PROSPECTUS
TECHNOLOGY SERVICE GROUP, INC. [LOGO]
T S G
1,000,000 Units
Each Unit Consisting of One Share of Common Stock
and
One Redeemable Warrant
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Technology Service Group, Inc. (the "Company") hereby offers 1,000,000
units (the "Units"), each Unit consisting of one share of common stock, $.01 par
value ("Common Stock"), and one redeemable warrant ("Redeemable Warrant"). The
Common Stock and Redeemable Warrants will be separately tradeable commencing
upon issuance. Two Redeemable Warrants entitle the registered holder thereof to
purchase one share of Common Stock at a price of $11.00, subject to adjustment,
at any time from issuance until May 9, 1999. The Redeemable Warrants are subject
to redemption by the Company, in whole and not in part, commencing February 10,
1997 at a redemption price of $0.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the average closing bid price of the Common Stock
as reported on the Nasdaq Small Cap Market ("Nasdaq") equals or exceeds $12.00
per share, subject to adjustment, for any 20 consecutive trading days ending on
the fifth trading day prior to the date of notice of redemption. See
"Description of Securities."
Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Redeemable Warrants, and there can be no assurance that such
a market will develop after the completion of the Offering or, if developed,
that it will be sustained. The offering price of the Units and the exercise
price and other terms of the Redeemable Warrants were determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's assets or book value, results of operations or any other established
criteria of value. See "Risk Factors," "Description of Securities" and
"Underwriting." The Units, the Common Stock and the Redeemable Warrants have
been accepted on Nasdaq under the symbols "TSGIU," "TSGI" and "TSGIW,"
respectively.
Investors purchasing the Units will own 22% (25% if the over-allotment
option is exercised) of the Common Stock of the Company upon completion of this
Offering. Other stockholders, including existing stockholders, will own 78% (75%
if the over-allotment option is exercised) of the Common Stock of the Company
upon completion of this offering. See "Risk Factors" and "Dilution."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
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THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discounts (1) Company (2)
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Per Unit ........ $9.00 $.81 $8.19
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Total (3) ....... $9,000,000.00 $810,000.00 $8,190,000.00
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(1) Does not include additional compensation to Brookehill Equities, Inc., the
representative of the several underwriters (the "Representative), in the
form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters, and other compensation payable to the
Representative.
(2) Before deducting estimated expenses of $840,000 payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option, exercisable within
45 days from the date of this Prospectus, to purchase up to 150,000
additional Units upon the same terms and conditions set forth above, solely
to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Proceeds to Company will be $10,350,000, $931,500 and $9,418,500,
respectively. See "Underwriting."
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The Units are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
the approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is expected
that delivery of the Units offered hereby will be made against payment therefor
at the offices of Brookehill Equities, Inc., New York, New York on or about May
15, 1996.
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BROOKEHILL EQUITIES, INC. JOSEPH STEVENS & COMPANY, L.P.
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May 10, 1996
<PAGE>
ADDITIONAL INFORMATION
Technology Service Group, Inc. has filed with the Securities and Exchange
Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement and
the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission.
The Company will furnish to its stockholders annual reports, which will
include financial statements audited by independent accountants, and quarterly
reports for the first three quarters of each fiscal year containing interim
unaudited financial information.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements, including the notes thereto, appearing elsewhere in this
Prospectus. Except where otherwise indicated, all share and per share data in
this Prospectus (i) give no effect to the issuance of 500,000 shares of Common
Stock upon the exercise of the 1,000,000 Redeemable Warrants; (ii) give no
effect to the 150,000 additional Units issuable upon exercise of the
Underwriters' over-allotment option; (iii) give no effect to 100,000 shares of
Common Stock issuable upon exercise of certain warrants to be issued to the
Representative to purchase 100,000 shares of Common Stock for $10.80 per share
of Common Stock (the "Representative's Warrants"); and (iv) assume no exercise
of stock options pursuant to various stock purchase and stock option plans of
the Company (the "Company Plans"). See "Description of Securities,"
"Underwriting" and "Management."
The Company
Technology Service Group, Inc. (the "Company") is engaged in the design,
development, manufacture and marketing of public communication products
consisting of payphone components, electronic wireline payphone products,
microprocessor-based wireline and wireless payphone products and related
payphone software management systems. The Company's products include what is
referred to in the payphone industry as "smart" payphone products sold under the
"Gemini", "Inmate", "GemStar" and "GemCell" trademarks. Smart payphone products
are based upon microprocessor technology and perform a variety of functions,
including calling card, debit card and credit card control, data storage, call
progress detection, call rating and maintenance, diagnostic and coin
administration functions. The Company is also a provider of payphone and
payphone component repair, refurbishment and upgrade conversion services to the
regulated telephone operating companies in the United States, which consist of
the operating subsidiaries of the seven Regional Bell Operating Companies
("RBOCs") and other local exchange carriers. The Company markets its products
and services primarily to the seven RBOCs in the United States and to
inter-exchange carriers and cellular providers in certain international markets.
The Company has derived substantially all of its revenues from sales to four
RBOCs. The Company has also entered the international market place for wireline
and cellular payphone products, which it believes provides an opportunity for
growth. See "Business" and "Risk Factors," including "Risks Associated with
International Markets."
On October 31, 1994, TSG Acquisition Corp., a non-operating company
wholly-owned by Wexford Partners Fund L.P. ("Wexford"), acquired all of the
outstanding capital stock of the Company pursuant to an Agreement and Plan of
Merger dated October 11, 1994 among Wexford, TSG Acquisition Corp., the Company
and the holders of a majority of the Company's preferred and common stock,
including Acor S.A. and Firlane Business Corp. (which are also current
stockholders of the Company). TSG Acquisition Corp. paid an aggregate of $3.5
million pursuant to the plan of merger, including contingent consideration that
was placed in escrow and distributed to former stockholders in September 1995.
The consideration consisted of $3,004,000 to acquire the outstanding capital
stock of the Company pursuant to the plan of merger and $496,000 to retire a
$400,000 subordinated master promissory note payable to former stockholders and
related accrued interest and preference fees of $96,000. Aggregate cash payments
to former stockholders, including the contingent consideration and the
retirement of the subordinated master promissory note, accrued interest and
preference fees, was $3,222,090. Consideration of $277,910 was withheld from
amounts payable to former stockholders to pay certain liabilities (the
"liabilities") of the Company. In connection with the acquisition, Acor S.A.
received aggregate consideration of $702,037, including $99,200 of principal and
related accrued interest and preference fees pursuant to the subordinated master
promissory note, and $680,843 in respect of Series C preferred stock, before a
pro rata share of the liabilities of the Company aggregating $78,006. Firlane
Business Corp. received aggregate consideration of $211,881, including $111,600
of principal and related accrued interest and preference fees pursuant to the
subordinated master promissory note, and $115,551 in respect of Series C
preferred stock, before a pro rata portion of the liabilities of the Company
aggregating $15,270. In conjunction with the acquisition, TSG Acquisition Corp.
was merged into the Company, which was then wholly-owned by Wexford.
Concurrently with the acquisition, the Company entered into an Investment
Agreement with Wexford, Acor S.A. and Firlane Business Corp. pursuant to which
the Company issued an aggregate of 3.5 million shares of Common Stock, $.01 par
value ("Common Stock"), to Wexford in exchange for the merger share held by
Wexford. Wexford sold 507,500 shares and 262,500 shares, respectively, to Acor
S.A. and Firlane Business Corp., pursuant to the terms of the Investment
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3
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Agreement. The consideration paid by Wexford, Acor S.A. and Firlane Business
Corp. for their common stock was $2,730,000, $507,500 and $262,500,
respectively. Also, the Company borrowed $2.8 million ($2,361,082 from Wexford
and $438,918 from Acor, S.A.) and issued subordinated promissory notes in
respect thereof due November 1, 1999 that bear interest at a rate of 10% per
annum (the "Affiliate Notes"). The Affiliate Notes will be repaid upon closing
of the Offering. See "The Company -- Development of the Company," "Use of
Proceeds," "Management -- Compensation of Directors," "Management -- Executive
Compensation," "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Transactions."
