-----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, TNKfBc0kUk0ecQG9rDCCKocqF5kPPq68koBWwUz9YipEcB12rfVQA0a8sXqfm1l1 S4uLoZ6TH+x3rsxb0g2E1g== 0000891092-99-000743.txt : 19991117 0000891092-99-000743.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891092-99-000743 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELCOTEL INC CENTRAL INDEX KEY: 0000801448 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 592518405 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15205 FILM NUMBER: 99754430 BUSINESS ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9417580389 MAIL ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 10-Q 1 FORM-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 Commission File No. 0-15205 ELCOTEL, INC. (Exact name of registrant as specified in its charter) Delaware 59-2518405 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6428 Parkland Drive, Sarasota, Florida 34243 (Address of principal executive offices) (Zip Code) (941) 758-0389 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- As of November 10, 1999, there were 13,499,693 shares of the Registrant's Common Stock outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements
ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts ) September 30, March 31, 1999 1999 ----------------- ---------------- (Unaudited) ASSETS Current assets: Cash $ 26 $ $ 16 Accounts and notes receivable, less allowance for credit losses of $2,010 and $1,970 10,772 12,209 Inventories 11,029 13,978 Income taxes receivable 1,995 1,997 Deferred tax asset - current portion 1,675 2,215 Prepaid expenses and other current assets 845 912 ------------- ----------- Total current assets 26,342 31,327 Property, plant and equipment, net 5,554 5,064 Notes receivable, less allowance for credit losses of $352 and $312 688 898 Identified intangible assets, net of accumulated amortization of $2,113 and $1,541 7,162 7,734 Capitalized software, net of accumulated amortization of $373 and $240 3,366 1,573 Goodwill, net of accumulated amortization of $1,222 and $878 22,874 23,218 Deferred tax asset 2,532 948 Other assets 675 533 ============= =========== $ 69,193 $ 71,295 ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 561 $ 1,428 Accounts payable 4,328 4,186 Accrued expenses and other current liabilities 3,627 4,197 Notes and debt obligations payable within one year 12,279 823 ------------- ----------- Total current liabilities 20,795 10,634 Notes and debt obligations payable after one year 64 10,355 ------------- ----------- 20,859 20,989 ------------- ----------- Commitments and contingencies -- -- Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized, 13,551,693 and 13,551,693 shares issued and outstanding 136 136 Additional paid-in capital 46,667 46,667 Retained earnings 1,757 3,680 Accumulated other comprehensive (loss): Holding loss on marketable securities (49) - Less - cost of 52,000 shares of common stock in treasury (177) (177) ------------- ----------- Total stockholders' equity 48,334 50,306 ------------- ----------- $ 69,193 $ 71,295 ============= ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts)
Three Months Ended Six Months Ended September 30, September 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 -------------- --------------- -------------- -------------- Revenues and net sales: Product sales $ 9,465 $ 16,091 $ 19,300 $ 28,861 Services 3,986 2,717 6,909 5,583 -------------- --------------- -------------- -------------- 13,451 18,808 26,209 34,444 -------------- --------------- -------------- -------------- Cost of revenues and sales: Cost of products sold 7,577 9,839 14,050 17,477 Cost of services 3,225 2,352 5,524 4,942 -------------- --------------- -------------- -------------- 10,802 12,191 19,574 22,419 -------------- --------------- -------------- -------------- Gross profit 2,649 6,617 6,635 12,025 -------------- --------------- -------------- -------------- Other costs and expenses: Selling, general and administrative expenses 2,790 3,024 5,336 5,875 Engineering, research and development expenses 1,547 1,592 2,877 3,167 Amortization 546 497 1,083 1,004 Interest expense, net 152 145 277 225 -------------- --------------- -------------- -------------- 5,035 5,258 9,573 10,271 -------------- --------------- -------------- -------------- Income (loss) before income tax (expense) benefit (2,386) 1,359 (2,938) 1,754 Income tax (expense) benefit 812 (494) 1,015 (652) -------------- --------------- -------------- -------------- Net income (loss) (1,574) 865 (1,923) 1,102 Other comprehensive loss, net of tax: Holding loss on marketable securities (49) - (49) - -------------- --------------- -------------- -------------- Comprehensive income (loss) $ (1,623) $ 865 $ (1,972) $ 1,102 ============== =============== ============== ============== Income (loss) per common and common equivalent share: Basic $ (0.12) $ 0.06 $ (0.14) $ 0.08 ============== =============== ============== ============== Diluted $ (0.12) $ 0.06 $ (0.14) $ 0.08 ============== =============== ============== ============== Weighted average number of common and common equivalent shares outstanding: Basic 13,500 13,457 13,500 13,430 ============== =============== ============== ============== Diluted 13,500 13,822 13,500 13,793 ============== =============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended September 30, ---------------------------------- 1999 1998 -------------- --------------- Cash flows from operating activities Net income (loss) $ (1,923) $ 1,102 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,750 1,524 Provision for credit losses 314 206 Provisions for obsolescence and warranty expense 1,313 408 Stock option compensation 31 - Deferred tax benefit (1,015) (27) Changes in operating assets and liabilities: Accounts and notes receivable 1,046 (3,964) Inventories 1,966 (8,385) Income taxes receivable 2 - Prepaid expenses and other current assets 276 5 Other assets (176) (33) Accounts payable 142 3,913 Accrued expenses and other current liabilities (931) (796) -------------- --------------- Net cash provided by (used for) operating activities 2,795 (6,047) -------------- --------------- Cash flows from investing activities Capital expenditures (1,157) (803) Capitalized software (1,926) (29) -------------- --------------- Net cash used for investing activities (3,083) (832) -------------- --------------- Cash flows from financing activities Net proceeds under revolving credit lines 1,563 4,485 (Decrease) increase in bank overdraft (867) 662 Principle payments on notes payable (398) (40) Proceeds from exercise of common stock options - 204 -------------- --------------- Net cash provided by financing activities 298 5,311 -------------- --------------- Increase (decrease) in cash 10 (1,568) Cash, beginning of period 16 1,655 ============== =============== Cash, end of period $ 26 $ 87 ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 4 ELCOTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. GENERAL The unaudited consolidated balance sheet at September 30, 1999 and the unaudited consolidated statements of operations and other comprehensive income (loss) for the three months and six months ended September 30, 1999 and 1998 and of cash flows for the six months ended September 30, 1999 and 1998 have been prepared by Elcotel, Inc. and subsidiaries (the "Company"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at September 30, 1999, and for all periods presented, have been made. The Company's unaudited consolidated financial statements for the three months and six months ended September 30, 1998 have been reclassified to conform with the presentation at and for the three months and six months ended September 30, 1999. The consolidated balance sheet at March 31, 1999 has been derived from the Company's audited consolidated financial statements as of and for the year ended March 31, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. The results of operations for the three months and six months ended September 30, 1999 are not necessarily indicative of the results for the full fiscal year. 2. INVENTORIES Inventories at September 30, 1999 and March 31, 1999 are summarized as follows: September 30, March 31, 1999 1999 ------------- ----------- Finished products $ 1,296 $ 1,875 Work-in-process 1,734 924 Purchased components 9,680 11,630 ------------- ----------- 12,710 14,429 Reserve for obsolescence (1,681) (451) ============= =========== $ 11,029 $ 13,978 ============= =========== 3. NOTES AND DEBT OBLIGATIONS PAYABLE On June 29, 1999, the Company and its bank entered into a Business Loan Agreement (the "Agreement") that provides the Company with a $2 million revolving credit line to finance export related inventory and accounts receivable. The export credit line matures on June 29, 2000. Interest on amounts borrowed under the export credit line is payable monthly at the bank's floating 30 day Libor rate plus 1.5%. Indebtedness outstanding under the Agreement is secured by substantially all of the Company's assets, including export-related inventories and accounts receivable. The Agreement contains covenants and conditions similar to 5 those contained in the Restated Loan and Security Agreement, as amended, between the Company and its bank dated November 25, 1997. As of September 30, 1999, the Company had not used the $2 million export credit line. The Company is in default of certain financial covenants contained in the loan agreements between the Company and its bank, and as a result thereof, the bank has the right to accelerate the maturity of the debt outstanding under such agreements. Accordingly, debt outstanding under the terms of such agreements at September 30, 1999 in the aggregate amount of $12,215 is classified as a current liability. The Company is presently attempting to renegotiate the terms of the loan agreements and believes, but cannot assure, that its efforts will be successful. However, if the Company is unable to renegotiate the terms of the loan agreements on terms satisfactory to the Company, the Company would be forced to secure alternative financing arrangements. In that event, there is no assurance that the Company's efforts to secure such alternative financing arrangements would be successful, or that if successful, that such financing would be on terms satisfactory to the Company. 4. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the six months ended September 30, 1999 are summarized as follows:
