) (66) (7,302) -------- -------- -------- Net cash flow (used in) provided by financing activities (424) 3,187 5,438 -------- -------- -------- Net increase (decrease) in cash 1,137 (1,639) 646 Cash at beginning of year 16 1,655 1,009 -------- -------- -------- Cash at end of year $ 1,153 $ 16 $ 1,655 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 7 ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 2000, 1999 AND 1998 (Dollars in thousands)
Common Stock Accumulated ------------------ Additional Retained Other Shares Paid-in Earnings Comprehensive Treasury Issued Amount Capital (Deficit) Income Stock Total ------ -------- ---------- ------- ------------- --------- -------- Balance, March 31, 1997 8,234 $ 82 $ 11,160 $ 1,562 $ -- $ (177) $ 12,627 Exercise of stock options 158 2 293 -- -- -- 295 Tax benefit from exercise of stock options -- -- 62 -- -- -- 62 Acquisition of Technology Service Group, Inc. 5,025 50 35,208 -- -- -- 35,258 Registration expenses of acquisition of Technology Service Group, Inc. -- -- (339) -- -- -- (339) Net income -- -- -- 1,757 -- -- 1,757 ------ -------- -------- -------- ------ ------ -------- Balance, March 31, 1998 13,417 134 46,384 3,319 -- (177) 49,660 Exercise of stock options 135 2 283 -- -- -- 285 Net income -- -- -- 361 -- -- 361 ------ -------- -------- -------- ------ ------ -------- Balance, March 31, 1999 13,552 136 46,667 3,680 -- (177) 50,306 Exercise of stock options 242 2 658 -- -- -- 660 Tax benefit from exercise of stock options -- -- 98 -- -- -- 98 Holding gain on marketable securities, net of tax -- -- -- -- 23 -- 23 Net loss -- -- -- (11,188) -- -- (11,188) ------ -------- -------- -------- ------ ------ -------- Balance, March 31, 2000 13,794 $ 138 $ 47,423 $ (7,508) $ 23 $ (177) $ 39,899 ====== ======== ======== ======== ====== ====== ========
The accompanying notes are an integral part of these financial statements. 8 ELCOTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2000, 1999 AND 1998 (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Elcotel, Inc. and its wholly owned subsidiaries (the "Company") design, develop, manufacture and market a comprehensive line of integrated public communications products and services. The Company's product line includes microprocessor-based payphone terminals known in the industry as "smart" or "intelligent" payphones, software systems to manage and control networks of the Company's smart payphone terminals, electromechanical payphone terminals also known in the industry as "dumb" payphones, replacement components and assemblies, and an offering of industry services including repair, upgrade and refurbishment of equipment, operator services, customer training and technical support. In addition, the Company has developed non-PC Internet terminal appliances for use in a public communications environment, which will enable the on-the-go user to gain access to Internet-based content and information through the Company's client-server network supported by its back office software system. The Company's a non-PC Internet terminal appliances were designed to provide the features of traditional smart payphone terminals, to provide connectivity to Internet-based content, to support e-mail and e-commerce services, and to generate revenues from display advertising, sponsored content and other services in addition to traditional revenues from public payphones. The Company's service bureau network was designed to manage and deliver display advertising content, Internet-based content and specialized and personalized services to its non-PC Internet terminal appliances. The Company's Internet appliance business is presently in the development stage and to date has not generated any significant revenues. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7, at March 31, 2000, the Company was in default of certain financial covenants contained in the loan agreements between the Company and its bank. The Company's difficulties in meeting the covenants of its loan agreements and its losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 16. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Elcotel, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Sales of products and related costs are recorded upon shipment or when customers accept title to such goods. The Company recognizes revenues from software licenses upon delivery of the software. Revenue from repair, refurbishment and upgrade of customer-owned equipment is recorded upon shipment. Revenues from other services are recognized as the services are rendered. 9 Inventories Inventories are stated at the lower of cost or market. Cost is determined based on the first-in, first-out ("FIFO") method or standard cost, which approximates cost on a FIFO basis. Reserves to provide for losses due to obsolescence and excess quantities are established in the period in which such losses become probable. Marketable Securities All marketable securities, classified as other current assets, are deemed by management to be available for sale and are reported at fair value with net unrealized gains or losses reported within stockholders' equity. Realized gains and losses are recorded based on the specific identification method. There were no realized gains or losses for the years ended March 31, 2000, 1999 and 1998. The carrying amount of the Company's marketable securities, consisting of equity securities, approximated $326 and $1 at March 31, 2000 and 1999, respectively. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is computed by the straight-line method based upon the estimated useful lives of the related assets, generally three years for computers, five years for equipment, furniture and fixtures and thirty-five years for buildings. Additions, improvements and expenditures that significantly extend the useful life of an asset are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts, and any gains or losses are included in income. Engineering, Research and Development Costs Costs and expenses incurred for the purpose of product research, design and development are charged to operations as incurred. Engineering, research and development costs consist primarily of costs associated with development of new products and manufacturing processes. The Company capitalizes software development costs once technological feasibility has been achieved. Once the product is released, the capitalized costs are amortized to operations based on the straight-line method over the estimated useful life of the product, which ranges from five to ten years. Capitalized software development costs are reported at the lower of cost, net of accumulated amortization, or net realizable value. Software development costs incurred prior to achieving technological feasibility are charged to research and development expense as incurred. Software development costs capitalized during the years ended March 31, 2000, 1999 and 1998 approximated $3,618, $639 and $100, respectively. Amortization of Goodwill and Identified Intangible Assets The excess of the purchase price over the fair value of assets and liabilities of acquired businesses is being amortized to operations on a straight-line basis over a period of 35 years. Identified intangible assets are being amortized over the following estimated useful lives: trade names and workforce - 35 years; customer contracts - 3.45 years; license agreements - 5 years; patented technology - 4 years; non-compete agreement - 2 years; and customer relationships - 15 years. 10 Income Taxes The Company uses the liability method in accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Income tax benefit (expense) is based upon income (loss) recognized for financial statement purposes and includes the effects of temporary differences between such income (loss) and that recognized for tax purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The deferred tax asset is reduced by a valuation allowance when, on the basis of available evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Earnings (Loss) Per Common Share Earnings (loss) per common share is computed in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, which requires disclosure of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive potential common shares outstanding during the year. The weighted average number of shares outstanding during the years ended March 31, 2000, 1999 and 1998 for purposes of computing basic earnings per share were 13,531,587, 13,456,255 and 9,640,530, respectively. During the year ended March 31, 2000, potential common shares outstanding were not dilutive. During the years ended March 31, 1999 and 1998, dilutive stock options had the effect of increasing the weighted average number of shares outstanding used in the computation of diluted earnings per share by 321,144 shares and 201,585 shares, respectively. Fair Value of Financial Instruments The carrying amount of cash, accounts receivable and accounts payable approximates fair value due to the short maturity of the instruments. The fair value of notes receivable is estimated by discounting the future cash flows using current interest rates offered for similar transactions and approximates carrying value. The fair value of the Company's debt obligations is estimated based on the interest rates currently available to the Company for bank loans with similar terms and average maturities and approximates carrying value. Credit Policy and Concentration of Credit Risks Credit is granted under various terms to customers that the Company deems creditworthy. In addition, the Company provides limited secured note financing with terms generally not exceeding two years and interest charged at competitive rates. Trade accounts and notes receivable are the primary financial instruments that subject the Company to significant concentrations of credit risk. In order to minimize this risk, the Company performs ongoing credit evaluations of its customers. With respect to notes receivable, the Company generally requires collateral consisting