The Company, Wexford, Acor S.A., Firlane Business Corp. and A.T.T. IV, N.V.
("ATTI") have entered into a Stock Purchase and Option Agreement (the "Stock
Purchase Agreement"). Pursuant to the terms of the Stock Purchase Agreement,
Wexford, Acor S.A. and Firlane Business Corp. will sell to ATTI, and ATTI will
purchase, an aggregate of 366,300 shares of Common Stock at a price of $8.14 per
share and options to purchase an additional 183,150 shares of Common Stock at an
exercise price of $11.00 per share (the "Options") at a price of $.10 per
Option. Wexford will sell 285,714 shares and Options to purchase 142,857 shares.
Acor S.A. will sell 53,114 shares and Options to purchase 26,557 shares. Firlane
Business Corp. will sell 27,472 shares and Options to purchase 13,736 shares.
The consideration to be received by Wexford, Acor S.A. and Firlane Business
Corp. pursuant to the terms of the Stock Purchase Agreement will be $2,339,998,
$435,004 and $224,995, respectively, exclusive of the proceeds from the exercise
of Options. Consummation of the transaction is subject to the consummation of
this Offering and other customary conditions. The number of shares of Common
Stock and Options to be acquired by ATTI is subject to adjustment based upon an
aggregate sales price to ATTI of $2,999,997 at 91% of the initial public
offering price of the Units. The exercise price of the Options is also subject
to adjustment based upon the initial public offering price of the Units. See
"Security Ownership of Certain Beneficial Owners and Management."
The Offering
Securities Offered by
the Company ................... 1,000,000 Units, each Unit consisting of one
share of Common Stock and one Redeemable
Warrant. The Common Stock and the Redeemable
Warrants will be separately transferable
commencing upon issuance. See "Description
of Securities."
Redeemable Warrants ............. Two Redeemable Warrants entitle the holder
to purchase one share of Common Stock at a
price of $11.00 per share beginning on the
date of issuance and ending May 9, 1999. The
Redeemable Warrants are redeemable by the
Company at its option, in whole and not in
part, at a redemption price of $.05 per
Redeemable Warrant at any time commencing
February 10, 1997 on 30 days' prior written
notice, provided that the average closing
bid price of the Common Stock equals or
exceeds $12.00 per share for 20 consecutive
trading days ending within five days prior
to the date of the notice of redemption. See
"Description of Securities."
Shares of Common Stock
Outstanding Before Offering(1) 3,500,000
Shares of Common Stock
Outstanding After Offering .... 4,500,000
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(1) Does not include (i) 835,000 shares of Common Stock reserved for issuance
pursuant to the Company Plans of which 434,250 shares relate to options
heretofore granted (350,250 of which are exercisable at $1.00 per share
and 84,000 of which are exercisable at $5.00 per share), and does not
include (ii) 40,000 shares of Common Stock reserved for issuance upon
exercise of certain warrants at $4.00 per share. See "Description of
Securities" and "Capitalization."
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4
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Use of Proceeds ................. The Company will use the net proceeds of the
Offering to repay outstanding indebtedness
under its revolving credit facility in order
to reduce its interest expense. The
remaining proceeds, if any, together with
financing available to the Company under its
revolving credit facility will be used (i)
for working capital and other general
corporate purposes, (ii) to repay the
Affiliate Notes, (iii) for research and
development, (iv) to expand sales and
marketing efforts, (v) to improve management
information systems and purchase capital
equipment and (vi) to repay an outstanding
bank term note. The Company will require
funds anticipated to be available to the
Company under its revolving credit facility
to accomplish the use of funds described
above. If an event of default under such
facility were to occur, however, the
Company's ability in this regard could be
curtailed, and in such event, if other
sources of financing are not available to
the Company, the anticipated use of funds
would be changed as necessary to fund the
Company's working capital requirements. See
"Use of Proceeds" and "Risk Factors."
Risk Factors .................... The Securities offered hereby are
speculative and involve a high degree of
risk, including continuing control by the
existing stockholders, and immediate and
substantial dilution, and should not be
purchased by investors who cannot afford the
loss of their entire investment. See "Risk
Factors" and "Dilution."
Nasdaq Symbols:
Units ......................... "TSGIU"
Common Stock .................. "TSGI"
Redeemable Warrants ........... "TSGIW"
TSG(R), Gemini System II(R), Gemini, InMate, GemStar, GemCell and CoinNet
are trademarks of the Company.
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5
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Summary Consolidated Financial Information
On October 31, 1994, TSG Acquisition Corp. acquired in a purchase
transaction (the "Acquisition") all of the outstanding capital stock of the
Company pursuant to an Agreement and Plan of Merger (the "Purchase Agreement")
dated October 11, 1994 for cash consideration of $2,396,381. In addition,
promissory notes payable to former stockholders at October 30, 1994 aggregating
$400,000, and related accrued interest and preference fees of $96,000, and
certain other obligations of the Company aggregating $277,910 were retired.
Further, additional consideration of $329,709, consisting of cash of $230,117
and a subordinated note of the Company in the principal amount of $99,592, was
placed in escrow. The escrow consideration, the distribution of which was
contingent upon compliance with indemnification provisions set forth in the
Purchase Agreement, was distributed to former stockholders in September 1995.
The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase price of $3,170,291, exclusive of contingent
consideration, was pushed down and allocated to the net assets acquired based
upon their fair values. The excess of the purchase price over the estimated fair
value of the net assets acquired of $3,853,877 was recorded as goodwill. Upon
distribution of the escrow consideration in September 1995, the aggregate
purchase price was increased to $3,500,000, which increased the excess purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $329,709. Prior to the Acquisition, the Company is sometimes
referred to as the "Predecessor."
The summary consolidated financial information set forth below for periods
prior to the Acquisition relates to the Predecessor and for periods subsequent
to the Acquisition relates to the Company. See "The Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Company's Consolidated Financial Statements, including the notes thereto,
included elsewhere in this Prospectus. The following summary consolidated
financial information is derived from and should be read in conjunction with
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
including notes thereto, appearing elsewhere in this Prospectus. The audited
consolidated financial statements of the Company as of and for the years ended
March 29, 1991 and April 3, 1992 and as of April 2, 1993 and the Accountants'
Reports thereon are not included in this Prospectus.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Predecessor
-----------------------------------------------------------------------------------
Year Ended Seven Months
--------------------------------------------------------------- Ended
March 29, April 3, April 2, April 1, October 30,
1991 1992 1993 1994 1994(1)
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ..................... $30,672,130 $29,310,095 $30,535,968 $31,048,706 $11,108,653
Net income (loss) ............. $ 1,361,519 $(1,634,832) $(1,998,497) $(5,485,425) $ (423,366)(2)
Income (loss) per
common and
common equivalent
share(3)(4) ................
Weighted average
number of common
equivalent shares
outstanding(3)(4) ..........