Holding Additional Loss on Common Paid-in Retained Marketable Treasury Stock Capital Earnings Securities Stock Total --------- ------------ ------------ -------------- ----------- ------------ Balance, March 31, 1999 $ 136 $ 46,667 $ 3,680 $ - $ (177) $ 50,306 Net income (loss) (1,923) (1,923) Holding loss on marketable securities (49) (49) ========= ============ ============ ============== =========== ============ Balance, September 30, 1999 $ 136 $ 46,667 $ 1,757 $ (49) $ (177) $ 48,334 ========= ============ ============ ============== =========== ============
5. SUPPLEMENTAL CASH FLOW INFORMATION A summary of the Company's supplemental cash flow information for the six months ended September 30, 1999 and 1998 is as follows:
1999 1998 ----------- ----------- Cash paid (refunded) during the period for: Interest $ 473 $ 402 Income taxes (2) 626 Non-cash transactions: Receipt of marketable securities to satisfy accounts receivable resulting in an increase in other current assets and a reduction in accounts receivable 287 - Unrealized loss on marketable securities resulting in a reduction of stockholders' equity and other current assets 78 - Tax benefit from unrealized loss on marketable securities resulting in an increase in current deferred tax assets and stockholders' equity 29 -
6 6. EARNINGS (LOSS) PER SHARE Earnings (loss) per common share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 requires disclosure of basic earnings (loss) per share and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and potential dilutive common shares outstanding during the period. The weighted average number of shares of common stock outstanding used to compute basic earnings (loss) per share for the three months and six months ended September 30, 1999 was 13,499,693 shares and 13,499,693 shares, respectively. The weighted average number of shares of common stock outstanding used to compute basic earnings (loss) per share for the three months and six months ended September 30, 1998 was 13,456,585 shares and 13,430,419 shares, respectively. There were no potential dilutive common shares outstanding during the three months and six months ended September 30, 1999 for purposes of computing diluted earnings (loss) per share. The weighted average number of potential dilutive common shares outstanding used in the computation of diluted earnings (loss) per share for the three and six months ended September 30, 1998 was 365,320 shares and 362,276 shares, respectively. 7. DISCLOSURE ABOUT SEGMENTS AND RELATED INFORMATION The Company's reportable segments are based upon the market segments that the Company addresses. The products provided by each of the reportable segments are similar in nature. There are no transactions between the reportable segments, and external customers account for all sales revenue. 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 three months ended September 30, 1999 and 1998 is set forth below: 1999 1998 --------------------- ---------------------- Sales Profit Sales Profit --------- --------- --------- --------- Private $ 2,998 $ 1,297 $ 6,639 $ 3,450 Telephone company 7,946 2,295 10,304 2,924 International 2,507 628 1,865 607 ========= ========= ========== ========= $ 13,451 $ 4,220 $ 18,808 $ 6,981 ========= ========= ========== ========= 7 The sales revenue and gross profit of each reportable segment for the six months ended September 30, 1999 and 1998 is set forth below: 1999 1998 ----------------------- ----------------------- Sales Profit Sales Profit ---------- --------- ----------- --------- Private $ 6,890 $ 3,149 $ 12,677 $ 6,402 Telephone company 15,393 4,646 18,609 5,255 International 3,926 1,121 3,158 1,163 ---------- --------- --------- ----------- $ 26,209 $ 8,916 $ 34,444 $ 12,820 ========== ========= ========= =========== The Company does not allocate assets or other corporate expenses to reportable segments. A reconciliation of segment profit information to the Company's financial statements for the three months and six months ended September 30, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended September 30, September 30, ---------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ---------- Total profit of reportable segments $ 4,220 $ 6,981 $ 8,916 $ 12,820 Unallocated cost of sales (1,571) (364) (2,281) (795) Unallocated corporate expenses (5,035) (5,258) (9,573) (10,271) ----------- ----------- ----------- ---------- Income (loss) before income taxes $ (2,386) $ 1,359 $ (2,938) $ 1,754 =========== =========== =========== ==========
8 Information with respect to sales of products and services during the three months and six months ended September 30, 1999 and 1998 is set forth below:
Three Months Ended Six Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Private segment: Payphone terminals $ 1,520 $ 2,822 $ 3,063 $ 5,486 Printed circuit board control modules and kits 892 3,107 2,750 6,037 Components and assemblies 214 379 320 570 Software 77 95 157 221 Operator services 191 107 364 120 Other services 104 129 236 243 --------- --------- --------- --------- 2,998 6,639 6,890 12,677 --------- --------- --------- --------- Telephone company segment: Payphone terminals 679 3,398 1,438 5,271 Printed circuit board control modules and kits 2,350 912 5,057 2,285 Components and assemblies 1,222 3,513 2,575 5,833 Repair, refurbishment and upgrade services 3,691 2,481 6,309 5,220 Other 4 - 14 - --------- --------- --------- --------- 7,946 10,304 15,393 18,609 --------- --------- --------- --------- International segment: Payphone terminals 2,271 877 3,507 1,690 Printed circuit board control modules and kits 79 59 136 117 Components and assemblies 157 929 281 1,351 Other - - 2 - --------- --------- --------- --------- 2,507 1,865 3,926 3,158 --------- --------- --------- --------- $13,451 $18,808 $26,209 $34,444 ========= ========= ========= =========
The Company sells its payphone products in the United States and in certain foreign countries. The Company's international business consists of export sales, and the Company does not presently have any foreign operations. Sales by geographic region for the three months and six months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- United States $ 10,944 $ 16,943 $ 22,283 $ 31,286 Canada 1,238 878 1,845 1,536 Latin America 848 965 1,619 1,597 Europe, Middle East and Africa 400 19 411 22 Asia Pacific 21 3 51 3 ---------- ---------- ---------- ---------- $ 13,451 $ 18,808 $ 26,209 $ 34,444 ========== ========== ========== ==========
9 8. SUBSEQUENT EVENTS Employment Agreement 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. Pursuant to the terms of the agreement, the Company issued options to the new President and Chief Executive Officer 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, and expire on October 15, 2004. Unvested options expire upon termination of the agreement by the Company for cause or upon notice of termination of the agreement by the President and Chief Executive Officer for any reason. If the Company terminates the agreement without cause, options that would have vested during the twelve months after such termination, or during the remaining term of the agreement, whichever is less, immediately vest and are thereafter exercisable until their expiration date. In addition, the options vest upon a change in control of the Company. 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. Restructuring In November 1999, the Company formulated a restructuring plan to consolidate manufacturing operations, resize its core business operations, reorient its distribution strategy and begin to build operations required to introduce its new information station terminal products and back office management software to the marketplace. In connection with this restructuring, the Company expects to recognize restructuring charges, consisting of the cost of estimated severance and salary continuation arrangements, remaining liabilities related to the closure of leased facilities and certain asset impairment losses, of approximately $1 million during the three months ending December 31, 1999. The Company believes, but cannot assure, that the restructuring will have the impact of reducing costs and expenses by approximately $2 million annually. The Company does not expect to begin to realize the full impact of the anticipated cost and expense reductions from the restructuring until the quarter ending June 30, 2000. ---------------------------- 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts, except per share data, in this Management's Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands. Forward Looking Statements The statements contained in this report which are not historical facts contain forward looking information regarding the Company's financial position, business strategy, plans, projections and future performance based on the beliefs, expectations, estimates, intentions or anticipations of management as well as assumptions made by and information currently available to the Company's management. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties and assumptions related to various factors that could cause the Company's actual results to differ materially from those expected by the Company, including competitive factors, customer relations, the integration of operations resulting from acquisitions, the risk of obsolescence of the Company's products, relationships with suppliers, the risk of adverse regulatory action affecting the Company's business or the business of the Company's customers, changes in the international business climate, product introduction and market acceptance, general economic conditions, seasonality, changes in industry practices, the outcome of litigation to which the Company is a party, and other uncertainties detailed in this report and in the Company's other filings with the Securities and Exchange Commission. Results of Operations The Company reported a net loss of $1,574, or $.12 per diluted share, for the three months ended September 30, 1999 on net sales of $13,451 as compared to net income of $865, or $.06 per diluted share, on net sales of $18,808 for the three months ended September 30, 1998. For the six months ended September 30, 1999, the Company reported a net loss of $1,923, or $.14 per diluted share, on revenues and net sales of $26,209 as compared to net income of $1,102, or $.08 per diluted share, on revenues and net sales of $34,444 for the six months ended September 30, 1998. The Company's operating results for the three months and six months ended September 30, 1999 have been adversely affected by industry conditions that began to impact the Company's sales and gross profit margins in the latter half of the Company's 1999 fiscal year ended March 31, 1999. These conditions include among others, the consolidation of domestic public communications providers and declining industry revenues resulting from increasing usage of wireless services and increased volume of dial-around (toll free and access code) calls. As a result of the prolonged continuance of these industry conditions, the Company does not believe that its domestic revenues and net sales from its core public communications products and services will improve significantly in the foreseeable future. During fiscal year 1999 and the first six months of fiscal 2000, the Company has made a significant investment in the development of new technology, including information station terminal products and back office management software, that are intended to provide the capability to handle advertising, information content and e-commerce transactions in addition to traditional payphone capabilities. The Company believes, but cannot assure, that it will begin to release its new information station terminal products and back office management software to the market during the quarter ending March 31, 2000, that such products will be accepted by the marketplace and that such products may result in an increase to the Company's sales and revenues. However, there is no assurance that the Company's information station terminal products and back office management software will be successfully introduced or accepted by the marketplace, or if they are, that revenues from such products would have a material favorable impact on the Company's sales and revenues in the foreseeable future or at all. 11 In November 1999, the Company formulated a restructuring plan to consolidate manufacturing operations, resize its core business operations, reorient its distribution strategy and begin to build operations required to successfully introduce its information station terminal products and back office management software. In connection with this restructuring, the Company expects to recognize restructuring charges of approximately $1 million during the three months ending December 31, 1999. The Company believes, but cannot assure, that the restructuring will have the impact of reducing costs and expenses by approximately $2 million annually. The Company does not expect to begin to realize the full impact of the anticipated cost and expense reductions from the restructuring until the quarter ending June 30, 2000. Three Months Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998 The following table shows certain line items in the Company's consolidated statements of operations for the three months ended September 30, 1999 and 1998 that are discussed below together with amounts expressed as a percentage of sales and with the change expressed as a percentage increase or (decrease).
Percent Percent Percentage 1999 of Sales 1998 of Sales Change -------------- ------------- ------------- ------------- ------------- Revenues and net sales $ 13,451 100% $ 18,808 100% (28%) Cost of revenues and sales 10,802 80 12,191 65 (11) Gross profit 2,649 20 6,617 35 (60) Selling, general and administrative expenses 2,790 21 3,024 16 (8) Engineering, research and development expenses 1,547 12 1,592 8 (3) Income tax expense (benefit) (812) 6 494 3 (264)
Revenues and net sales by market segment for the three months ended September 30, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below: Increase Percentage 1999 1998 (Decrease) Change ---------- --------- ---------- ----------- Private segment $ 2,998 $ 6,639 $ (3,641) (55%) Telephone company segment 7,946 10,304 (2,358) (23) International segment 2,507 1,865 642 34 ========== ========= ========== =========== $ 13,451 $ 18,808 $ (5,357) (28%) ========== ========= ========== =========== 12 Revenues and net sales of products and services for the three months ended September 30, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below:
Increase Percentage 1999 1998 (Decrease) Change ---------- ---------- ---------- ----------- Products: Payphone terminals $ 4,470 $ 7,097 $ (2,627) (37%) Printed circuit board control modules and kits 3,321 4,078 (757) (19) Components and assemblies 1,593 4,821 (3,228) (67) Software 81 95 (14) (15) Services: Repair, refurbishment and upgrade services 3,691 2,481 1,210 49 Operator services 191 107 84 79 Other services 104 129 (25) (19) ========== ========== ========== =========== $ 13,451 $ 18,808 $ (5,357) (28%) ========== ========== ========== ===========
The decrease in revenues and net sales to the private and telephone company segments for the three months ended September 30, 1999 as compared to the same period last year is primarily attributable to a decrease in volume of product sales partially offset by an increase in the usage of repair, refurbishment and upgrade services by the telephone company segment. The Company believes that these fluctuations are primarily attributable to declining revenues of payphone service providers caused by increasing usage of wireless services and higher volume of dial-around calls. In addition, the fluctuations in sales mix among payphone terminals, control modules and components and assemblies and continuing downward pricing pressures contributed to the decline in revenues and net sales in these domestic market segments. The increase in revenues and net sales to the international segment for the three months ended September 30, 1999 as compared to the three months ended September 30, 1998 is primarily attributable to an increase in export volume of payphone terminals to customers in Canada and Africa. Cost of sales and gross profit as a percentage of net sales approximated 80% and 20%, respectively, for the three months ended September 30, 1999 as compared to 65% and 35%, respectively, for the three months ended September 30, 1998. The decline in the gross profit percentage between such periods is principally attributable to a number of factors including: (i) the increase in the percentage of sales to telephone companies at margins lower than those achieved from the private segment, (ii) downward pricing pressures in the private segment, (iii) an increase in the obsolescence provision of $821 to reflect the net realizable value of certain slow moving inventories, which is attributable to the continued weakness in the domestic market; and (iv) an increase in low margin export sales to certain international customers. The decrease in selling, general and administrative expenses is primarily attributable to a reduction in personnel and other operating expenses as a result of the reorganization of selling and marketing activities at the end of fiscal 1999 and a decline in variable selling expenses, which is related to the decline in sales, partially offset by an increase in the provision for credit losses of $81,000, which is related to the deterioration of the financial position of certain customers in the private segment. Despite the decline in revenues and net sales, the Company continued to make a significant investment in engineering, research and development activities associated with the development of the Company's new information terminal products and back office management software designed to provide the capability to handle advertising, information content and e-commerce transactions in addition to traditional payphone 13 capabilities. Total engineering, research and development expenditures, including capitalized software, during the three months ended September 30, 1999 increased by $1,018, or approximately 64%, to $2,610 versus $1,592 for the three months ended September 30, 1998. Capitalized software expenditures approximated $1,063 during the three months ended September 30, 1999. During the three months ended September 30, 1998 no software development costs were capitalized. The Company's effective tax rate declined to approximately 34% of pre-tax income (loss) for the three months ended September 30, 1999 from approximately 36% for the three months ended September 30, 1998 primarily due to fluctuations in non-deductible expenses and research and development tax credits. Six Months Ended September 30, 1999 Compared to the Six Months Ended September 30, 1998 The following table shows certain line items in the Company's consolidated statements of operations for the six months ended September 30, 1999 and 1998 that are discussed below together with amounts expressed as a percentage of sales and with the change expressed as a percentage increase or (decrease).