primarily of the payphone terminals and related equipment. Allowances for credit losses on accounts and notes receivable are estimated based upon expected collectibility. Allowances for impairment of notes receivable are measured based upon the fair value of collateral or the Company's estimate of the present value of future expected cash flows in accordance with Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a Loan." 11 Warranty Reserves The Company accrues and recognizes warranty expense based on historical experience and statistical analysis. The Company provides warranties ranging from one to three years and passes on warranties on products manufactured by others. Stock Based Compensation Plans The Company recognizes compensation expense with respect to stock-based compensation plans based on the difference, if any, between the per-share market value of the stock and the option exercise price on the measurement date in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"). In addition, in accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the Company discloses the pro forma effects on net income (loss) per share assuming the adoption of the fair value based method of accounting for compensation cost related to stock options and other forms of stock-based compensation set forth in SFAS 123. Impairment of Long-Lived Assets The Company evaluates the carrying value of property plant and equipment, goodwill and other intangible assets when indicators of impairment are present, and recognizes impairment losses if the carrying value of the assets is less than expected future undiscounted cash flows of the underlying business in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Impairment losses are measured by the amount of the asset carrying values in excess of fair market value. During the year ended March 31, 2000, the Company recorded impairment losses of $148 related to the closure of one of its manufacturing facilities and the abandonment of a software development project. No impairment losses were recorded during the years ended March 31, 1999 and 1998. Comprehensive Income The Company adopted the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," during the year ended March 31, 1999. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements, and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In addition, SFAS 130 requires enterprises to classify items of other comprehensive income by their nature and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. During the year ended March 31, 2000, the Company had one item of other comprehensive income relating to marketable equity securities. The Company had no items of other comprehensive income during the years ended March 31, 1999 and 1998. Disclosure about Segments of an Enterprise and Related Information During the year ended March 31, 1999, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. See Note 12. 12 Derivative Financial Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting of derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires entities to recognize derivative instruments as assets and liabilities and measure them at fair value, and to match the timing of gain or loss recognition on hedging instruments with the recognition of changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or the earnings effect of the hedged forecasted transaction. Management does not believe that the adoption of SFAS 133 will have a significant impact on the Company's consolidated financial statements. Computer Software Developed or Obtained for Internal Use During the year ended March 31, 2000, the Company adopted the provisions of Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") issued by the American Institute of Certified Public Accountants (the "AICPA") in March 1998. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and new cost recognition principles and identifies the characteristics of internal use software. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, financial position or cash flows. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification of Prior Years The Company's consolidated financial statements at March 31, 1999 and 1998 and for the years then ended have been reclassified to conform to the presentation at and for the year ended March 31, 2000. NOTE 2 - ACQUISITIONS The Company's acquisitions have been accounted for under the purchase method. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on fair value at the dates of acquisition. The results of acquired businesses and assets are included in the consolidated financial statements of the Company from the dates of acquisition. On December 18, 1997, the Company acquired, via a merger, Technology Service Group, Inc. ("TSG"), and issued 4,944,292 shares of common stock in exchange for the outstanding common stock of TSG based on an exchange ratio of 1.05 shares of the Company's common stock for each share of common stock of TSG, and TSG became a wholly owned subsidiary of the Company. In addition, the Company issued 80,769 shares of common stock in payment of certain acquisition expenses. Further, 13 holders of options and rights to purchase shares of common stock of TSG pursuant to option and stock purchase plans received options and rights to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the merger. Similarly, holders of warrants to purchase shares of common stock of TSG received warrants to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the merger. A summary of the purchase price is set forth below. Issuance of 4,944,292 shares of common stock stock at a market price of $6.50 per share $ 32,138 Fair value of outstanding common stock warrants, options and purchase rights 2,595 Costs and expenses of the merger 872 -------- Total purchase price $ 35,605 ======== The Company registered the shares of common stock issued pursuant to the Merger and incurred registration expenses of $339. These expenses were charged to paid-in capital during the year ended March 31, 1998. A summary of the book value of the assets and liabilities of TSG at December 18, 1997 as compared to their estimated fair values recorded at the acquisition date is set forth below.
Estimated Book Fair Value Value ------- --------- Cash and temporary investments $ 239 $ 239 Accounts receivable 3,703 3,703 Inventories 11,103 6,490 Refundable income taxes 604 604 Deferred tax asset, current 748 3,719 Prepaid expenses and other current assets 12 12 Property, plant and equipment 662 782 Capitalized software 875 846 Identified intangible assets 147 6,684 Other assets 29 29 Accounts payable (3,634) (3,634) Accrued expenses (1,519) (2,719) Borrowings under lines of credit (3,970) (3,970) Deferred tax liability, non-current (4) (1,276) ------- -------- Net assets acquired $ 8,995 11,509 ======= Excess of purchase price over net assets acquired 24,096 -------- Total $ 35,605 ========
The fair value of identified intangible assets includes TSG's trade names of $2,869, assembled workforce of $1,372, patented technology of $419, and customer contracts of $2,024 (see Note 6). The 14 fair value of inventories was reduced by $4,810 to reflect the estimated net realizable value of inventories related to products discontinued by the Company. The fair value of accrued liabilities includes estimated liabilities of $1,200 pursuant to a plan to exit certain activities of TSG and terminate and relocate employees of TSG (see Note 8). During the year ended March 31, 2000, the Company reduced the estimated liabilities related to the exit plan and credited $126 against the excess of the purchase price over the net assets acquired ("goodwill"). On September 30, 1997, the Company acquired from Lucent Technologies Inc. ("Lucent") inventories, machinery, and equipment and tooling, as well as licenses of certain patent and other intellectual property rights, related to the payphone manufacturing and component parts business conducted by Lucent. The purchase price, including acquisition expenses of $367, was $5,957. A summary of the allocation of the purchase price to the net assets acquired from Lucent based on the Company's estimates of their fair values is set forth below. Inventories $ 2,991 Equipment and tooling 500 Intangible assets 2,591 Accrued warranty expense (125) ------- Total purchase price $ 5,957 ======= Identified intangible assets are comprised of license agreements of $938, a non-compete agreement of $77 and customer relationships of $1,576 (see Note 6). Assuming the acquisitions had occurred on April 1, 1997, the Company's pro forma results of operations for the year ended March 31, 1998 would have been as follows: 1998 -------- Net sales $ 66,554 ======== Net income $ 14 ======== Basic earnings per share $ -- ======== Diluted earnings per share $ -- ======== The pro forma results of operations for the fiscal year ended March 31, 1998 include the operating results of TSG from April 1, 1997 to December 18, 1997 and pro forma adjustments consisting of an increase in amortization of goodwill and other intangible assets of $932 due to the increase in the carrying value of intangible assets and amortization over their estimated useful lives, a decrease in depreciation of $228 due to an increase in the carrying value of property and equipment and depreciation over different estimated useful lives, a decrease in deferred tax expense of $104 resulting from the allocation to deferred tax assets and liabilities and a decrease in income tax expense of $179 to reflect the pro forma effect on income tax expense resulting from the acquisition. The pro forma adjustments related to the acquisition of Lucent's assets for the fiscal year ended March 31, 1998 include an increase in amortization of intangible assets of $130, an increase in depreciation of $50, an increase in interest expense of $245 and a decrease in income tax expense of $149. 