</TABLE>
Company
---------------------------------------------
Five Months Two Months Nine Months
Ended Ended Ended
March 31, December 31, December 29,
1995(1) 1994(1) 1995(1)
----------- ------------ ------------
Net sales ..................... $ 9,161,359 $3,261,335 $23,677,489
Net income (loss) ............. $(1,065,581) $ (389,036) $ 660,403
Income (loss) per
common and
common equivalent
share(3)(4) ................ $ (0.30) $ (0.11) $ 0.17
Weighted average
number of common
equivalent shares
outstanding(3)(4) .......... 3,541,778 3,541,778 3,870,889
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(1) The results of operations and financial data for the periods presented may
not be indicative of the results of operations and financial data for the
full fiscal year.
(2) Includes a gain of $261,022 from the settlement of litigation and includes
restructuring credits of $534,092. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Assuming the purchase and merger transaction had occurred on April 2, 1994,
the Company's and the Predecessor's net loss for the year ended March 31,
1995 would have approximated $1,599,000, or $.45 per common and common
equivalent share outstanding of 3,541,778 shares.
(4) Income (loss) per common and common equivalent share and the weighted
average number of common equivalent shares outstanding are not presented
for periods prior to the five months ended March 31, 1995 since such data
is not meaningful for periods prior to the Acquisition on October 31, 1994.
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<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
Predecessor
----------------------------------------------------------------------------------
March 29, April 3, April 2, April 1, October 30,
1991 1992 1993 1994 1994
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Total assets .................. $17,275,310 $16,453,263 $18,868,906 $13,421,291 $10,397,376
Total liabilities ............. 12,964,710 10,595,299 15,011,222 14,826,335 12,218,506
Working capital (deficit) ..... 2,897,855 2,882,973 1,270,335 (3,264,237) (611,053)
Stockholders' equity
(deficit) .................. $ 4,310,600 $ 5,857,964 $ 3,857,684 $(1,405,044) $(1,821,130)
</TABLE>
Company
---------------------------------------------
March 31, December 31, December 29,
1995 1994 1995(1)
----------- ------------ -----------
Total assets .................. $15,669,648 $15,675,330 $22,289,684
Total liabilities ............. 13,564,669 12,897,764 19,207,438
Working capital (deficit) ..... 1,694,567 1,914,561 2,663,151
Stockholders' equity
(deficit) .................. $ 2,104,979 $ 2,777,566 $ 3,082,246
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(1) Assuming that the net proceeds of the Offering are used to repay
outstanding revolving credit indebtedness and the Company subsequently
draws down funds available under its revolving credit facility to repay
the Affiliate Notes in the amount of $2,800,000 and a bank term note of
$348,214 (see "Use of Proceeds" and "Capitalization"), total assets, total
liabilities, working capital and stockholders' equity at December 29, 1995
after giving effect to the Offering would have been $22,289,684,
$11,857,438, $4,757,794 and $10,432,246, respectively.
The following sets forth a summary of selected statement of operations data
(unaudited) for the quarters ended July 1, 1994 and September 30, 1994, for the
month ended October 30, 1994 and two months ended December 31, 1994 and for the
quarters ended June 30, 1995, September 29, 1995 and December 29, 1995.
Predecessor
-------------------------------------------------
Quarter Ended One Month
------------------------------ Ended
July 1, September 30, October 30,
1994 1994 1994
---------- ----------- -------------
Net sales .................. $4,862,795 $5,045,289 $1,200,569
Net income (loss) .......... $ 1,390(1) $ (357,752)(2) $ (67,004)(3)
<TABLE>
<CAPTION>
Company
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Two Months Quarter Ended(4)
Ended ------------------------------------------------------
December 31, June 30, September 29, December 29,
1994(4) 1995 1995 1995
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales .................. $3,261,335 $6,354,145 $7,737,680 $9,585,664
Net income (loss) .......... $ (389,036) $ (230,658) $ 236,104 $ 654,957
</TABLE>
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(1) Includes a gain of $261,022 from the settlement of litigation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Includes restructuring credits of $25,493. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Includes restructuring credits of $508,599. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) Includes the effects of the Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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7
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the Securities offered hereby.
History of Prior Losses; Recent Results
The Company incurred losses of $1,998,497, $5,485,425 and $1,448,947 for
the years ended April 2, 1993, April 1, 1994 and March 31, 1995, respectively.
The loss of $1,448,947 for the year ended March 31, 1995 is composed of a loss
of $423,366 of the Predecessor for the seven months ended October 30, 1994 and a
loss of $1,065,581 for the Company for the five months ended March 31, 1995.
During the three months ended September 29, 1995 and December 29, 1995, the
Company generated profits of $236,104 and $654,957, respectively, as compared to
net losses of $357,752 and $456,040 for the three months ended September 30,
1994 and December 31, 1994, respectively. The net loss of $456,040 for the three
months ended December 31, 1994 is composed of a loss of $67,004 of the
Predecessor for the one month ended October 30, 1994 and a loss of $389,036 for
the Company for the two months ended December 31, 1994. During the nine months
ended December 29, 1995, the Company generated a profit of $660,403 as compared
to a net loss of $812,402 for the nine months ended December 31, 1994. The net
loss of $812,402 for the nine months ended December 31, 1994 is composed of a
loss of $423,366 for the Predecessor for the seven months ended October 30, 1994
and a loss of $389,036 for the Company for the two months ended December 31,
1994. Although recent increases in sales and a restructuring initiated during
the fiscal year ended April 1, 1994 have had the effect of improving the
Company's recent results, there can be no assurance that the Company's
operations will remain profitable. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements."
Dependence on Key Customers
The Company derives substantially all of its revenues from certain of the
RBOCs. During fiscal 1993, Bell Atlantic Corp. ("Bell Atlantic"), BellSouth
Telecommunications, Inc., NYNEX Corp. ("NYNEX") and Southwestern Bell Telephone
Company ("SWB") collectively accounted for approximately $24.8 million (81%) of
the Company's sales. During fiscal 1994, Bell Atlantic, BellSouth
Telecommunications, Inc. and NYNEX collectively accounted for approximately
$22.4 million (73%) of the Company's sales. During fiscal 1995, Ameritech
Services, Inc., Bell Atlantic, SWB and NYNEX collectively accounted for
approximately $14.6 million (72%) of the Company's sales. During the nine months
ended December 29, 1995, Bell Atlantic, NYNEX and SWB collectively accounted for
approximately $20.5 million (86%) of the Company's sales. Each of the customers
named above accounted for at least 10% of the Company's sales for the periods
indicated. The Company anticipates that it will continue to derive most of its
revenues from such customers, and other regional telephone companies, for the
foreseeable future. The loss of any one of such RBOC customers or a significant
reduction in sales to such RBOCs would have a material adverse effect on the
Company's business. See "Business--Sales and Markets--Domestic." Recently, two
mergers between Pacific Telesis Inc. and SBC Communications, Inc. (the parent of
SWB), and between Bell Atlantic and NYNEX were announced. The immediate effect
of the two mergers, if completed, on the Company will be a reduction in the
number of customers and potential customers of its business. The Company cannot
predict the impact that such mergers or other future mergers will or may have on
the Company's business.