Percent Percent Percentage 1999 of Sales 1998 of Sales Change ---------- ----------- ---------- ----------- ----------- Revenues and net sales $ 26,209 100% $ 34,444 100% (24%) Cost of revenues and sales 19,574 75 22,419 65 (13) Gross profit 6,635 25 12,025 35 (45) Selling, general and administrative expenses 5,336 20 5,875 17 (9) Engineering, research and development expenses 2,877 11 3,167 9 (9) Income tax expense (benefit) (1,015) (4) 652 2 (256)
Revenues and net sales by market segment for the six months ended September 30, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below: Increase Percentage 1999 1998 (Decrease) Change ---------- ---------- ---------- ----------- Private segment $ 6,890 $ 12,677 $ (5,787) (46%) Telephone company segment 15,393 18,609 (3,216) (17) International segment 3,926 3,158 768 24 ========== ========== ========== =========== $ 26,209 $ 34,444 $ (8,235) (24%) ========== ========== ========== =========== 14 Revenues and net sales of products and services for the six months ended September 30, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below:
Increase Percentage 1999 1998 (Decrease) Change ---------- ---------- ----------- ----------- Products: Payphone terminals $ 8,008 $ 12,447 $ (4,439) (36%) Printed circuit board control modules and kits 7,943 8,439 (496) (6) Components and assemblies 3,176 7,754 (4,578) (59) Software and other 173 221 (48) (22) Services: Repair, refurbishment and upgrade services 6,309 5,220 1,089 21 Operator services 364 120 244 203 Other services 236 243 (7) (3) ========== ========== =========== =========== $ 26,209 $ 34,444 $ (8,235) (24%) ========== ========== =========== ===========
The decrease in revenues and net sales to the private and telephone company segments for the six months ended September 30, 1999 as compared to the same period last year is primarily attributable to a decrease in volume of product sales partially offset by an increase in the usage of repair, refurbishment and upgrade services by the telephone company segment. The Company believes that these fluctuations are primarily attributable to declining revenues of payphone service providers caused by increasing usage of wireless services and higher volume of dial-around calls. In addition, the fluctuations in sales mix among payphone terminals, control modules and components and assemblies and continuing downward pricing pressures contributed to the decline in revenues and net sales in these domestic market segments. The increase in revenues and net sales to the international segment for the six months ended September 30, 1999 as compared to the six months ended September 30, 1998 is primarily attributable to an increase in export volume of payphone terminals to customers in Canada and Africa. Cost of sales and gross profit as a percentage of net sales approximated 75% and 25%, respectively, for the six months ended September 30, 1999 as compared to 65% and 35%, respectively, for the six months ended September 30, 1998. The decline in the gross profit percentage between such periods is principally attributable to a number of factors including: (i) the increase in the percentage of sales to telephone companies at margins lower than those achieved from the private segment, (ii) downward pricing pressures in the private segment, (iii) an increase in the obsolescence provision of $983 to reflect the net realizable value of certain slow moving inventories, which is attributable to the continued weakness in the domestic market; and (iv) an increase in low margin export sales to certain international customers. The decrease in selling, general and administrative expenses is primarily attributable to a reduction in personnel and other operating expenses as a result of the reorganization of selling and marketing activities at the end of fiscal 1999 and a decline in variable selling expenses, which is related to the decline in sales. Total engineering, research and development expenditures, including capitalized software, during the six months ended September 30, 1999 increased by $1,636, or approximately 51%, to $4,803 versus $3,167 for the same period of fiscal 1999. Capitalized software related to the development of the Company's new information station terminal products and back office management software designed to provide the capability to handle advertising, information content and e-commerce transactions in addition to traditional 15 payphone capabilities approximated $1,926 during the six months ended September 30, 1999. During the six months ended September 30, 1998 no software development costs were capitalized. The Company's effective tax rate declined to approximately 34% of pre-tax income (loss) for the six months ended September 30, 1999 as compared to 37% for the six month ended September 30, 1998 primarily due to fluctuations in non-deductible expenses and research and development tax credits. Impact of Inflation The Company's primary costs, inventory and labor, increase with inflation. However, the Company does not believe that inflation and changing prices have had a material impact on its business. Liquidity and Capital Resources Financing Activities. The credit lines available to the Company pursuant to the Restated Loan and Security Agreement, as amended (the "Loan Agreement"), between the Company and its bank include a $10 million revolving credit line to finance the Company's domestic working capital requirements (the "working capital line") and a $1.5 million revolving credit line to finance the Company's capital expenditures (the "capital line"). In addition, on June 29, 1999, the Company and its bank entered into a Business Loan Agreement (the "Export Loan Agreement") that provides the Company with a $2 million revolving credit line to finance export related inventory and accounts receivable (the "export line"). Indebtedness outstanding under the Loan Agreement and the Export Loan Agreement (collectively the "Agreements") is collateralized by substantially all of the assets of the Company. The Agreements 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 Agreements require the Company to comply with specific financial covenants, including covenants with respect to cash flow, working capital and net worth. Noncompliance with any of these covenants or the occurrence of an event of default, if not waived, could accelerate the maturity of the indebtedness outstanding under the Agreements. The Company borrows funds under its revolving credit lines to finance capital expenditures, increases in accounts and notes receivable and inventories and decreases in bank overdrafts (as drafts clear), accounts payable and accrued liability obligations to the extent that such requirements exceed cash provided by operations, if any. The Company also uses the financing available under its revolving credit lines to fund operations and payments on long-term debt when necessary. The Company measures its liquidity based upon the amount of funds the Company is able to borrow under its revolving credit lines, which varies based upon operating performance and the value of collateral. Indebtedness outstanding under the working capital and export lines cannot exceed the value of eligible collateral, as defined in the Agreements, consisting of accounts receivable and inventories. The working capital line matures on November 25, 2002. The export line matures on June 29, 2000. The capital line matures on July 31, 2000. Interest on amounts borrowed under the revolving credit lines is payable monthly at the bank's floating 30 day Libor rate plus 1.5% (6.668% at September 30, 1999). At September 30, 1999 and March 31, 1999, outstanding debt under the working capital line amounted to $6,510 and $5,185, respectively, and at September 30, 1999, the Company was able to borrow up to a maximum of $8,944 under the working capital line based on the value of eligible collateral. The indebtedness outstanding under the capital line amounted to $238 at September 30, 1999. At September 30, 1999, the Company has not used the export line, but was able to borrow up to a maximum of $2 million under the 16 export line based on the value of eligible collateral. Outstanding indebtedness under mortgage and installment notes between the Company and its bank aggregated $5,467 and $5,833 at September 30, 1999 