15 NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE Current accounts and notes receivable at March 31, 2000 and 1999 include notes receivable due within one year of $487 and $803, respectively, net of credit and impairment allowances of $1,080 and $1,242, respectively. Notes receivable consist of trade notes receivable from customers with remaining maturities of two years or less, and are generally collateralized by the payphone equipment sold and giving rise to the asset. The notes bear interest at rates ranging from 12% to 16%. Interest income on impaired notes is recognized as the interest is collected. The Company recognizes interest income on notes with no related credit loss allowance as earned. Changes in allowances for credit losses on accounts and notes receivable for the years ended March 31, 2000, 1999 and 1998 are summarized as follows: 2000 1999 1998 ------- ------- ------- Balance, beginning of year $ 2,282 $ 2,410 $ 1,301 Provision for credit losses 545 117 1,352 Write-offs, net of recoveries (962) (245) (243) ------- ------- ------- Balance, end of year 1,865 2,282 2,410 Long-term allowances (272) (312) (487) ------- ------- ------- Current allowances $ 1,593 $ 1,970 $ 1,923 ======= ======= ======= NOTE 4 - INVENTORIES Inventories at March 31, 2000 and 1999 consisted of the following: 2000 1999 -------- -------- Finished products $ 1,679 $ 1,875 Work-in-process 1,068 924 Purchased components 7,835 11,630 -------- -------- 10,582 14,429 Reserve for obsolescence (1,814) (451) -------- -------- $ 8,768 $ 13,978 ======== ======== Substantially all inventories are pledged to secure bank indebtedness (See Note 7). Changes in reserves for potential losses due to obsolescence and slow moving inventories for the years ended March 31, 2000, 1999 and 1998 are summarized as follows: 2000 1999 1998 ------- ------- ------- Balance, beginning of year $ 451 $ 100 $ 100 Provision for losses 1,401 406 13 Write-offs (38) (55) (13) ------- ------- ------- Balance, end of year $ 1,814 $ 451 $ 100 ======= ======= ======= 16 NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 2000 and 1999 is comprised of the following: 2000 1999 -------- -------- Land $ 372 $ 372 Buildings 3,067 2,842 Engineering and manufacturing equipment 5,671 4,291 Furniture, fixtures and office equipment 2,250 1,841 -------- -------- 11,360 9,346 Less accumulated depreciation (5,493) (4,282) -------- -------- $ 5,867 $ 5,064 ======== ======== Depreciation expense for the years ended March 31, 2000, 1999, and 1998 was $1,295, $1,163, and $645, respectively. Substantially all property, plant and equipment are pledged to secure bank indebtedness (see Note 7). Assets under capital leases are capitalized using interest rates appropriate at the date of purchase or at the inception of the lease, as applicable. The cost and accumulated depreciation of engineering and manufacturing equipment under capital leases included in property and equipment was $279 and $28 at March 31, 2000. No assets under capital leases were held at March 31, 1999. NOTE 6 - IDENTIFIED INTANGIBLE ASSETS Identified intangible assets recorded in connection with acquisitions, net of accumulated amortization, at March 31, 2000 and 1999 consisted of the following: 2000 1999 ------ ------ Trade names, net of accumulated amortization of $187 and $105 $2,682 $2,764 Customer contracts, net of accumulated amortization of $1,341 and $754 683 1,270 Workforce, net of accumulated amortization of $90 and $50 1,282 1,322 License agreements, net of accumulated amortization of $469 and $281 469 657 Patented technology, net of accumulated amortization of $239 and $135 180 284 Non-compete agreement, net of accumulated amortization of $77 and $58 -- 19 Customer relationships, net of accumulated amortization of $262 and $158 1,314 1,418 ------ ------ $6,610 $7,734 ====== ====== 17 NOTE 7 - NOTES, DEBT AND CAPITAL LEASE OBLIGATIONS PAYABLE Notes, debt and capital lease obligations payable at March 31, 2000 and 1999 are summarized as follows: 2000 1999 -------- -------- Secured Promissory Notes Payable to Bank: Revolving credit lines due July 31, 2000 $ 6,376 $ 5,185 11.5% installment note, payable in four equal monthly installments of $80 including interest, with remaining principal balance of $3,215 due on July 31, 2000 3,322 4,000 11.5% mortgage note, payable in four equal monthly installments of $19 including interest, with remaining principal balance of $1,755 due on July 31, 2000 1,762 1,833 Capital lease obligations 263 -- Unsecured promissory note, payable in thirty equal monthly installments of $6 including interest 96 160 -------- -------- 11,819 11,178 Amount payable within one year (11,611) (823) -------- -------- Amount payable after one year $ 208 $ 10,355 ======== ======== As of March 31, 2000, the Company was in default of certain financial covenants contained in the Loan and Security Agreements (the "Loan Agreements") between the Company and its bank. On April 12, 2000, the Company entered into a Forbearance and Modification Agreement (the "Forbearance Agreement") with its bank that modified the terms of the Loan Agreements. Under the terms of the Forbearance Agreement, the maturity date of all indebtedness outstanding under the Loan Agreements, including indebtedness outstanding under the revolving credit lines, the installment note and the mortgage note was accelerated to July 31, 2000. In addition, the annual interest rates of the installment note and mortgage note were increased to 11.5% from 7.55% and 8.5%, respectively, the annual interest rate under the revolving credit lines was increased from one and one-half percentage point over the bank's floating 30 day Libor rate (7.63% at March 31, 2000) to two and one-half percentage points above the bank's prime interest rate (11.5% at April 12, 2000), and the availability of additional funds under a $2,000 export revolving credit line (none of which is outstanding at March 31, 2000) and a $1,500 equipment revolving credit line ($281 of which was outstanding at March 31, 2000) was cancelled. The Forbearance Agreement permits an overadvance of indebtedness outstanding under a $10,000 working capital revolving credit line ($6,095 of which was outstanding at March 31, 2000) and a $4,000 installment note ($3,322 of which was outstanding at March 31, 2000) of $2,800 through June 30, 2000 and $1,500 thereafter based on the value of collateral consisting of eligible accounts receivable and inventories. Indebtedness outstanding under the Loan Agreements is collateralized by substantially all of the assets of the Company. As a result of the default and modification of the Loan Agreements, the Company has classified outstanding bank debt in the aggregate amount of $11,460 at March 31, 2000 as a current liability. On March 29, 1999, the Company and its bank entered into an amendment (the "Amendment") that modified the terms of the Loan Agreements. Pursuant to that Amendment, the Company's working capital revolving credit line was reduced from $15,000 to $10,000 and the Company borrowed $4,000 pursuant to an installment note and established a $1,500 revolving credit line to finance its capital 18 expenditures and a $2,000 revolving credit line to finance its export activities. The proceeds from the term note were used to reduce the Company's outstanding indebtedness under the $15,000 revolving credit line. The Loan Agreements, as modified by the Forbearance Agreement, contain covenants that prohibit or restrict the Company from engaging in certain transactions without the consent of the bank, including mergers or consolidations and disposition of assets, among others. Additionally, the Loan Agreements, as modified by the Forbearance Agreement, require the Company to maintain a working capital ratio of 1 to 1 and a ratio of total liabilities to net worth of 1.5 to 1. Noncompliance with any of these conditions and covenants or the occurrence of an event of default, if not waived or cured, could accelerate the maturity of the indebtedness outstanding under the Loan Agreements. Scheduled maturities of notes, debt and capital lease obligations payable for the next five years are as follows: Fiscal 2001 $11,611 Fiscal 2002 127 Fiscal 2003 81 ------- $11,819 ======= The Company leases certain equipment under capital lease obligations. The present value of future minimum lease payments for the assets under capital leases at March 31, 2000 is as follows: Fiscal 2001 $ 111 Fiscal 2002 109 Fiscal 2003 85 ----- Total minimum capital lease obligation 305 Less portion representing interest (42) ----- Present value of minimum lease payments $ 263 ===== NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities as of March 31, 2000 and 1999 consist of the following: 2000 1999 ------ ------ Payroll and payroll taxes $1,237 $1,218 Warranty expense 561 1,101 Relocation, severance and reorganization charges 440 615 Professional fees 48 248 Royalities and technology transfer fees 249 284 Customer advances 329 457 Other 259 274 ------ ------ $3,123 $4,197 ====== ====== In November 1999, the Company announced a restructuring plan to consolidate manufacturing operations, resize its core payphone business operations, reorient its distribution strategy and begin to build operations required to introduce its new public access Internet appliance products and back office 19 management systems to the marketplace. In connection with this restructuring, the Company recognized other charges of $733 during the year ended March 31, 2000. These other charges consisted of estimated employee termination benefits under severance and benefit arrangements of $608 and future lease payments of $125 related to the closure of leased facilities. The other charges do not include the recognition of impairment losses of $148 related to closed facilities and the Company's decision to abandon a software development project related to certain discontinued activities. Impairment losses of $140 and $8 are classified as engineering, research and development expenses and selling, general and administrative expenses, respectively, during the year ended March 31, 2000. Under the November 1999 restructuring plan, the Company will terminate the