The Company's prospects for continued profitability are largely dependent
upon the RBOC's upgrading the technological capabilities of their installed base
of payphones, and utilizing the Company's products and services for such upgrade
conversion programs. To date, the Company believes that two of the seven RBOC's
have commenced or completed a technological upgrade conversion program for their
installed base of payphones. One of such companies, which is a significant
customer of the Company, has entered into a three-year $21.3 million sales
agreement with the Company in connection with the upgrade of a portion of its
installed base of payphones. Primarily as a result of such agreement, the
Company's sales of smart payphone products increased to approximately $15.1
million for the first nine months of fiscal 1996 as compared to $3.3 million for
the first nine months of fiscal 1995. In December 1995, the Company entered into
an amendment to a sales agreement with another RBOC, also a significant customer
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of the Company, that provides for the sale of approximately $12 million of smart
products and other components over an eight-month period commencing November 1,
1995. Both of these sales agreements may be terminated at the option of the
customer upon prior notice to the Company. The termination of these or any of
the Company's sales agreements could have a material adverse effect on the
Company's business. Further, any assessment of damages under the Company's sales
contracts could have a further material adverse effect on the Company's
operating results and liquidity. The Company is also competing for another smart
payphone award with one of its significant customers. The Company's prospects
are dependent upon this award as well as its ability to obtain other sales
agreements with the RBOCs in the future. Further, the Company's ability to
maintain and/or increase its sales is dependent upon its ability to compete for
and maintain satisfactory relationships with the RBOCs, particularly those
significant customers referred to above. See "Business--Sales and
Markets--Domestic" and "Business--Changing Product Mix." Prior to a
restructuring instituted in 1994, the Company experienced difficulties with a
first generation smart payphone product, which difficulties subsequently were
remedied. Such difficulties, however, resulted in the termination of a contract
for such product with one of the Company's then significant RBOC customers (see
"The Company--Development of the Company--Restructuring," "Business--Sales and
Markets--Domestic" and "Business--Changing Product Mix"). There can be no
assurances that similar difficulties will not occur in the future. See
"Business--Changing Product Mix" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and
"Business."
Changing Product Mix
The Company's business is shifting from repair and refurbishment services
to the design and manufacture of smart payphone products. The Company's business
and prospects for growth are presently dependent upon, among other things,
market acceptance and success of its smart payphone products, as well as the
development of other smart payphone products containing additional advanced
features. If the Company is unable to attract the interest of RBOCs to deploy
the Company's smart payphone products, including those developed in the future,
the Company's sales revenues, business and prospects for growth would be
materially and adversely affected. See "Business--Changing Product Mix" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Changing Regulatory Environment
The Company believes that the regulatory climate in the United States over
recent years has begun to influence the RBOCs deployment of public communication
products. The Company also believes that the RBOCs have begun to upgrade their
payphone base with smart products that reduce their cost of management,
maintenance and coin administration and that include revenue enhancement
features. The deployment and business strategies of the public communication
divisions of the RBOCs have affected and will continue to affect the Company's
business. To the extent that these business strategies were to change, for
regulatory reasons or otherwise, the Company's prospects would be materially and
adversely affected. On February 8, 1996, the President signed into law the
Telecommunications Act of 1996, which deregulates many elements of the
telecommunications industry as a means of stimulating competition. This
deregulation could affect the payphone products industry. Although the Company
believes that deregulation generally will benefit the Company, there can be no
assurance that the Company will benefit from deregulation or that it will not be
adversely affected by deregulation. See "Business--The Public Payphone
Industry--Domestic Regulatory Outlook."
Dependence on Certain Manufacturers; Single Sources of Supply; Possible
Inventory Increase
The Company generally assembles its smart payphone products from assemblies
produced by certain manufacturers under contractual arrangements. To the extent
that such manufacturers encounter difficulties in their production processes
that delay shipment to the Company or that affect the quality of items supplied
to the Company, the Company's ability to perform its sales agreements or
otherwise to meet supply schedules with its customers can be adversely affected.
In April 1995, the Company determined that certain of its products were subject
to failure due to contamination introduced into the manufacturing process by the
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Company's contract manufacturer. As a result, the Company recalled approximately
5,500 units for repair or replacement by the contract manufacturer. Although the
recall and associated shipment delays had an adverse impact on the Company's
operating results during the first quarter of fiscal 1996, the Company has been
able to maintain a satisfactory relationship with the affected customer. See
"Business--Manufacturing, Assembly and Sources of Supply." There can be no
assurance, however, that similar problems will not arise in the future. In the
event that contract manufacturers delay shipments or supply defective materials
to the Company in the future, and such delays or defects are material, the
Company's customer relations could deteriorate and its sales and operating
results could be materially and adversely affected. See
"Business--Manufacturing, Assembly and Sources of Supply" and "Legal Proceedings
and Disputes."
The majority of the Company's products in terms of revenues contain
components or assemblies that are purchased from single sources. The Company
believes that there are alternative sources of supply for most of the components
and assemblies currently purchased from single sources. Some of the components
and assemblies used by the Company for which there are not immediately available
alternative sources of supply are provided to the Company under standard
purchase arrangements. If a shortage or termination of the supply of any one or
more of such components or assemblies were to occur, however, the Company's
business could be materially and adversely affected. In such event, the Company
would have to incur the costs associated with redesigning its products to
include available components or assemblies or otherwise obtain adequate
substitutes, which costs could be material. Also, any delays with respect to
redesigning products or obtaining substitute components would materially
adversely affect the Company's business. See "Business--Manufacturing, Assembly
and Sources of Supply" and "Legal Proceedings and Disputes."
The Company has entered into two agreements pursuant to which it is
obligated to acquire certain product inventory in prescribed time periods. The
Company presently anticipates that scheduled purchases under such contracts
through December 1996 will exceed sales requirements as a result of changes in
the Company's customer delivery requirements. Although the Company is
encouraging its customer to accelerate purchases and is seeking to reschedule
deliveries pursuant to such agreements, an increase in inventories related to
such agreements is anticipated and such increase could approximate as much as
$2.0 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and
"Business--Changing Product Mix."
Fixed Price Products
The Company's agreements with its manufacturers generally provide that the
Company will bear certain cost increases incurred by the manufacturer.
Accordingly, the Company's manufacturing costs may fluctuate based on costs
incurred by its contract manufacturers and such fluctuations could have a
material and adverse impact on earnings. The Company's sales agreements with
customers generally have fixed product prices with limited price escalation
provisions. Two of the Company's sales agreements commit the customer to
purchase specific quantities of the Company's products at specified prices,
subject to the cancellation provisions of such agreements. Other sales
agreements, however, do not commit the customer to purchase specified quantities
of the Company's products. Consequently, there is a risk that the Company may
not be able to pass on price increases to its customers. In the event the
Company's costs increase or orders are lost due to price increases, the
Company's profitability would be adversely affected. See "Business--Sales and
Markets--Domestic," "Business--Changing Product Mix" and
"Business--Manufacturing, Assembly and Sources of Supply."
Competition
The market for payphone products is highly competitive. Other companies
offer products similar to the Company's products and target the same customers
as the Company. The Company believes its ability to compete depends upon many
factors within and outside its control, including the timing and market
acceptance of new products developed by the Company and its competitors,
performance, price, reliability and customer service and support. The Company's
primary competitors in the United States include Protel Inc., Elcotel, Inc.,
Intellicall, Inc., Lucent Technologies, Inc. ("Lucent") and International
Totalizing Systems, Inc., and with respect to repair and refurbishment services,
Restor Industries, Inc. The Company also competes with numerous foreign
companies marketing products in the United States, including Northern Telecom,
Inc.
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Many of the Company's competitors are substantially larger than the Company
and have significantly greater financial, technical and marketing resources. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. It is also possible that new competitors may emerge and acquire
significant market share. Possible new competitors include large foreign
corporations, the Company's RBOC customers and other entities with substantial
resources. In addition, as a result of the Telecommunications Act of 1996, the
RBOCs will be permitted to manufacture and provide telecommunications equipment
and to manufacture customer premises equipment when certain competitive
conditions have been met. It is possible that one or more RBOCs will decide to
manufacture payphone products, which would increase the competition faced by the
Company and could decrease demand for the Company's products by such RBOCs.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures will not
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, it is unlikely that the Company will
become a significant supplier of smart payphone products to all seven of the
RBOCs since competition for business with the RBOCs is intense. See
"Business--Competition."