and March 31, 1999, respectively. During the six months ended September 30, 1999 and 1998, net proceeds under the Company's working capital line and capital line aggregated $1,563 and $4,485, respectively. Principal payments under the mortgage and installment notes between the Company and its bank and other notes payable during the six months ended September 30, 1999 and 1998 amounted to $398 and $40, respectively. As discussed below under "Liquidity," the Company is in default of certain financial covenants contained in the loan agreements between the Company and its bank, and as a result thereof, the bank has the right to accelerate the maturity of the debt outstanding under such agreements. Accordingly, debt outstanding under the terms of such agreements at September 30, 1999 in the aggregate amount of $12,215 is classified as a current liability. Operating Activities. Cash flows from operating activities for the six months ended September 30, 1999 and 1998 are summarized as follows: 1999 1998 --------- ---------- Net income (loss) $ (1,923) $ 1,102 Non-cash charges and credits, net 2,393 2,111 --------- ---------- 470 3,213 Changes in operating assets and liabilities: Accounts and notes receivable 1,046 (3,964) Inventories 1,966 (8,385) Accounts payable, accrued expenses and other current liabilities (789) 3,117 Other 102 (28) --------- ---------- $ 2,795 $ (6,047) --------- ---------- The Company's operating cash flow is primarily dependent upon operating results, sales levels and related credit terms extended to customers and inventory purchases, and the changes in operating assets and liabilities related thereto. During the six months ended September 30, 1999, weaker operating performance resulted in a decline in cash flows from operations, net of non-cash charges and credits, of $2,743, to $470 from $3,213 for the six months ended September 30, 1998. However, during the six months ended September 30, 1999, the Company generated $2,325 of cash from changes in operating assets and liabilities as compared to the six months ended September 30, 1998 when the Company used $9,260 of cash to fund changes in operating assets and liabilities. The Company's operating assets and liabilities are comprised principally of accounts and notes receivable, inventories, accounts payable, accrued expenses and other current liabilities. During the six months ended September 30, 1999, the Company generated $1,046 and $1,966 of cash through reductions in accounts and notes receivable and inventories, respectively, and used $789 of cash to fund a net decrease in accounts payable, accrued expenses and other current liabilities. In comparison, during the six months ended September 30, 1998, the Company used $3,964 and $8,385 of cash to fund increases in accounts and notes receivable and inventories, respectively, and generated $3,117 of cash from increases in accounts payable, accrued expenses and other current liabilities. 17 The Company's current ratio declined to 1.27 to 1 at September 30, 1999 as compared to 2.95 to 1 at March 31, 1999 primarily due to the classification of outstanding bank indebtedness as a current liability as a result of the default in certain financial covenants contained in the loan agreements between the Company and its bank. During the six months ended September 30, 1999, the Company's current assets decreased by $4,985 (16%) and current liabilities increased by $10,161 (96%). Working capital decreased by $15,146, to $5,547 at September 30, 1999 from $20,693 at March 31, 1999 primarily as a result of the reclassification of bank debt, the net loss for the period and the increase in capital asset and capitalized software expenditures discussed below. Extension of credit to customers and inventory purchases represent the principal working capital requirements of the Company, and material increases in accounts and notes receivable and/or inventories could have a significant effect on the Company's liquidity. Accounts and notes receivable and inventories represented in the aggregate 83% and 84% of current assets at September 30, 1999 and March 31, 1999, respectively. The Company experiences varying accounts receivable collection periods from its three customer segments, and believes that credit losses will not have a significant effect on future liquidity as a significant portion of its accounts and notes receivable are due from customers with substantial financial resources. The level of inventory maintained by the Company is dependent on a number of factors, including delivery requirements of customers, availability and lead time of components and the ability of the Company to estimate and plan the volume of its business. Investing Activities. Net cash used for investing activities during the six months ended September 30, 1999 and 1998 amounted to $3,083 and $832, respectively. The Company's investing activities include capital expenditures consisting primarily of manufacturing tooling and equipment, computer equipment and building improvements required to support operations and capitalized software, including new product software development costs. Cash used for capital expenditures during the six months ended September 30, 1999 and 1998 aggregated $1,157 and $803, respectively. During the six months ended September 30, 1999 and 1998, cash used to acquire software and capitalized software development costs aggregated $1,926 and $29, respectively. The Company has not entered into any significant commitments for the purchase of capital assets other than manufacturing tooling in an amount of approximately $500. Liquidity. The Company finances its operations, working capital requirements and capital expenditures from internally generated cash flows and financing available under the loan agreements between the Company and its bank. The Company is in default of certain financial covenants contained in the loan agreements. As a result thereof, the bank has the right to accelerate the maturity of debt outstanding under the loan agreements in the aggregate amount of $12,215 at September 30, 1999. The Company is presently attempting to renegotiate the terms of the loan agreements and believes, but cannot assure, that its efforts will be successful. However, if the Company is unable to renegotiate the terms of the loan agreements on terms satisfactory to the Company or at all, the Company would be forced to secure alternative financing arrangements. In that event, there is no assurance that the Company's efforts to secure such alternative financing arrangements would be successful, or that if successful, that such financing would be on terms satisfactory to the Company. The inability of the Company to renegotiate the terms of the loan agreements on satisfactory terms or secure alternative financing arrangements on satisfactory terms would have a significant adverse effect on the Company's liquidity. Accordingly, the Company's cash flows may not be sufficient to fund its working capital requirements, capital expenditures and debt service requirements through September 30, 2000 unless the Company is able to successfully renegotiate the terms of its loan agreements or secure alternative financing arrangements on terms satisfactory to the Company. 18 Year 2000 Discussion The Company is continuing its efforts to assess the impact of Year 2000 on its business and address Year 2000 issues. Year 2000 issues result from computer programs designed to use two-digit date codes rather than four digits to define the applicable year. As a result, there is a risk that programs with time-sensitive software may recognize a year using "00" as the year 1900 rather than the year 2000, resulting in system miscalculations or system failures. The Company has identified several general areas in which Year 2000 concerns may be material if not resolved before January 1, 2000. These areas include (1) products and services of the Company, (2) management information systems and other systems within the Company, and (3) third parties that provide materials and services (including utilities) to the Company. The Company established a "Validation Test Plan" to assess Year 2000 compliance of all products and services currently sold or supported by the Company. This test plan was designed to identify the products and services currently supported by the Company, features of such products and services that required assessment, and the approach and resources required. The Validation Test Plan was also designed to assess Year 2000 compliance of those items in order of relative importance to the Company. The Company believes that it has completed its Year 2000 compliance testing with respect to the products and systems it currently sells and supports. In addition, the Company believes it has completed substantially all Year 2000 software modifications to such products, and believes that such products are Year 2000 compliant or Year 2000 compliant with issues. The Company believes that products defined as Year 2000 compliant with issues will operate properly in year 2000 if programmed and configured in accordance with the Company's published guidelines. However, there can be no assurance that the Company's tests pursuant to its Validation Test Plan have detected all instances of Year 2000 noncompliance, that the cost of any future remediation activities that may be required will not be material or that all products and systems currently supported by the Company will, in fact, be Year 2000 compliant. Based on the Company's