employment of 56 employees by December 31, 2000, including 28 employees in connection with the consolidation of manufacturing operations and the closure of its manufacturing facility in Sarasota, Florida and 28 corporate employees in all major functions. As of March 31, 2000, the Company had terminated the employment of 54 employees under the plan. During the year ended March 31, 2000, the Company charged $320 of severance and benefit payments against the restructuring liability, which is included in accrued relocation, severance and reorganization liabilities. Under the restructuring plan, the Company closed a leased office facility in Alpharetta, Georgia and leased a larger facility to accommodate service operations related to its new public access Internet appliance products and back office management systems. The restructuring charges related to future lease payments include a termination settlement of $27 under a lease termination agreement with respect to the closed office facility and remaining lease payments of $98 under the lease agreement related to the Company's manufacturing facility. During the year ended March 31, 2000, payments of $47 related to the lease termination agreement and the closed facility were charged against the restructuring liability. During the year ended March 31, 1999, the Company reorganized its sales and marketing organization. The Company accrued and recognized reorganization charges of $490, which included the estimated costs of severance and salary continuation arrangements and related employee benefits with respect to terminated employees. During the years ended March 31, 2000 and 1999, the Company charged $373 and $117 of severance and benefit payments against the restructuring liability accrued in connection with the reorganization. The restructuring and reorganization charges of $733 and $490 during the years ended March 31, 2000 and 1999, respectively, are included in other charges (credits) in the accompanying consolidated statements of operations and other comprehensive income (loss). In connection with the acquisition of TSG, the Company assumed estimated liabilities of $1,200 pursuant to a plan to exit certain activities of TSG and terminate and relocate employees of TSG. These liabilities included the estimated costs of severance and salary continuation arrangements and related employee benefits of $730 and the estimated costs to relocate employees and property of TSG of $470. The plan provided for the closure of TSG's corporate facility and the integration of TSG's general, administrative and engineering activities into those of the Company, and identified the employees that were expected to be relocated or terminated as a result of the acquisition. During the years ended March 31, 2000, 1999 and 1998, the Company charged payments of $42, $806 and $152, respectively, against the liabilities accrued pursuant to the plan. During the year ended March 31, 2000, the Company charged $126 of the liabilities accrued pursuant to plan against goodwill recorded in connection with the acquisition, such amount representing a change in estimate related to remaining liabilities to be paid. 20 Changes in accrued relocation, severance and reorganization charges for the years ended March 31, 2000, and 1999 are summarized as follows: 2000 1999 1998 ------- ------- ------- Balance, beginning of year $ 615 $ 1,048 $ -- Acquired obligations -- -- 1,200 Restructuring and reorganization charges 733 490 -- Payments (782) (923) (152) Adjustment to goodwill (126) -- -- ------- ------- ------- Balance, end of year $ 440 $ 615 $ 1,048 ======= ======= ======= Changes in accrued warranty expense for the years ended March 31, 2000, 1999 and 1998 are summarized as follows: 2000 1999 1998 ------- ------- ------- Balance, beginning of year $ 1,101 $ 1,170 $ 295 Acquired obligations -- -- 1,075 Expense provision 53 419 240 Charges incurred (593) (488) (440) ------- ------- ------- Balance, end of year $ 561 $ 1,101 $ 1,170 ======= ======= ======= 21 NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION A summary of the Company's supplemental cash flow information for the years ended March 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------- ------- ------- Cash paid (received) during the year for Interest $ 950 $ 861 $ 427 Income taxes (1,876) 845 694 Non-cash investing and financing activities Receipt of marketable securities to satisfy accounts receivable resulting in an increase in other current assets and a reduction in accounts receivable 287 -- -- Equipment acquired under capital lease obligations 279 -- -- Tax benefit from exercise of options resulting in an increase in stockholders' equity and an increase in non-current deferred tax assets in 2000 and a decrease in income taxes payable in 1998 98 -- 62 Issuance of common stock to acquire Technology Service Group, Inc. (see Note 2) -- -- 35,258 Write-off of acquired accrued restructuring liabilities resulting in a decrease in accrued expenses and goodwill 126 -- -- Compensation related to exercised stock options resulting in an increase in stockholders' equity and a decrease in accrued expenses 18 -- -- Other assets acquired by issuance of note payable -- 160 --
NOTE 10 - STOCKHOLDERS' EQUITY Common Stock On November 2, 1999, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock, $.01 par value, authorized for issuance to 40,000,000 shares, from 30,000,000 shares. Holders of voting common stock are entitled to one vote per share on all matters to be voted on by the stockholders. No dividends have been declared or paid on the Company's common stock during the years ended March 31, 2000, 1999 and 1998. Common Stock Warrants At the acquisition date of TSG, TSG had issued and outstanding 1,150,000 redeemable warrants to purchase 575,000 shares of common stock at an exercise price of $11.00 per share (the "Redeemable Warrants") and warrants to purchase 100,000 shares of common stock at an exercise price of $10.80 per 22 share (the "Underwriter Warrants"). In connection with the acquisition, the Redeemable Warrants were converted into warrants of the Company to purchase 603,750 shares of common stock at a per share exercise price of $10.48, and the Underwriter Warrants were converted into warrants of the Company to purchase 105,000 shares of common stock at a per share exercise price of $10.29 (see Note 2). On May 9, 1999, the Redeemable Warrants, none of which had been exercised or redeemed, expired pursuant to their terms. The Underwriter Warrants may be exercised at any time until May 9, 2001, the expiration date of the Underwriter Warrants. The Underwriter Warrants contain anti-dilution a provision providing for adjustments of the number of warrants and exercise price under certain circumstances. The Underwriter Warrants grant to the holders thereof certain rights of registration of the securities issuable upon their exercise. Stock Option Plans On October 15, 1999, the Board of Directors of the Company adopted the 1999 Stock Option Plan (the "1999 Plan"). The Compensation Committee (the "Committee") appointed by the Board of Directors of the Company administers the 1999 Plan, and pursuant to the 1999 Plan have the authority to grant non-qualified stock options to senior executive officers of the Company. Non-qualified stock options to purchase up to an aggregate of 539,988 shares of common stock may be granted under the 1999 Plan at option exercise prices determined by the Committee. The Committee has the authority to interpret the provisions of the 1999 Plan, to determine the terms and provisions of options granted under the 1999 Plan and to determine the number of shares subject to options granted and the vesting periods thereof. The Committee's authority to grant options under the 1999 Plan expires on October 15, 2004. Options granted under the 1999 Plan expire five years from the date of grant unless they are terminated prior thereto upon the termination of employment of a grantee. Unvested options granted under the 1999 Plan expire immediately upon the termination of a grantee's employment by the grantee for any reason or by the Company for cause. Upon the termination of a grantee's employment by the Company without cause, options that would have vested during the twelve months after such termination of employment or during the remaining term of any employment agreement between the grantee and the Company, whichever is less, immediately vest and are thereafter exercisable until their expiration date, and any remaining unvested options expire as of the termination date. Pursuant to the terms of an employment agreement between the Company and its President and Chief Executive Officer dated October 15, 1999, the Company granted options under the 1999 Plan to purchase 539,988 shares of the Company's common stock at an exercise price of $1.67 per share. Such options vest and become exercisable ratably at the end of each month over the term of the employment agreement, which expires on October 11, 2002. As of March 31, 2000, options to purchase 90,000 shares of common stock are exercisable. On July 2, 1991, the Company adopted the 1991 Stock Option Plan (the "1991 Plan"). The 1991 Plan provides the Board of Directors of the Company with the authority to grant to employees, officers and directors of the Company non-qualified stock options and incentive stock options within the meaning of Section 422A of the Internal Revenue Code. On November 2, 1999, the stockholders approved an amendment to the 1991 Plan that increased the number shares of the Company's common stock that may be issued under the 1991 Plan from 2,100,000 shares to 2,600,000 shares. The Board's authority to grant options under the 1991 Plan expires on July 2, 2001. The Board has the authority to determine the number of shares subject to options granted and such other terms and conditions under which options may be exercised. The per-share option price of stock options granted under the 1991 Plan shall not be less than the greater of the per-share fair market value of the Company's common stock as of the date of grant or $.75, or 110% of the per-share market value with respect to incentive stock options granted to employees owning 10% or more of the total combined voting power of all classes of the Company's stock. Options granted under the 1991 Plan expire five years from the date of grant or 30 days after termination of employment, except for termination of employment for certain specified reasons or unless the Board of Directors extends such 30-day period. 