Risks Associated With International Market
The Company's export sales to international markets approximated $551,000,
$798,000 and $1.4 million during fiscal 1993, 1994 and 1995, respectively. The
Company's export sales during the nine months ended December 29, 1995
approximated $558,000. Substantially all of the Company's international sales
are direct sales to foreign customers and resellers. The Company believes that
the international public communications market represents a growth opportunity.
The Company, however, has limited experience exporting products and operating
outside the United States and there can be no assurance that the Company will be
able to generate significant revenues from international business. Conducting
business internationally is subject to a number of potential risks, including
political instability, foreign currency fluctuations, adverse movements in
exchange rates, economic instability, the imposition of tariffs and import and
export controls, changes in governmental policies (including U.S. policy toward
these countries), general credit and business risks and other factors, one or
more of which, if they occur, could have an adverse effect on the Company's
ability to generate international sales or operations. During the later part of
fiscal 1995 and during the nine months ended December 29, 1995, the Company's
largest foreign customer ceased importing the Company's products as a result of
the devaluation of the Mexican peso. See "Business--Sales and
Markets--International." The Company's sales to date have been denominated in
U.S. dollars and as a result, no losses related to currency fluctuations have
been incurred. For the same reason, the Company has not engaged in currency
hedging activities. There is no assurance, however, that the Company will be
able to continue to export its products in U.S. dollar denominations or that its
business will not become subject to significant exposure to foreign currency
risks. In addition, the Company intends to develop wireline payphone products
for international CCITT applications (see "Business -- Products and Services"),
and there is no assurance that the Company will be able to successfully develop
or market such products. Finally, many of the Company's known and potential
international competitors have substantially more financial and other resources
than the Company and, therefore, are formidable competitors. See
"Business--Competition" and "Business--Sales and Markets--International."
Possible Need For Additional Financing
The Company believes, based on its current plans and assumptions relating
to its operations, that the proceeds from this Offering, together with projected
cash flow from operations and available borrowings under its working capital
facility, will be sufficient to satisfy its anticipated cash requirements for at
least twelve months following the consummation of this Offering. In the event
that the Company's plans or the basis for its assumptions change or prove to be
inaccurate or the proceeds of this Offering or cash flow prove to be
insufficient to fund the Company's operations (due to unanticipated expenses,
loss of sales revenues, problems, operating difficulties or otherwise), the
Company would be required to seek additional financing. In such event, there can
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be no assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Relationships and Transactions."
Limitations on Borrowing; Certain Covenants
Under the terms of its working capital facility with a bank, the Company is
subject to certain covenants which limit its ability to incur additional
indebtedness. In addition, the loan agreement pertaining to such facility limits
advances to the Company to specified percentages of the Company's eligible
accounts receivable and inventories. The Company is currently in compliance with
all covenants under the facility. The Company intends to use the net proceeds of
the Offering to repay outstanding indebtedness under its working capital
facility in order to reduce its interest expense. See "Use of Proceeds." The
Company will then use the financing available under the facility to fund the use
of proceeds described herein and to finance its on-going working capital needs.
If an event of default under the existing working capital facility were to
occur, however, the Company's ability in this regard could be curtailed. In such
event, the Company would seek alternative financing sources and, if such
financing were not obtained, the anticipated use of proceeds of this Offering
would be changed as necessary to provide for the Company's on-going working
capital needs. See "Use of Proceeds." Prior to October 31, 1994, the Company was
periodically in default under the loan agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Significant Control by Existing Stockholders
Upon completion of this Offering, Wexford will beneficially own
approximately 54% of the outstanding Common Stock after giving effect to a
proposed sale pursuant to the terms of a Stock Purchase Agreement (51% assuming
the Options contemplated thereby are exercised). See "Security Ownership of
Certain Beneficial Owners and Management." As a result, Wexford will be able to
control most matters requiring approval by the stockholders of the Company, such
as the election of directors and a merger or consolidation of the Company. Under
certain circumstances, such control could prevent stockholders from recognizing
a premium over the then current market price for their Common Stock. See
"Management," "Security Ownership of Certain Beneficial Owners and Management"
and "Description of Securities."
Risk of Competing Communication Technologies
Telecommunications technology is constantly changing. Alternative means of
communicating, such as radio-based paging services, cellular mobile telephone
services and personal communication services are becoming more popular. To date,
such alternative means of communicating have not reduced the need for or
replaced payphones. As competing technologies are developed, however, or become
substantially less expensive, there is some risk that public payphones will
become less widely used. In such event, the demand for payphone products and
services could be materially and adversely affected. In addition, even if
payphones continue to exist or proliferate world-wide, technological advances
could occur that would render the Company's technology and know-how
non-competitive. Such development would have a material adverse effect on the
Company. See "Business--Competition."
Potential Environmental Liabilities
One of the Company's former facilities in Florida is currently the subject
of evaluation by the Florida Department of Environmental Protection (the
"FDEP"). The Company has completed the assessment and monitoring activities
agreed upon with the FDEP, determined that contamination of the site was below
concentration level guidelines set by the FDEP and filed with the FDEP what it
believes to be the final report with respect to such assessment and monitoring
activities. The Company has concluded, based on its clean-up, testing and
monitoring activities, that detected contaminant concentrations are minimal and
are generally within the state's maximum concentration guidelines, and that
trends of detected contaminant concentrations are declining. The Company
believes, but cannot assure, that the site will be granted a "no further action
status" and that continued monitoring or remediation activities will not be
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<PAGE>
required by the State. Accordingly, the Company has not accrued any additional
costs with respect to this site. It is possible, however, that the FDEP may
require further remedial or monitoring actions at such site. Accordingly, the
Company cannot estimate a range of costs, if any, that it may incur in the
future since such costs would be dependent upon the scope of additional response
actions, if any, required by the State of Florida.
The Company has been notified by the North Carolina Department of
Environment, Health and Natural Resources ("DEHNR") that it is a Potentially
Responsible Party ("PRP") that may be liable for undertaking response actions at
a facility for the treatment, storage, and disposal of hazardous substances
operated by Seaboard Chemical Corporation from 1975 to 1989 at Jamestown, North
Carolina. The Company has become a member of the PRP groups (the "Seaboard
Groups") formed to cooperatively respond to the DEHNR's Notices of
Responsibility and Imminent Hazard Order to undertake a surface removal action
and an initial remedial investigation at the site, and to take additional
response actions at the site, including a feasibility study and, if necessary,
soil and groundwater remedial action, that may be required pursuant to consent
orders that may be entered into among the PRP groups and the DEHNR. The Company
has been defined by the PRP groups as a small generator of hazardous substances
shipped to the site and is referred to as a "De Minimis" party. As a De Minimis
party, the Company's proportionate share of costs incurred by the PRP groups to
comply with response actions required by the DEHNR have been insignificant. With
respect to the Seaboard site, the Company contributed 1,100 gallons of waste of
a total of 19 million gallons. The Company executed a buy-out agreement with
respect to a Phase I clean-up (the cost of which aggregated $3.753 million) at a
buy-out price of $423. The aggregate cost of a Phase II remedial investigation
and remediation and the cost of post Phase I response actions are estimated to
be $28.5 million. The Company has received notification that it will be able to
execute a buy-out agreement with respect to the remedial investigation and
remediation at a buy-out cost of approximately $8,200. The Company believes, but
cannot assure, based on information presently available to the Company, that its
proportionate share of costs incurred by the PRP groups in connection with
additional response actions that may be required will not be material.