Year 2000 compliance testing and remediation activities, the only products historically sold by the Company that will not be Year 2000 compliant or compliant with issues are products the manufacture of which has been discontinued and that are no longer supported by the Company. These discontinued products are not Year 2000 compliant and the Company does not intend to bring these products into compliance, and has so notified its customers. The Company does not believe that it has an obligation to bring these discontinued products into compliance or an obligation to replace these products under its warranties since those products were last sold more than five years ago. Accordingly, the Company has not recorded any liability related to these products in its financial statements. The Company has provided information to its customers and others about its Year 2000 compliance program. The Company's web site describes each product historically supplied by the Company and its status as "compliant", "not compliant", "compliant with issues" with an attached description of the issues, or "compliance anticipated" with a projected release date. The risks associated with the failure of the Company's products to be Year 2000 compliant include: (1) loss of data from or an adverse impact on the reliability of data generated by the Company's products; (2) loss of functionality; (3) failure to communicate with other non-Company user applications of its customers that may not be Year 2000 compliant; and (4) potential litigation by customers with respect to products and services no longer supported. The Company purchased new business software in June 1997, and based on representations received from the vendor, the Company believes that its management information system is Year 2000 compliant. Based on the 19 Company's internal testing, the Company believes that substantially all of the Company's related operating systems are also Year 2000 compliant with the exception of certain items which the Company does not believe are material. The Company continues to assess Year 2000 compliance of its other internal systems such as engineering, shipping, payroll and EDI systems and is upgrading these systems as required if deficiencies within these systems are deemed to be critical. The costs related to such system upgrades or acquisition of new Year 2000 compliant software to date have not been material, but the costs to complete such upgrades or acquisitions could be material. The risks associated with failure of such systems to be Year 2000 compliant are primarily the increase in administrative related functions and increased costs associated with such functions. The Company believes that all critical internal systems will be assessed and remediated by the end of the calendar year. The Company has completed an inventory and tested most of its internal computer equipment, including personal computers, related servers and software for Year 2000 compliance. Based on the Company's testing, the Company plans to spend approximately $100 to replace and upgrade such equipment and software to achieve Year 2000 compliance. The Company believes that the necessary replacements and upgrades can be completed by the end of the calendar year. The Company has relationships with various third parties in the ordinary course of business. The Company continues to assess the readiness of third parties, especially critical suppliers and others that have material relationships with the Company, by sending questionnaires, evaluating responses and identifying the risks with respect to Year 2000 plans of those third parties. The Company will continue to identify the risks associated with third parties based on responses to those questionnaires and will then formulate appropriate contingency plans on a case by case basis to mitigate such risks. The Company expects to complete its assessment of the readiness of third parties by the end of the calendar year. The effect, if any, on the Company's results of operations from failure of these third parties to be Year 2000 compliant is not reasonably estimable but could be material. The Company has begun, but not yet completed, an analysis of the operational problems that would be reasonably likely to result from the failure of the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. The Company's Year 2000 efforts to date have been undertaken largely with its existing engineering and information technology personnel. The Company does not separately track the costs incurred for such efforts and such costs are principally the related compensation costs for those personnel. The Company presently has no contingency plans for Year 2000 compliance problems that might arise, but will develop such contingency plans as the Company identifies situations in which Year 2000 compliance could be a problem. However, there can be no assurance that any contingency plan will be timely or effective to avoid a material disruption of the Company's operations. New Accounting Pronouncements 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, 1999. 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. 20 During the six months ended September 30, 1999, the Company adopted Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") issued by the American Institute of Certified Public Accountants (the "AICPA"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and new cost recognition principles and identifies the characteristics of internal use software. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, financial position or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risks The are no material changes with regards to quantitative and qualitative disclosures about market risks from that set forth in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. --------------------------- 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants. San Diego Superior Court Case No. 691635. As previously reported, this putative class action was filed in 1995 in the Superior Court of the State of California for the County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that filed for bankruptcy, conspired with its own officers and professionals, and with various telephone suppliers (including the Company) to defraud investors in Amtel by operating a Ponzi scheme. See Item 3, Legal Proceedings of Part I of the Company's Form 10-KSB for the fiscal year ended March 31, 1996 and Item 1, Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended September 30, 1996. On September 28, 1998, the 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 and the appeal is pending. The Company disputes liability and intends to defend this matter vigorously, although the Company cannot predict the ultimate outcome of this litigation. Item 3. Defaults by the Company on its Senior Securities The Company is in default of certain financial covenants contained in the loan agreements between the Company and its bank. As a result thereof, the bank has the right to accelerate the maturity of debt outstanding under the loan agreements in the aggregate principal amount of $12,215 at September 30, 1999. The Company is presently attempting to renegotiate the terms of the loan agreements and believes, but cannot assure, that its efforts will be successful. However, if the Company is unable to renegotiate the terms of the loan agreements on terms satisfactory to the Company or at all, the Company would be forced to seek alternative financing arrangements. In that event, there is no assurance that the Company's efforts to secure such alternative financing arrangements would be successful, or that if successful, that such financing would be on terms satisfactory to the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The following exhibits are filed herewith as part of this report: Exhibit No. Description of Exhibit ------- ---------------------- 10.1 Employment Agreement between Elcotel, Inc. and Michael J. Boyle dated October 15, 1999. 27 Financial Data Schedule (Edgar Filing only) (b) Reports on Form 8-K: None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Elcotel, Inc. ----------------------------------- (Registrant) Date: November 15, 1999 By: /s/ William H. Thompson ---------------------------------- William H. Thompson Senior Vice President, Administration and Finance (Principal Financial Officer) By: /s/ Scott M. Klein ---------------------------------- Scott M. Klein Controller (Principal Accounting Officer) 23 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made and entered into as of October 15, 1999, by and between ELCOTEL, INC. (hereinafter referred to as the "Company"), a Delaware corporation, and MICHAEL J. BOYLE (hereinafter referred to as the "Executive"). R E C I T A L S WHEREAS, the Company desires to employ the Executive, and the Executive is desirous of accepting such employment by the Company, upon the terms and conditions hereinafter set forth, NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the satisfaction of the conditions set forth in this Section 1, the Company agrees to employ the Executive, and the Executive agrees to render his services to the Company, as its President and Chief Executive Officer, during the Term (as defined below). Following the next shareholder meeting of the Company, the Executive shall be appointed to serve as a member as the Board of Directors of the Company. The Executive shall render his services at the direction of the Board of Directors of the Company at the Company's principal executive offices. The Executive agrees to use his best efforts to promote and further the business, reputation and good name of the Company and the Executive shall promptly and faithfully comply with all instructions, directions, requests, rules and regulations made or issued from time to time by the Company. 