23 As of March 31, 2000, options to purchase 541,534 shares of common stock were available for grant under the 1991 Plan. The weighted average exercise price of options outstanding under the 1991 Plan at March 31, 2000, 1999 and 1998 was $4.77, $5.09 and $4.72, respectively. At March 31, 2000, 1999 and 1998, options outstanding under the 1991 Plan had weighted average remaining contractual lives of 3.7 years, 3.0 years and 3.2 years, respectively. The following table summarizes information, including the status and changes in stock options outstanding, with respect to the 1991 Plan for each of the years in the three-year period ended March 31, 2000: Number of Option Price Shares Range Per Share ------------ --------------- Outstanding at March 31, 1997 391,448 $1.31 - $7.50 Granted 285,400 $5.56 - $6.00 Exercised (69,385) $1.31 - $6.19 Cancelled (62,188) $3.50 - $7.50 ------------ Outstanding at March 31, 1998 545,275 $1.81 - $7.38 Granted 561,000 $4.56 - $5.88 Exercised (22,600) $1.81 - $3.50 Cancelled (57,675) $3.50 - $6.94 ------------ Outstanding at March 31, 1999 1,026,000 $3.50 - $7.38 Granted 806,250 $1.88 - $6.19 Exercised (140,250) $4.56 - $6.19 Cancelled (535,825) $1.88 - $7.38 ------------ Outstanding at March 31, 2000 1,156,175 $1.88 - $6.81 ============ Options exercisable at March 31, 2000 258,899 $4.56 - $6.81 ============ Options exercisable at March 31, 1999 291,255 $3.50 - $7.38 ============ Options exercisable at March 31, 1998 137,800 $1.81 - $6.19 ============ On July 2, 1991, the Company adopted a Directors' Stock Option Plan (the "Directors Plan"). The Directors Plan provides for the grant of non-qualified stock options to directors who are not employees of the Company. On November 2, 1999, the stockholders of the Company approved an amendment to the Directors Plan that increased the number shares of the Company's common stock that may be issued under the Director Plan from 225,000 shares to 300,000 shares. The Board's authority to grant options under the Directors Plan expires on July 2, 2001. Pursuant to the Directors Plan, each new non-employee director automatically receives a non-qualified option to purchase 4,000 shares of common stock upon appointment or election to the Board. Thereafter, on March 31 of each year, each non-employee director receives a non-qualified stock option to purchase 1,000 shares of common stock for each committee of the Board on which such non-employee director is then serving and for each committee of the Board on which such non-employee director is then serving as chairman. Non-employee directors are also eligible for discretionary grants of options under the Directors Plan. The per-share option price of stock options granted under the Directors Plan shall not be less than the greater of the per-share fair market value of the Company's common stock as of the date of grant or $2.00. Options granted under the Directors Plan become exercisable on the first anniversary of the date of grant. Options granted under the Directors Plan expire five years from the date of grant or 30 days after the date a 24 director ceases to serve as a director (one year in the event of death or disability), except that such 30-day period does not apply if director status ceased within one year after a change in control of the Company or unless the Board of Directors extends such 30 day period. As of March 31, 2000, options to purchase 124,000 shares of common stock were available for grant under the Directors Plan. The weighted average exercise price of options outstanding under the Directors Plan at March 31, 2000, 1999 and 1998 was $4.71, $4.75 and $4.78, respectively. At March 31, 2000, 1999 and 1998, options outstanding under the Directors Plan had weighted average remaining contractual lives of 3.3 years, 3.9 years and 2.3 years, respectively. The following table summarizes information, including the status and changes in stock options outstanding, with respect to the Directors Plan for each of the years in the three-year period ended March 31, 2000: Number of Option Price Shares Range Per Share ------------ --------------- Outstanding at March 31, 1997 100,000 $2.00 - $6.31 Granted 28,000 $5.56 - $5.88 Exercised (31,000) $2.00 - $3.94 Cancelled (4,000) $5.88 ------------ Outstanding at March 31, 1998 93,000 $3.81 - $6.31 Granted 51,000 $3.59 - $4.56 Exercised (22,000) $3.81 - $5.25 Cancelled (28,000) $3.81 - $6.31 ------------ Outstanding at March 31, 1999 94,000 $3.59 - $6.31 Granted 12,000 $3.16 Exercised (2,000) $3.94 Cancelled (13,000) $3.59 - $3.94 ------------ Outstanding at March 31, 2000 91,000 $3.16 - $6.31 ============ Options exercisable at March 31, 2000 79,000 $3.59 - $6.31 ============ Options exercisable at March 31, 1999 43,000 $3.94 - $6.31 ============ Options exercisable at March 31, 1998 69,000 $3.81 - $6.31 ============ In connection with the acquisition of TSG, options to purchase 41,000 shares of common stock outstanding under TSG's 1995 Non-Employee Director Stock Plan (the "1995 Directors Plan") were converted into options to purchase 43,050 shares of common stock of the Company. No additional options may be granted under the 1995 Directors Plan subsequent to the acquisition. Such options became exercisable in full as a result of the acquisition of TSG and expire one year after the date a director ceases to serve as a director of TSG or ten years from the date of grant, whichever is earlier. At March 31, 1998, options to purchase 43,050 shares of common stock were outstanding at exercise prices ranging from $4.76 to $10.30 per share, and all such options were exercisable. The weighted average exercise price of options outstanding under the 1995 Directors Plan at March 31, 1998 was $7.83, and the remaining weighted average contractual life of such options was .7 years. During the year ended March 31, 1999, all options outstanding under the 1995 Directors Plan expired unexercised. 25 In addition, in connection with the acquisition of TSG, options to purchase 531,125 shares of common stock outstanding under TSG's 1994 Omnibus Stock Plan (the "Omnibus Plan") were converted into options to purchase 557,682 shares of common stock of the Company. No additional options may be granted under the Omnibus Plan subsequent to the acquisition. The options are exercisable in four equal annual installments beginning on the date of grant, and expire ten years from the date of grant. The weighted average exercise price of options outstanding under the Omnibus Plan at March 31, 2000, 1999 and 1998 was $4.23, $3.10 and $3.09, respectively. At March 31, 2000, 1999 and 1998, options outstanding under the Omnibus Plan had weighted average remaining contractual lives of 4.4 years, 5.2 years and 6.5 years, respectively. The following table summarizes information, including the status and changes in stock options outstanding, with respect to the Omnibus Plan for each of the years in the three-year period ended March 31, 2000: Number of Option Price Shares Per Share -------------- ------------ Options assumed and converted 557,682 $.95 - $10.26 Exercised (68,479) $.95 - $4.76 Cancelled (40,297) $.95 - $10.26 -------------- Outstanding at March 31, 1998 448,906 $.95 - $10.26 Exercised (90,244) $.95 - $4.76 Cancelled (23,887) $.95 - $10.26 -------------- Outstanding at March 31, 1999 334,775 $.95 - $9.05 Exercised (146,300) $.95 - $4.76 Cancelled (4,200) $9.05 -------------- Outstanding at March 31, 2000 184,275 $.95 - $9.05 ============== Options exercisable at March 31, 2000 184,275 $.95 - $9.05 ============== Options exercisable at March 31, 1999 320,662 $.95 - $9.05 ============== Options exercisable at March 31, 1998 402,614 $.95 - $10.26 ============== Accounting for Stock-Based Compensation During the year ended March 31, 2000, the Company recognized stock-based compensation expense of $64 with respect to compensatory options granted under the 1999 Plan. During the year ended March 31, 1999, the Company modified the terms of certain outstanding options to include provisions that would accelerate their vesting upon a change in control of the Company and to extend the exercise period of vested options upon certain events. As a result of the modifications, the Company recognized stock-based compensation expense of $112 during the year ended March 31, 1999. During the year ended March 31, 2000, the Company credited $83 of previously recognized stock-based compensation expense related to cancelled and expired options to income. The Company did not recognize any compensation expense with respect to stock options granted under the Company's plans during the year ended March 31, 1998. 