The Company has also been notified that it is a PRP that may be liable for
response actions at the Galaxy/Spectron Superfund Site in Elkton, Maryland. The
Company, however, is a De Minimis party with respect to this site, and its
proportionate share of costs to undertake response actions, the Company
believes, will likely be insignificant. The Company contributed 770 gallons of
waste to the site, but has not received any information with respect to the
total number of gallons contributed to the site by other PRPs. The Company has,
however, received notification that the De Minimis parties will be able to buy
out and obtain a release from any further clean-up liability at the site at a
cost presently estimated at $3.70 per gallon of contributed waste, which would
amount to $2,849 with respect to the Company's contribution. The Company has not
incurred any costs with respect to this site and believes that its ultimate
costs will not be material.
The Company has accrued environmental costs amounting to $12,948 in its
consolidated financial statements at March 31, 1995 and December 29, 1995. Based
on information available to the Company as of the date of this Prospectus, the
Company believes that such loss accrual is adequate to provide for the
above-described environmental contingencies. However, there is no assurance that
such estimate will not be revised in the future upon receipt of additional
information or that any such additional estimated loss accruals will not have a
material adverse affect on the Company's results of operations or financial
position. Furthermore, the Company's potential liability with respect to the
above matters may not limited to its proportionate share of hazardous waste
contributed to the sites. To the extent that other PRPs are unable to pay, and
if the large generator PRPs are unable to bear the cost of remedial actions, the
amount that the Company would be required to pay in connection with future
remedial actions could increase to amounts that would be material to the
Company.
Government Regulation
Certain of the Company's products must comply with FCC rules. Parts 15 and
68 establish technical standards and procedural and labeling requirements for
equipment subject to these rules. The Company has determined that a small number
of its products are not in compliance with Parts 15 and 68. Based upon
discussions with the FCC, however, the Company does not believe that any
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material penalties will be imposed on the Company for such non-compliance. There
can be no assurance that the FCC will not impose penalties on the Company for
its non-compliance with the rules or that such penalties, if imposed, would not
have a material adverse impact upon the Company. The Company intends to bring
all of its products into full compliance with the requirements of Parts 15 and
68. See "Business--Government Regulation."
No Assurance of Public Market; Determination of Public Offering Price; Possible
Volatility of Market Prices for the Securities
Prior to this Offering, there has been no public trading market for the
Units, the Common Stock or the Redeemable Warrants. Consequently, the initial
public offering price of the Units and the exercise price and terms of the
Redeemable Warrants have been determined by negotiations between the Company and
the Representative and are not necessarily related to and do not necessarily
reflect the Company's assets or book value, results of operations or any other
established criteria of value. There can be no assurance that a regular trading
market for the Units, the Common Stock or the Redeemable Warrants will develop
after this Offering or that, if developed, will be sustained. The market price
of the Units, the Common Stock and Redeemable Warrants following this offering
may be highly volatile as has been the case with securities of many emerging
companies. Factors such as the Company's operating results, announcements by
competitors of new products or contracts, or the activities of the RBOCs may
significantly impact the market price of the Units, the Common Stock and
Redeemable Warrants. The Units, the Common Stock and the Redeemable Warrants
have been accepted for listing on Nasdaq. See "Underwriting."
Immediate and Substantial Dilution
This Offering involves an immediate and substantial dilution of $7.70
(86%) per share of Common Stock between the pro forma net tangible book value
per share of Common Stock after giving effect to the Offering and the assumed
initial public offering price of $9.00 per share (assuming that no value is
attributed to the Redeemable Warrants). See "Dilution."
Possible Lack of Value of Redeemable Warrants; Possible Redemption or Forced
Exercise or Sale of Redeemable Warrants
In addition to the other issues identified herein, an investment in the
Redeemable Warrants presents certain additional risks. Purchasers of the
Redeemable Warrants will have the right to exercise them to purchase shares of
Common Stock only if a current prospectus relating to such shares is then in
effect and only if the shares are qualified for sale under the securities laws
of the state or states in which the purchaser resides. Absent any material
changes in the Company's business which would cause this Prospectus to cease to
be current at an earlier date, this Prospectus will cease to be current nine
months following the date of this Prospectus. The Company has undertaken and
intends to maintain a current prospectus that will permit the purchase and sale
of the Common Stock underlying the Redeemable Warrants, but there can be no
assurance that the Company will be able to do so. The Company will not call the
Redeemable Warrants for redemption at any time a current prospectus is not
effective. Although the Company intends to seek to qualify the shares of Common
Stock underlying the Redeemable Warrants in all states, no assurance can be
given that such qualification will occur. The Redeemable Warrants may be
deprived of any value if a current prospectus covering the shares issuable upon
the exercise thereof is not filed and kept effective or if such underlying
shares are not, or cannot be, registered in the applicable states. See
"Description of Securities."
Beginning nine months from the date of this Prospectus, the Redeemable
Warrants are redeemable by the Company, in whole but not in part, at its option
at $.05 per Redeemable Warrant on 30 days' prior written notice, provided that
the market price of the Common Stock equals or exceeds $12.00 per share for 20
consecutive trading days ending within five days prior to the date of the notice
of redemption. See "Description of Securities." The Redeemable Warrants can only
be redeemed if they are then exercisable and a current registration statement
covering the Redeemable Warrants and the shares of Common Stock issuable
thereunder is then in effect. The Company intends, so long as the Redeemable
Warrants are outstanding, to use its best efforts to keep a registration
statement effective under the Securities Act and state securities laws to permit
the issuance of the shares of Common Stock upon exercise or exchange of the
Redeemable Warrants. Nevertheless, although the Company intends to do so, no
assurance can be given that the registration statement will be kept current. The
failure to do so would result in the Redeemable Warrants not being exercisable
or exchangeable and therefore worthless. Redemption of the Redeemable Warrants
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may force the holders (i) to exercise the Redeemable Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so or
(ii) to sell the Redeemable Warrants at the current market price when they might
otherwise wish to hold the Redeemable Warrants. See "Description of
Securities--Redeemable Warrants."
Possible Consequences of Antitakeover Provisions
The Company's Board of Directors has the authority to issue up to 100,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. While the Company has no present intent to
issue shares of Preferred Stock after the closing of this Offering, such
issuance, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, unless acquired from Wexford. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company, including a possible change of
control that could result in stockholders receiving a premium over the then
current market value of their shares of Common Stock. See "Management" and
"Description of Securities."
Potential Adverse Effect of Shares Eligible for Future Sale on Market Price of
Common Stock
Upon completion of the Offering, there will be 4,500,000 shares of Common
Stock outstanding. Of such shares, the 1,000,000 shares sold in the Offering,
will be freely tradeable in the public market (other than shares acquired by
"affiliates" of the Company as such term is defined by Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act")). The 3,500,000
remaining shares (the "Restricted Shares"), representing 78% of the then
outstanding shares of Common Stock, will be "restricted securities" as that term
is defined in Rule 144. Restricted securities may only be sold pursuant to a
registration statement under the Securities Act or an applicable exemption
thereunder, such as the exemption made available by Rule 144. Generally, the
Restricted Shares will not be eligible for sale in the public market after the
Offering pursuant to Rule 144 until two years from the date of their issuance,
which is October 31, 1996. A registration statement, however, could be used
prior to such date to effect a distribution of such shares. Although the Company
cannot predict the timing or amount of future sales of Common Stock or the
effect that such sales or the availability of such shares for sale could have on
the market price for the Common Stock prevailing from time to time, sales of
substantial amounts of Common Stock in the public market following the offering
could adversely affect the market price of Common Stock. However, the Company's
principal stockholders, which in the aggregate hold 3,500,000 shares of Common
Stock, and ATTI have agreed not to sell, assign, or transfer any securities of
the Company for a period of 12 months from the closing of this Offering without
the Representative's prior written consent. In addition, officers, directors and
employees holding options to purchase 434,250 shares of Common Stock have agreed
not to sell, assign or transfer any such shares acquired upon exercise of
options for a period of 12 months following this Offering without the prior
written consent of the Representative. See "Security Ownership of Certain
Beneficial Owners and Management," "Shares Eligible for Future Sale" and
"Underwriting."