2. TERM. The term of employment pursuant to this Agreement (the "Term") shall commence on October 15, 1999 and continue until October 11, 2002; provided that either party may terminate this Agreement by providing the other with 30 days prior written notice of such termination. Notwithstanding the foregoing, this Agreement may be terminated by the Company in the event that "Cause" for such termination exists as provided in Section 7 below. In the event the Company terminates this Agreement or the Executive's employment other than for Cause, the Company shall pay the Executive Severance Compensation as provided in Section 3(c) hereof. In the event (a) the Company terminates this Agreement or the Executive's employment for Cause, or (b) the Executive terminates this Agreement or his employment for any reason, the Executive shall not be entitled to any Severance Compensation or other compensation of any kind following the effective date of such termination. 3. COMPENSATION. As full and complete compensation for all the Executive's services hereunder, the Company shall pay the Executive the compensation described below. (A) CASH COMPENSATION. (i) During the Term, the Company shall pay the Executive an annual base salary of $250,000 ("Base Salary"). In the event this Agreement is terminated prior to the expiration of the Term, the Company shall pay to the Executive, in addition to any Severance Compensation payable under Section 3(c), any accrued but unpaid Base Salary through the termination date. (ii) In addition to the Base Salary, during the Term, the Company shall pay to the Executive an annual bonus (a "Bonus") in an amount up to 50% of the Executive's Base Salary during the relevant bonus period as the board of directors of the Company shall determine in its discretion, provided that the Bonus for the First Bonus Period (as defined below) shall be not less that 25% of the Executive's Base Salary during such First Bonus Period. A Bonus shall be paid (x) for the period from the beginning of the Term through December 31, 2000 (the "First Bonus Period"), (y) for the 2001 calendar year, and (z) for the period from January 1, 2002 through the end of the Term. In the event this Agreement or the Executive's employment is terminated by the Company or by the Executive for any reason, the Executive shall not be entitled to any Bonus Compensation for the period in which such termination occurs. (B) EQUITY COMPENSATION. (i) Concurrently with the execution and delivery of this Agreement, the Company shall issue to the Executive, as compensation and without cost to the Executive, options (the "Options") to purchase 539,988 shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock"), representing 4% of the shares of Common Stock that are currently issued and outstanding. Such Options shall be issued pursuant to a 1999 Stock Option Plan. The Options shall have an exercise price per share equivalent to the average closing price of the Company's Common Stock during the 20 business days prior to the execution of this Agreement. The Options shall vest and become exercisable as follows: 15,000 shares shall vest on the last day of each month during the first 24 months of the Term and 14,999 shares shall vest on the last day of each month during the next 12 months of the Term. In all cases the Options shall be subject to termination as provided below. The Executive shall have the right to exercise any vested Options at any time prior to October 15, 2004 and any Options not exercised within such deadline shall be deemed terminated and void. The Executive shall be entitled to exercise any vested Options through a "cashless exercise" in a broker escrow or other arrangement set forth in the 1999 Stock Option Plan, provided that such transaction does not adversely affect the Company. (ii) In the event this Agreement or the Executive's employment is terminated (x) by the Company for Cause, or (y) by the Executive for any reason, the Options shall cease vesting as of the date that the Company or the Executive provides notice of such termination, and any unvested Options shall immediately terminate and become void. In the event this Agreement or the Executive's employment is terminated by the Company other than for Cause, the Options shall vest as and to the extent provided in Section 3(c) hereof. 2 (iii) Notwithstanding anything to the contrary otherwise contained herein except as may be provided in Section 3(b)(iv), if at any time during the Term the Company shall, by stock dividend, stock split, combination, reclassification or exchange, or through merger, consolidation or otherwise, change its shares of Common Stock into a different number, kind or class of shares or other securities or property, then the Board of Directors shall arrange for a successor or surviving corporation, if any, to grant replacement options, or to adjust the number of shares covered by the Options and the price of each share. The determination of the Board of Directors shall be conclusive. (iv) Notwithstanding anything to the contrary otherwise contained herein, if at any time during the Term, there shall be a Change of Control (as defined below) all unvested Options shall immediately vest in their entirety. For purposes of this provision, the occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (A) If any transaction occurs whereby substantially all of the assets of the Company are transferred, exchanged or sold to a non-affiliated third party other than in the ordinary course of business; (B) If a merger or consolidation involving the Company occurs and the stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation at least fifty percent (50%) of the outstanding common stock of the surviving entity or the entity into which the common stock of the Company is converted; or (C) If any person (including, without limitation, any individual, partnership or corporation), other than Fundamental Management Corporation and its affiliates or other than Wexford Management LLC and its affiliates, becomes the owner, directly or indirectly, of securities of the Company or its successor (or a parent company thereof) representing thirty-five (35%) or more of the combined voting power of the Company's or its successor's (or a parent's, as the case may be) securities then outstanding. (C) SEVERANCE COMPENSATION. In the event the Company terminates this Agreement or the Executive's employment other than for Cause, the Company shall pay to the Executive as Severance Compensation $250,000, provided that in the event the remainder of the Term is less than 12 months, such Severance Compensation shall be prorated for the remainder of the Term. For example, if the Company terminates this Agreement other than for Cause with 8 months remaining in the Term, the Company shall pay the Executive Severance Compensation of $166,667. The Executive shall also receive as Severance Compensation (i) an immediate vesting of those Options that would have vested during the 12 months after such termination, or such lesser period through the end of the Term, if the Executive's employment had not been terminated, and (ii) continuation of medical benefits for the lesser of 12 months or the remainder of the Term. 3 4. NO OTHER COMPENSATION. Except as otherwise expressly provided herein, or in any other written document executed by the Company and the Executive, no other compensation or other consideration shall become due or payable to the Executive on account of the services rendered hereunder. The Company shall have the right to deduct and withhold from the compensation payable to the Executive hereunder any amounts required to be deducted and withheld under the provisions of any statute, regulation, ordinance, order or any other amendment thereto, heretofore or hereafter enacted, requiring the withholding or deduction of compensation. 5. BENEFITS. (a) MEDICAL & 401K BENEFITS. The Company agrees that the Executive shall be entitled to participate in any retirement, 401K, disability, medical, pension, profit sharing, group insurance, or any other plan or arrangement, or in any other benefits now or hereafter generally available to executives of the Company, in each case to the extent that the Executive shall be eligible under the general provisions thereof, provided that the Company shall waive any waiting period for participation in any such plan to the extent permitted under the plan. (b) RELOCATION EXPENSES. The Company shall pay the Executive $40,000 as reimbursement for moving and relocation expenses incurred by him and his immediate family in connection with his relocation to Sarasota and his temporary living expenses in Sarasota prior to such relocation. 6. RELOCATION. The Executive agrees to relocate to Sarasota, Florida no later than December 31, 2000. Prior to such relocation the Executive agrees that he shall rent a temporary residence in Sarasota and reside there in connection with the performance of his duties under this Agreement. 