26 A comparison of the Company's net income (loss) and earnings (loss) per share as reported and on a pro forma basis for the years ended March 31, 2000, 1999 and 1998 assuming the Company had adopted the fair value based method of accounting for compensation cost related to stock options and other forms of stock-based compensation set forth in SFAS 123 is as follows: 2000 1999 1998 --------- ------ ------- Net income (loss) As reported $ (11,188) $ 361 $ 1,757 Pro forma $ (11,928) $ (173) $ 1,522 Basic earnings (loss) As reported $ (0.83) $ 0.03 $ 0.18 per share Pro forma $ (0.88) $(0.01) $ 0.16 Diluted earnings (loss) As reported $ (0.83) $ 0.03 $ 0.18 per share Pro forma $ (0.88) $(0.01) $ 0.15 The fair value of each option granted under the Company's stock option plans is estimated on the date of grant using the Black-Scholes Option pricing model. The significant weighted-average assumptions used during the years ended March 31, 2000, 1999 and 1998 to estimate the fair values of options granted under the Company's stock option plans are summarized below: 2000 1999 1998 --------- --------- ---------- 1999 Plan Expected dividend yield -- -- -- Expected volatility 77.66% -- -- Risk free interest rate 6.20% -- -- Expected life 4.0 years -- -- 1991 Plan Expected dividend yield -- -- -- Expected volatility 77.66% 47.07% 45.32% Risk free interest rate 6.20% 6.20% 6.20% Expected life 4.13 years 4.7 years 3.8 years Directors Plan Expected dividend yield -- -- -- Expected volatility 78.52% 45.33% 45.32% Risk free interest rate 6.20% 6.20% 6.20% Expected life 4.0 years 4.0 years 3.8 years Based on these assumptions, the weighted average fair value of each option granted under the Company's 1999 Plan during the year ended March 31, 2000 was $1.01. The weighted average fair value of each option granted under the 1991 Plan during the years ended March 31, 2000, 1999 and 1998 was $2.52, $2.25 and $2.46, respectively. The weighted average fair value of each option granted under the Directors Plan during the years ended March 31, 2000, 1999 and 1998 was $0, $1.80 and $2.38, respectively. 27 Common Stock Reserved The number of shares of common stock reserved for issuance pursuant to the Company's stock option plans and outstanding common stock warrants at March 31, 2000 and 1999 is summarized as follows: 2000 1999 --------- --------- Stock Option Plans 2,636,972 1,807,734 Redeemable Warrants -- 603,750 Underwriter Warrants 105,000 105,000 Stockholder Rights Plan The Company adopted a Stockholder Rights Plan and granted common stock purchase rights as a dividend at the rate of one right ("Right") for each share of outstanding common stock of the Company held of record as of the close of business on May 11, 1999. When the Rights become exercisable, the holders thereof will be entitled to purchase, for an amount equal to $10 per Right (the "Purchase Price," which is subject to adjustment) common stock of the Company with a fair market value equal to two times such amount. Subject to certain exceptions, if certain persons or entities (an "Acquirer"), as defined in the Stockholder Rights Agreement between the Company and its transfer agent, become the beneficial owners of 10% or more of the common stock of the Company or announce a tender or exchange offer which would result in its ownership of 10% or more of the common stock of the Company, the Rights, unless redeemed by the Company, become exercisable ten (10) days after a public announcement that an Acquirer has become such. If, following the Rights becoming exercisable, the Company is acquired in a merger or similar transaction, or if 50% or more of the Company's assets or earning power are sold in one or more related transactions, the holders of the Rights would be entitled to purchase, upon exercise, common stock of the acquiring company with a fair market value of two times the Purchase Price. The Rights may be redeemed at any time until ten days following a public announcement that an Acquirer has become such at $.001 per Right upon a vote therefore by a majority of the outside directors. Presently, the Rights are not exercisable nor are they separately traded from the Company's common stock. The Rights expire on May 11, 2009. 28 NOTE 11 - INCOME TAXES Income tax expense for the years ended March 31, 2000, 1999 and 1998 is comprised of the following: 2000 1999 1998 ------- ------- ------- Current tax expense (benefit): Federal $ 67 $ (422) $ 624 State (28) 72 21 ------- ------- ------- 39 (350) 645 ------- ------- ------- Deferred tax expense (benefit): Federal 2,894 550 124 State 353 13 84 ------- ------- ------- 3,247 563 208 ------- ------- ------- Net tax expense $ 3,286 $ 213 $ 853 ======= ======= ======= During the year ended March 31, 2000, the Company recorded a valuation allowance equal to the entire deferred tax asset balance because the Company's financial condition gives rise to an uncertainty as to whether the deferred tax asset is realizable. The increase in the valuation allowance during the year ended March 31, 2000 was $6,193. There was no increase or decrease to the valuation allowance for the years ended March 31, 1999 and 1998. Deferred tax assets and liabilities as of March 31, 2000 and March 31, 1999 are comprised of the following: 2000 1999 ------- ------- Deferred tax assets: Accounts and notes receivable reserves $ 691 $ 845 Inventory and inventory reserves 760 723 Warranty and other accruals 621 847 Other assets and liabilities (14) -- State taxes 187 -- Tax credit carryforwards 1,442 1,213 Net operating loss carryforwards 6,236 3,729 ------- ------- 9,923 7,357 ------- ------- Deferred tax liabilities: Property, plant and equipment 6 75 Intangible and other assets 1,395 1,675 State taxes -- 85 ------- ------- 1,401 1,835 ------- ------- Excess of deferred tax assets over deferred tax liabilities 8,522 5,522 Less valuation allowance (8,522) (2,359) ------- ------- Net deferred tax asset -- 3,163 Less current deferred tax asset -- (2,215) ------- ------- Non-current deferred tax asset $ -- $ 948 ======= ======= 29 At March 31, 2000, the Company has available net operating loss carryforwards for federal and state tax purposes of approximately $16,789 and $15,705 respectively, which expire from 2001 through 2015. In addition, the Company has available approximately $1,442 in research and other tax credit carryforwards, which expire from 2001 through 2015. The utilization of certain net operating loss carryforwards for federal income tax purposes is subject to an annual limitation of approximately $200 as a result of a previous change in ownership of TSG. In addition, these pre-change losses may only be utilized to the extent that taxable income is generated by TSG. These limitations do not reduce the total amount of net operating losses that may be taken for federal income tax purposes, but rather substantially limit the amount that may be used during a particular year. As a result, it is more likely than not that the Company will be unable to use a significant portion of these net operating loss carryforwards. The valuation allowance of $2,215 at March 31, 1999 relates to these carryforwards. The reconciliation of income tax attributable to income before taxes for the years ended March 31, 2000, 1999 and 1998 computed at the U.S. statutory tax rate to the Company's effective tax rate is as follows: 2000 1999 1998 ------ ------ ------ U.S. statutory rate (34)% 34.0% 34.0% Increases (decreases) resulting from: State taxes, net of federal benefit -- 10.5 2.7 Business credits 2.9 (71.6) (7.4) Amortization of goodwill (8.7) 40.8 2.5 Stock option compensation -- 6.6 -- Expired net operating losses -- 7.8 -- Change in valuation allowance 84.5 -- -- Other (3.1) 8.9 .9 ---- ---- ---- Effective rate 41.6% 37.0% 32.7% ==== ==== ==== NOTE 12 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION The Company has two business segments, the public payphone market segment and the public Internet appliance market segment, which is in the development stage. The Company has not generated any significant revenues from the public Internet appliance market segment as of March 31, 2000. The Company's customers include private payphone operators and telephone companies in the United States and certain foreign countries and its distributors. During the year ended March 31, 2000, the Company modified the way it analyzes its business. Previously, the Company analyzed its business based on three customer groups consisting of domestic telephone companies, domestic private payphone operators and international customers. Because of the development of its Internet business, the Company now analyzes its business based on two segments, the payphone market segment and the Internet appliance market segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies set forth in Note 1. The Company evaluates segment performance based on gross profit and its overall performance based on profit or loss from operations before income taxes. 30 The products and services provided by each of the reportable segments are similar in nature, particularly with regard to public telecommunications terminals and related services. However, the public terminals provided by the Internet appliance segment provide the capability to access internet-based content in addition to their public telecommunications capability and the services of this segment include the management of content delivered to the interactive terminals. There are no transactions between the reportable segments. External customers account for all sales revenue of each reportable segment. The information that is provided to the chief operating decision maker to measure the profit or loss of reportable segments includes sales, cost of sales based on standards and gross profit based on standards. Operating expenses, including depreciation, amortization and interest are not included in the information provided to the chief operating decision maker to measure performance of reportable segments. The sales revenue and gross profit of each reportable segment for the years ended March 31, 2000, 1999 and 1998 is set forth below:
2000 1999 1998 ------------------------ ------------------------ ------------------------ Sales Gross Profit Sales Gross Profit Sales Gross Profit -------- ------------ -------- ------------ -------- ------------ Payphone segment $ 47,217 $ 16,091 $ 65,263 $ 24,607 $ 46,250 $ 19,869 Internet appliance segment 78 19 -- -- -- -- -------- -------- -------- -------- -------- -------- $ 47,295 $ 16,110 $ 65,263 $ 24,607 $ 46,250 $ 19,869 ======== ======== ======== ======== ======== ========