Possible Dilution From Issuance of Shares Reserved Under Company Plans and
Warrants; Registration Rights
The Company has reserved 835,000 shares of Common Stock for issuance upon
awards of restricted stock or exercise of options granted or available for grant
to employees, officers, directors and consultants pursuant to the Company Plans,
as well as an aggregate of 675,000 shares of Common Stock for issuance upon (i)
exercise of the Redeemable Warrants (including those associated with the
Underwriter's Overallotment Option) and (ii) exercise of the Representative's
Warrants. The existence of the aforementioned options and warrants may prove to
be a hindrance to future financing by the Company. The holders of such options
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and warrants may exercise them at a time when the Company would otherwise be
able to obtain additional equity capital on terms more favorable to the Company.
The Company has agreed that, under certain circumstances, it will register
under Federal and state securities laws the Representative's Warrants and the
shares of Common Stock issuable thereunder. In addition, certain existing
stockholders of the Company have registration rights. See "Security Ownership of
Certain Beneficial Owners and Management", "Certain Relationships and
Transactions" and "Underwriting." Exercise of these registration rights could
involve substantial expense to the Company at a time when it could not afford
such expenditures and may adversely affect the terms upon which the Company may
obtain additional financing. See "Description of Securities."
No Dividends
The Company does not expect to pay cash dividends in the foreseeable future
and is prohibited from paying dividends under its revolving credit facility. See
"Dividend Policy."
Lack of Experience of Representative and Underwriter
Although the Representative commenced operations in 1979, and Joseph
Stevens & Company, L.P. commenced operations in May 1994, neither has extensive
experience as an underwriter of public offerings of securities. Joseph Stevens &
Company, L.P. does not intend to participate as a market maker in the Units, the
Common Stock or the Redeemable Warrants. In addition, the Representative is a
relatively small firm and no assurance can be given that the Representative will
be able to participate as a market maker in the Units, the Common Stock or the
Redeemable Warrants, and no assurance can be given that any broker-dealer will
make a market in the Units, the Common Stock or the Redeemable Warrants. See
"Underwriting."
Patents and Technology; Certain Royalties
The Company owns several patents and a patent application covering aspects
of its payphone products and generally seeks patents whenever it makes
significant innovations. However, the Company views it business as not being
primarily dependent upon patent protection. It is the Company's policy to seek
to protect its patents against infringement by others. The Company does not
believe that it is infringing on the patents of others and would defend itself
against any allegations to that effect. There can be no assurances, however,
that infringement claims will not be asserted in the future or that the results
of any patent related litigation would not be material to the Company. The
Company has a license agreement under which certain minimum annual royalties
must be paid to the licensor in the event that a patent for the licensed
algorithm is issued. Management does not believe, but cannot assure, that a
patent for the algorithm will be issued due to existing prior art. If a patent
were to be issued, however, royalties would be payable as described herein
regardless of whether or not the algorithm is incorporated into the Company's
products. See "Business--Licenses, Patents and Trademarks."
Limitations of Officers' and Directors' Liabilities under Delaware Law
Pursuant to the Company's Certificate of Incorporation, as authorized under
Delaware law, officers and directors of the Company are not liable for monetary
damages for breach of fiduciary duty, except in connection with a breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law, or for any transaction in which a
director has derived an improper personal benefit. In addition, the Company's
Certificate of Incorporation provides that the Company shall indemnify its
officers and directors to the fullest extent permitted by Delaware law for all
expenses incurred in the settlement of any actions against such persons in
connection with their having served as officers or directors of the Company. See
"Management--Indemnification of Officers and Directors."
Forward Looking Statements
This Prospectus contains certain forward looking statements concerning the
Company's operations, economic performance and financial condition. Such
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified under "Risk Factors" and elsewhere in this
Prospectus.
16
<PAGE>
THE COMPANY
General
The Company is engaged in the design, development, manufacture and
marketing of public communication products consisting of payphone components,
electronic wireline payphone products, microprocessor-based wireline and
wireless payphone products and related payphone software management systems. The
Company's products include smart payphone products sold under the "Gemini",
"Inmate", "GemStar" and "GemCell" trademarks. Smart payphone products are based
upon microprocessor technology and perform a variety of functions, including
calling card, debit card and credit card control, data storage, call progress
detection, call rating and maintenance, diagnostic and coin administration
functions. The Company is also a provider of payphone and payphone component
repair, refurbishment and upgrade conversion services to the regulated telephone
operating companies in the United States, which consist of the seven RBOCs and
other local exchange carriers. The Company markets its products and services
primarily to the seven RBOCs in the United States and to inter-exchange carriers
and cellular providers in certain international markets. The Company has derived
substantially all of its revenues from sales to four RBOCs. See "Business--Sales
and Markets--Domestic." The Company has also entered the international market
place for wireline and cellular payphone products, which it believes provides a
further opportunity for growth. See "Business" and "Risk Factors."
Development of the Company
General. The Company was incorporated in the State of Delaware in 1975 as
Florida Data Corporation for the purpose of developing, manufacturing and
marketing high-speed dot matrix printers. From 1975 to 1986, the Company
incurred significant operating losses from its high-speed dot-matrix printer
business. In June 1986, the Company acquired International Teleservice
Corporation, Inc., a company engaged in the repair and refurbishment of
telecommunication products consisting of residential telephones and payphones,
and changed its name to Technology Service Group, Inc. Between fiscal 1986 and
1988, the Company discontinued its high-speed dot-matrix printer business, sold
the assets of its residential telephone repair and refurbishment business, and
began to focus its business on the public communications industry. The Company
established International Service Technologies Inc. ("IST"), which established a
foreign division in Taiwan, and Technology Service Enterprises, Inc. and
expanded its public communications business to include the manufacture and
marketing of payphones and payphone components and the provision of services to
convert and upgrade payphones with components designed and manufactured by the
Company and its subsidiaries. In fiscal 1991, Technology Services Enterprises,
Inc. acquired the assets of the Public Communication Systems Division of
Executone Information Systems, Inc. ("PCS"), including its microprocessor-based
technology. In fiscal 1993, the Company established Wireless Technologies, Inc.
and began to develop microprocessor-based wireless payphone products for
international applications. In April 1993, International Teleservice
Corporation, Inc., Technology Service Enterprises, Inc. and Wireless
Technologies, Inc. were merged into the Company.
The development of the Company's first generation smart payphone product
was substantially completed and released to market during fiscal 1992. During
fiscal 1993, the Company continued to develop its smart payphone products and
began to develop its wireless payphone products. Also, during fiscal 1992 and
1993, the Company expanded its sales and marketing activities to start to
develop international markets for the Company's products.