7. TERMINATION FOR CAUSE. The Company, by written notice to the Executive, may immediately terminate this Agreement and the Executive's employment hereunder for Cause. As used herein, a termination by the Company "for Cause" shall mean that the Executive has (i) failed or refused to perform a material part of his duties hereunder, (ii) materially breached the provisions of Sections 8, 9 or 10 hereof, (iii) acted fraudulently or dishonestly in his relations with the Company, (iv) committed larceny, embezzlement, conversion or any other act involving the misappropriation of Company funds or assets in the course of his employment, or (v) been indicted or convicted of any felony or other crime involving an act of moral turpitude. 8. CONFIDENTIAL INFORMATION. (a) Executive agrees that he will not at any time or place during his employment or after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the 4 generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Executive agrees that both during the course of his employment with Company and thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Executive agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Executive in the course of his employment duties with Company. (b) Executive agrees that during the course of his employment with the Company and for one year thereafter he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Executive agrees that he will not, during the course of his employment with the Company and for one year thereafter, engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Executive during the course of his employment with Company would be utilized. (d) The Executive recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 8 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Executive further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Executive, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Executive further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 8 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Executive under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 9. COVENANT NOT TO COMPETE WITH COMPANY. Executive further covenants and agrees that: (a) During the course of his employment with Company and for one year thereafter, Executive shall not undertake any employment or financial involvement with, or assistance of, any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones or in any other business in which the Company is engaged or has 5 current plans to engage as of the date of termination of employment. (b) Executive recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 9 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Executive further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Executive, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Executive further agrees that his violation of any of the terms of paragraph (a) of this Section 9 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Executive under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 10. PROPRIETARY INFORMATION. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones or relating to any other business in which the Company is engaged or has plans to engage (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Executive either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company or any other business in which the Company is engaged or has plans to engage, shall be the sole property of Company. Executive hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Executive shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Executive's obligations under this Section 10 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Executive at a reasonable rate for time actually spent by Executive at Company's request on such assistance after termination of Executive's employment with Company. If Company is unable, after reasonable effort, to secure Executive's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Executive's physical or mental incapacity or for any other reason whatsoever, Executive hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Executive's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Executive. 6 11. INDEMNIFICATION. Executive shall be indemnified by the Company with respect to claims made against him as a director, officer and/or employee of the Company and as a director, officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 12. NOTICES. All notices and other communications required or permitted hereunder shall be in writing (including facsimile, telegraphic, telex or cable communication) and shall be deemed to have been duly given when delivered by hand, faxed or mailed, certified or registered mail, return receipt requested and postage prepaid: If to the Company: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: Bill Thompson, Chief Financial Officer Fax No.: 941-751-4716 If to the Executive: Michael J. Boyle 5316 Shoreline Circle Lake Forest, FL 32771 Fax No.: 407-302-4171 13. APPLICABLE LAW. This Agreement was negotiated and entered into within the State of Florida. All matters pertaining to this Agreement shall be governed by the laws of the State of Florida applicable to contracts made and to be performed wholly therein. Nothing in this Agreement shall be construed to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any material present or future statute, law, governmental regulation or ordinance as a result of which the parties have no legal right to contract or perform, the latter shall prevail, but in such event the provision(s) of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it or them within the legal requirements. 14. ENTIRE AGREEMENT; MODIFICATION; CONSENTS AND WAIVERS. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements or understandings, written or oral, between the parties with respect to the subject matter hereof. No interpretation, change, termination or waiver of or extension of time for performance under any provision of this Agreement shall be binding upon any party unless in writing and signed by the party intended to be bound thereby. Except as otherwise provided in this Agreement, no waiver of or other failure to exercise any right under or default or extension of time for performance under any provision or this Agreement shall affect the right of any party to exercise any subsequent right under or otherwise enforce said provision or any other provision hereof or to exercise any right or remedy in the event of any other default, whether or not similar. 7 15. SEVERABILITY. The parties acknowledge that, in their view, the terms of this Agreement are fair and reasonable as of the date signed by them, including as to the scope and duration of post-termination activities. Accordingly, if any one or more of the provisions contained in this Agreement shall for any reason, whether by application of existing law or law which may develop after the date of this Agreement, be determined by an arbitrator or court of competent jurisdiction to be excessively broad as to scope of activity, duration or territory, or otherwise unenforceable, the parties hereby jointly request such court to construe any such provision by limiting or reducing it so as to be enforceable to the maximum extent in favor of the Company compatible with then-applicable law. If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall nonetheless be determined by an arbitrator or court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 16. ASSIGNMENT. The Company may, at its election, assign this Agreement or any of its rights hereunder. This Agreement may not be assigned by the Executive. 17. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 18. ARBITRATION. The parties agree to submit any controversy, claim or dispute of whatever nature arising between them, including without limitation, those arising out of or relating to this Agreement or the construction, interpretation, performance, breach, termination, enforceability or validity of this Agreement or the arbitration provisions contained in this Agreement, for determination solely by binding arbitration, in Tampa, Florida by one arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator shall base his or her award or decision on applicable law and judicial precedent, shall include in such award or decision the findings of fact and conclusions of law upon which the award or decision is based and shall not grant any relief or remedy that a court could not grant under applicable law. The parties agree to be conclusively bound by the award or decision of such arbitrator. Judgment on the award or decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. Employee and the Company each hereby waive any and all rights to request or receive punitive damages in connection with any action or proceeding related to the subject matter of this Agreement. Employee and the Company each hereby waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this Agreement. 19. SURVIVAL. The provisions of Sections 8 through 18 of this Agreement shall survive any expiration or termination of this Agreement. 8 IN WITNESS WHEREOF, that parties hereto have executed this Employment Agreement as of the date first above written. ELCOTEL, INC. BY: /S/ C. SHELTON JAMES -------------------- Name: C. Shelton James Title: Chairman MICHAEL J. BOYLE /S/ MICHAEL J. BOYLE -------------------- MICHAEL J. BOYLE 9 EX-27 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA. 1,000 6-MOS MAR-31-2000 SEP-30-1999 26 0 12,782 2,010 11,029 26,342 10,494 4,940 69,193 20,795 64 0 0 136 48,198 69,193 19,300 26,209 14,050 19,574 0 314 277 (2,938) (1,015) (1,923) 0 0 0 (1,923) (.14) (.14)
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