The sales revenue of each reportable segment by customer group for the years ended March 31, 2000, 1999 and 1998 is summarized as follows: 2000 1999 1998 ------- ------- ------- Payphone segment: Private operators $10,366 $20,081 $18,684 Telephone companies 27,209 32,507 15,999 Distributors 3,360 4,995 2,368 International operators 6,282 7,680 9,199 Internet appliance segment: International operators 78 -- -- ------- ------- ------- $47,295 $65,263 $46,250 ======= ======= ======= The Company does not allocate assets or other corporate expenses to reportable segments. A reconciliation of segment gross profit information to the Company's financial statements is as follows: 2000 1999 1998 -------- -------- -------- Total gross profit of reportable segments $ 16,110 $ 24,607 $ 19,869 Unallocated cost of sales (3,995) (2,979) (2,264) Unallocated corporate expenses (20,017) (21,054) (14,995) -------- -------- -------- (Loss) income before income taxes $ (7,902) $ 574 $ 2,610 ======== ======== ======== 31 Information with respect to sales of products and services of the Company's reportable segments during the years ended March 31, 2000, 1999 and 1998 is set forth below: 2000 1999 1998 ------- ------- ------- Payphone segment: Payphone terminals $12,896 $23,758 $22,920 Printed circuit board control modules and kits 15,056 18,790 10,436 Components, assemblies and other products 5,804 12,200 10,070 Repair, refurbishment and upgrade services 12,363 9,895 2,285 Other services 1,098 620 539 Internet appliance segment: Internet appliance terminals 78 -- -- ------- ------- ------- $47,295 $65,263 $46,250 ======= ======= ======= The Company markets its products and services in the United States and in certain foreign countries. The Company's international payphone business consists of export sales, and the Company does not presently have any foreign operations. Sales by geographic region for the years ended March 31, 2000, 1999 and 1998 were as follows: 2000 1999 1998 ------- ------- ------- United States $40,935 $57,583 $37,051 Canada 2,851 3,197 2,012 Latin America 3,023 3,943 6,168 Europe, Middle East and Africa 410 41 195 Asia Pacific 76 499 824 ------- ------- ------- $47,295 $65,263 $46,250 ======= ======= ======= During the years ended March 31, 2000 and 1999, one customer accounted for 39% and 20%, respectively, of the Company's sales. During the year ended March 31, 1998, no single customer accounted for 10% or more of the Company's sales. Ten domestic customers and five international customers account for $4,735 (62%) and $1,826 (24%), respectively, of the Company's accounts receivable at March 31, 2000. The domestic customers primarily include telephone companies and distributors. The international customers include cellular carriers and private operators in Canada, Puerto Rico, Guatemala and Ecuador. Five domestic customers and three international customers account for (net of specific allowances for credit losses) $479 (21%) and $1,276 (57%) respectively, of the Company's notes receivable at March 31, 2000. The domestic customers include private operators and the international customers include a telephone company and private operators in Mexico and the Philippines. NOTE 13 - SAVINGS PLAN The Company has a savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby eligible employees may voluntarily contribute a percentage of their compensation, but not in excess of the maximum allowed under the Code. The TSG 401(k) retirement and profit sharing plan was merged into the Company's savings plan on January 1, 1999, and the Company's plan was amended to include provisions at least as favorable as those of the TSG plan. The Company matches up to 50% of the participants' contributions, up to an additional 2% of the participants' compensation. Participants are 100% vested with respect to their contributions to the plan. Vesting in Company matching contributions 32 begins at 20% after one year of service with the Company and increases annually each year thereafter until full (100%) vesting upon five years of service. The plan pays retirement benefits based on the participant's vested account balance. Benefit distributions are generally available upon a participant's death, disability or retirement. Participants generally qualify to receive retirement benefits upon reaching the age of 65. Early retirees generally qualify for benefits provided they have reached age 55 and have completed 5 years of service with the Company. Benefits are payable in lump sums equal to 100% of the participant's account balance. Plan expense approximated $189, $151 and $114, respectively, for the years ended March 31, 2000, 1999 and 1998. NOTE 14 - OTHER CHARGES (CREDITS) Other charges (credits) for the year ended March 31, 2000 consist of the restructuring charges discussed in Note 8. During the year ended March 31, 1999, the Company was involved in negotiations concerning a possible business combination with an international telecommunications equipment manufacturer. During April 1999, the Company decided that the terms and conditions of the business combination as then proposed would not be, at that time, in the best long-term interests of the Company's stockholders, and terminated the negotiations. In connection therewith, the Company charged to operations approximately $1.2 million of expenses, consisting primarily of legal, accounting and consulting fees and expenses incurred by the Company during the negotiations and in connection with due diligence investigations. This charge, together with charges of $490 related to the reorganization discussed in Note 8 and other miscellaneous charges of $42, are reflected as other charges (credits) in the accompanying consolidated statement of operations and other comprehensive income (loss) for the year ended March 31, 1999. NOTE 15 - COMMITMENTS AND CONTINGENCIES Litigation The Company is a defendant in a punitive class action alleging that a former customer of the Company that filed for bankruptcy conspired with its own officers and professionals, and with various telephone suppliers (including the Company) to defraud investors in that customer by operating a Ponzi scheme. Allegations include unlawful business practices, fraudulent and unfair business practices, false and misleading advertising, fraud and deceit, conspiracy to defraud, negligence and negligent misrepresentation, violations of California law, professional negligence and legal malpractice and spoliation of evidence. On September 28, 1998, the Company's Motion for Summary Judgment was granted by the Court and the Court dismissed the Company from the class action. On December 11, 1998, the plaintiffs appealed the Court's decision to grant the Company's Motion for Summary Judgment. On June 8, 2000, the Court of Appeal, Fourth Appellate District, Division One of the State of California affirmed the Summary Judgment entered by the Superior Court of San Diego County in favor of the Company. While the Company is subject to various other legal proceedings incidental to its business, there are no such pending legal proceedings, which are believed to be material to the business of the Company. 33 Operating Leases Minimum future rental payments at March 31, 2000 under non-cancelable operating leases with an initial term of more than one year are summarized as follows: Fiscal 2001 $266 Fiscal 2002 161 Fiscal 2003 123 Fiscal 2004 112 Fiscal 2005 66 ---- $728 ==== Rent expense for the years ended March 31, 2000, 1999 and 1998 approximated $399, $421 and $253, respectively. Royalty and Technology Transfer Fee Agreements Pursuant to the terms of patent license and technology transfer agreements entered into in connection with the acquisition of the Lucent assets, the Company agreed to pay royalties and fees with respect to sales of acquired products. In addition, during the year ended March 31, 2000, the Company entered into various other license agreements regarding technology used its Internet appliance products. Royalties and fees under these agreements during the fiscal years ended March 31, 2000, 1999 and 1998 approximated $318, $220 and $86, respectively. Employment Contracts On October 15, 1999, the Company hired a new President and Chief Executive Officer. The employment agreement between the Company and its new President and Chief Executive Officer expires on October 11, 2002 and may be terminated earlier by either party with 30 days prior written notice. The agreement provides for minimum annual base compensation of $250 and incentive compensation of up to 50% of base compensation at the discretion of the Board of Directors, subject to a minimum of 25% of base compensation for the period beginning October 15, 1999 and ending December 31, 2000. In addition, under the terms of the agreement, the President and Chief Executive Officer is entitled to receive benefits made available to other executives of the Company and reimbursement of relocation expenses of $40. Further, the agreement provides for the payment of severance compensation if the Company terminates the agreement without cause equal to $250 unless the remaining term of the agreement is less than 12 months in which event such amount is prorated over the remainder of the term. The employment agreement also contains confidentiality and non-compete provisions. Pursuant to the terms of the agreement, the Company granted options under the 1999 Plan to purchase 539,988 shares of the Company's common stock at an exercise price of $1.67 per share (see Note 10). In addition, the Company has entered into employment agreements with certain of its other officers that continue in effect until either party to the agreement terminates the agreement with at least 60 days prior written notice, subject to certain earlier termination provisions. Pursuant to the agreements, the officers are entitled to minimum compensation aggregating $380 annually. In addition, if these agreements are terminated by the Company without cause, the officers are entitled to receive the amount of compensation and benefits they would otherwise have received for a period of six months from the date of termination and thereafter until they locate employment comparable to their employment at the date of termination but not for a period longer than twelve months from the date of termination of employment. 34 NOTE 16 - LIQUIDITY During the year ended March 31, 2000, the Company reported a net loss of $11,188. Although sales and revenues from the Company's core payphone business began to decline in the previous year, the Company believed that the decline would stabilize. However, based on reduced sales and revenues for the year ended March 31, 2000, non-recurring charges related to an aborted business combination during the year ended March 31, 1999 and significant investments in the development of the Company's Internet terminal appliances and back office software systems, the Company breached one of the financial covenants contained in the loan agreements between the Company and its bank, as further described in Note 7. As a result of the covenant default, the bank stopped advancing funds to the Company under the revolving credit lines provided under the loan agreements, and had the right to accelerate the maturity of outstanding indebtedness under the loan agreements. On April 12, 2000, the Company entered into the Forbearance Agreement pursuant to which the maturity date of indebtedness outstanding under the loan agreements was changed to July 31, 2000. The Company will not be able to pay its outstanding bank indebtedness on July 31, 2000 unless it is able to raise additional capital and/or restructure the bank indebtedness, and may not be able to remain in compliance with the terms of the Forbearance Agreement until July 31, 2000. As a result, the Company is attempting to secure an asset-based financing arrangement and raise additional equity capital and/or other sources of funding through a private placement of securities. The Company believes that its efforts to raise additional capital and/or other funding will be successful, and that it will be able to refinance and/or restructure its outstanding bank indebtedness. If the Company is successful in raising additional equity capital, the percentage ownership of the Company's then current stockholders will be reduced and such reduction may be substantial. However, there is no assurance that the Company's efforts will be successful, or if successful, that such financing would not be on onerous terms. If the Company's efforts to raise additional equity capital and/or other funding and refinance and/or restructure its bank debt are not successful, the Company could experience difficulties meeting its obligations and it may be unable to continue normal operations, except to the extent permitted by its bank. Cash flows from operations will not be adequate to fund the Company's obligations and operations for the next twelve months without raising additional capital. The Company may require additional funds during or after such period in addition to that currently sought. Additional financing may not be available except on onerous terms, or at all. If the Company cannot raise adequate funds, if and when necessary, to satisfy its capital requirements, it may have to limit its operations significantly, which would adversely affect its prospects. The Company's future capital requirements depend upon many factors, including, but not limited to, the level of sales and revenues of its payphone business, success of its Internet appliance business, the extent to which it develops and upgrades its network, the extent to which it expands its content solutions and delivery capabilities and the rate at which it expands its sales and marketing operations. 35 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Report. (1) Financial Statements - See the index to the financial statements in Item 8. (2) Financial Statement Schedules - See the index to the financial statement schedules in Item 8. (3) Exhibits - Exhibit No. Description of Exhibit 3.1 Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999) 3.2 By-Laws, as amended (incorporated by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1992) 4.1 Form of Common Stock Certificate (incorporated by reference to Registrant's Registration Statement on Form 8-A dated November 21, 1986) 4.2 Representative's Warrant Agreement between Technology Service Group, Inc. and Brookehill Equities, Inc. dated May 10, 1996 (incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-4, File No. 333-38439) 4.3 Supplemental Warrant Agreement between the Registrant, Technology Service Group, Inc. and Brookehill Equities, Inc. dated December 18, 1997 (incorporated by reference to Exhibit 4.4 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1999) 4.4 Rights Agreement, dated as of May 10, 1999, between Registrant and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 99.1 to Registrant's Form 8-K dated April 19, 1999) 10.1* 1991 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999) 10.2* Directors Stock Option Plan, as amended (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999) 10.3* 1999 Stock Option Plan (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999) 36 10.4* 1994 Omnibus Stock Plan of Technology Service Group, Inc. (incorporated by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1998) 10.5 Restated Loan Agreement between Registrant and NationsBank, N.A. dated November 25, 1997 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997) 10.6 First Amendment to Loan and Security Agreement between Registrant and NationsBank, N.A. dated March 29, 1999 (incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1999) 10.7 Promissory Note between Registrant and NationsBank, N.A. dated March 29, 1999 (incorporated by reference to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1999) 10.8 First Replacement Promissory Note between Registrant and NationsBank, N.A. dated March 29, 1999 (incorporated by reference to Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1999) 10.9 Second Replacement Promissory Note between Registrant and NationsBank, N.A. dated March 29, 1999 (incorporated by reference to Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1999) 10.10 Mortgage Modification and Future Advance Agreement between Registrant and NationsBank, N.A. November 26, 1997 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997) 10.11 Business Loan Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) Commercial Security Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999 10.12 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.13 Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999 (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.14 Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999 (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.15 Forbearance and Modification Agreement between Elcotel, Inc. and Bank of America, N.A. dated April 12, 2000 (incorporated by reference to Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the Year Ended March 31, 2000) 10.16 Mortgage and Security Agreement between Elcotel, Inc. and Bank of America, N.A. dated April 12, 2000 (incorporated by reference to Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the Year Ended March 31, 2000) 37 10.17 Mortgage Modification Agreement between Elcotel, Inc. and Bank of America, N.A. dated April 12, 2000 (incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the Year Ended March 31, 2000) 10.18* Employment Agreement between Elcotel, Inc. and Michael J. Boyle dated October 15, 1999 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999) 10.19* Retirement Agreement between Elcotel, Inc. and Tracey L. Gray dated June 11, 1999 (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.20* Employment Agreement between Elcotel, Inc. and C. Shelton James dated June 10, 1999 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) 10.21* Employment Agreement between Elcotel, Inc. and David F. Hemmings dated December 10, 1998 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998) 10.22* Employment Agreement between Elcotel, Inc. and William H. Thompson dated December 10, 1998 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998) 10.23* Employment Agreement between Elcotel, Inc. and Kenneth W. Noack dated December 10, 1998 (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998) 10.24* Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla dated December 10, 1998 (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998) 10.25* Employment Termination Agreement between Elcotel, Inc. and Eduardo Gandarilla effective April 2, 2000 (filed herewith) 10.26 Technology and Transfer Agreement between Registrant and Lucent Technologies Inc. dated September 30, 1997 (incorporated by reference to Exhibit 2.2 to Registrant's Form 8-K dated September 30, 1997) 10.27 Patent License Agreement between Registrant and Lucent Technologies Inc. dated September 30, 1997 (incorporated by reference to Exhibit 2.3 to Registrant's Form 8-K dated September 30, 1997) 10.28 Stockholders' Agreement (incorporated by reference to Exhibit 2.3 to Registrant's Registration Statement on Form S-4, File No. 333-38439) 38 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to Registrant's Annual Report on Form 10-K for the Year Ended March 31, 2000) 23.1 Independent Auditor's Consent (filed herewith) 27 Financial Data Schedule (incorporated by reference to Exhibit 27 to Registrant's Annual Report on Form 10-K for the year ended March 31, 2000) * Management compensation agreements and plans. (b) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the fourth quarter of the year ended March 31, 2000. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, on the 31st day of August 2000. ELCOTEL, INC. By: /s/ William H. Thompson -------------------------------------- William H. Thompson Senior Vice President, Chief Financial Officer, Secretary (principal financial officer) 40 EX-23.1 2 0002.txt INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-46559, 333-46561, 333-46563, 333-46573 33-68806, 33-68808, 33-62631, 33-62633 and 333-40974 of Elcotel, Inc. on Forms S-8, of our report dated June 20, 2000, appearing in this Amendment No. 1 to Annual Report on Form 10-K of Elcotel, Inc. for the year ended March 31, 2000. DELOITTE & TOUCHE LLP Tampa, Florida August 31, 2000 -----END PRIVACY-ENHANCED MESSAGE-----