Restructuring. During the latter part of fiscal 1994 and prior to the
Acquisition, the Company's sales and operating performance were adversely
affected by the termination of a first generation smart payphone sales agreement
with one of the Company's then significant RBOC customers caused by technical
and delivery problems experienced by the Company and the non-renewal of a
refurbishment sales agreement with such RBOC. See "Business--Changing Product
Mix." In the fourth quarter of fiscal 1994 prior to the Acquisition, the Company
initiated a plan to change certain senior management, restructure its
operations, reduce its costs and expenses, refocus its development activities,
increase sales, turn around its business, improve liquidity and attain
profitable operations. In connection with this plan, the Company recorded
restructuring charges of $2,570,652 during the fiscal year ended April 1, 1994.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE>
As part of the restructuring plan and its efforts to improve liquidity, the
Company began to seek additional financing from the venture capital firms that
held the then outstanding preferred stock of the Company. These venture capital
firms invested $400,000 in the Company pursuant to a subordinated master
promissory note dated June 9, 1994, but did not invest sufficient capital to
fund the Company's business for an extended period. These investors had held
their investment in the Company for longer periods than anticipated, and sought
to liquidate their investment. Accordingly, the then current Board of Directors
of the Company authorized management to seek alternative financing sources
interested in acquiring the outstanding capital of the Company and in investing
additional funds in the Company. Such efforts culminated in the Acquisition
described below.
Effective June 8, 1994, the Board of Directors authorized and the Company
executed executive retention agreements with its executive officers. The purpose
of the executive retention agreements was to retain the executives in the employ
of the Company to facilitate the Company's efforts to effect a change in
ownership and attract capital. The executive retention agreements provided for
the payment of bonuses based upon the value of a transaction which resulted in a
change in ownership. On November 1, 1994, the Company's newly constituted Board
of Directors approved the payment of such bonuses as a result of the
Acquisition. See "Management--Executive Compensation" and "Certain Relationships
and Transactions."
The Acquisition. On October 31, 1994, TSG Acquisition Corp., a wholly-owned
subsidiary of Wexford, acquired all of the outstanding capital stock of the
Company pursuant to an Agreement and Plan of Merger dated October 11, 1994
between Wexford, TSG Acquisition Corp., the Company and the majority holders of
the Company's preferred and common stock, including Acor S.A and Firlane
Business Corp. (which are also current stockholders of the Company). The
consideration paid by TSG Acquisition Corp. aggregated $3.5 million including
contingent consideration of $329,709 placed in escrow and distributed to the
former stockholders in September 1995. The aggregate consideration consisted of
$3,004,000 to acquire the outstanding capital stock of the Company and $496,000
to retire a $400,000 subordinated master promissory note payable to former
stockholders and related accrued interest and preference fees of $96,000
representing 5% of the outstanding principal for each month that the note was
outstanding. Aggregate cash payments to the former stockholders, including the
contingent consideration of $329,709 and the retirement of the subordinated
master promissory note, accrued interest and preference fees of $496,000,
amounted to $3,222,090. Consideration of $277,910 was withheld from amounts paid
to former stockholders to pay liabilities of the Company including a success fee
of $75,000 payable to Atlantic Management Associates, Inc. (see
"Management--Compensation of Directors," "Management--Executive Compensation"
and "Certain Relationships and Transactions") and the settlement of a dispute
with respect to a terminated employment contract of a former executive of
$202,910.
The former stockholders of the Company's common stock, Series A preferred
stock, and Series B preferred stock received no consideration for their shares.
The former stockholder of the Series E Preferred Stock received consideration of
$2.50 per share or $750,000, less a pro rata portion of $17,400 of the success
fee payable to Atlantic Management Associates, Inc. The former stockholders of
Series C preferred stock received consideration of $2,254,000, or $.96 per
share, less a pro rata portion of $57,600 of the success fee paid to Atlantic
Management Associates, Inc. and the $202,910 settlement liability. The former
stockholders also received the consideration paid in respect of the subordinated
master promissory note and related accrued interest and preference fees in
accordance with the terms of the subordinated master promissory note.
In conjunction with the transaction, TSG Acquisition was merged into the
Company, which was then wholly-owned by Wexford. The outstanding shares of the
Company's capital stock and rights to purchase the Company's capital stock,
including preferred stock purchase warrants, at October 30, 1994 and the
Company's then existing Incentive Stock Option Plan were cancelled and the
outstanding shares of capital stock of TSG Acquisition held by Wexford were
converted into one share of the Company's common stock, $.05 par value (the
"merger share").
In addition, on October 31, 1994, the Company amended its Certificate of
Incorporation to reflect its current authorized capital. Further, the Company
entered into an Investment Agreement with Wexford, Acor S.A. and Firlane
Business Corp. (collectively the "investors"). Acor S.A. and Firlane Business
Corp. were stockholders of the Company. Pursuant to the Investment Agreement,
18
<PAGE>
the Company issued an aggregate of 3.5 million shares of common stock, $.01 par
value, at a price of $1.00 per share to Wexford in exchange for the merger
share. Wexford, in turn, sold to Acor S.A. and Firlane Business Corp. 507,500
and 262,500 shares, respectively, of Common Stock pursuant to the terms of the
Investment Agreement. The consideration paid by Wexford, Acor S.A. and Firlane
Business Corp. for their shares of Common Stock was $2,730,000, $507,500 and
$262,500, respectively. Also, the Company borrowed $2.8 million from Wexford and
Acor S.A. and issued subordinated promissory notes due November 1, 1999 that
bear interest at a rate of 10% per annum (the "Affiliate Notes"). The Company
issued a 10% interest bearing subordinated note to Wexford in the principal
amount of $2,361,082 dated October 31, 1994. The Company also issued 10%
interest bearing subordinated promissory notes to Acor S.A. in the principal
amount of $208,216.73 dated October 31, 1994, $99,591.93 dated October 31, 1994,
$83,497.82 dated November 10, 1994 and $47,611.52 dated December 23, 1994. See
"Use of Proceeds", "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Transactions."
In connection with the purchase and merger transaction, Acor S.A. received
aggregate consideration of $702,037, including $99,200 of principal and related
accrued interest and preference fees pursuant to the subordinated master
promissory note, and $680,843 in respect of Series C preferred stock, before a
pro rata share of the Atlantic Management Associates, Inc. success fee of
$16,715 and the settlement obligation of $61,291. Firlane Business Corp.
received aggregate consideration of $211,881, including $111,600 of principal
and related accrued interest and preference fees pursuant to the subordinated
master promissory note, and $115,551 in respect of Series C preferred stock,
before a pro rata share of the Atlantic Management Associates, Inc. success fee
of $4,868 and the settlement obligation of $10,402. See "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and
Transactions."
Proposed Stock Purchase Agreement. The Company, Wexford, Acor S.A., Firlane
Business Corp. and ATTI have entered into the Stock Purchase and Option
Agreement. Pursuant to the terms of the Stock Purchase Agreement, Wexford, Acor
S.A. and Firlane Business Corp. will sell to ATTI, and ATTI will purchase, an
aggregate of 366,300 shares of Common Stock at a price of $8.14 per share and
options to purchase an additional 183,150 shares of Common Stock at an exercise
price of $11.00 per share (the "Options") at a price of $.10 per Option. Wexford
will sell 285,714 shares and Options to purchase 142,857 shares. Acor S.A. will
sell 53,114 shares and Options to purchase 26,557 shares. Firlane Business Corp.
will sell 27,472 shares and Options to purchase 13,736 shares. The consideration
to be received by Wexford, Acor S.A. and Firlane Business Corp. pursuant to the
terms of the Stock Purchase Agreement will be $2,339,998, $435,004 and $224,995,
respectively. Consummation of the transaction is subject to the consummation of
this Offering and other customary conditions. The number of shares of Common
Stock and Options to be received by ATTI is subject to adjustment based upon an
aggregate sales price to ATTI of $2,999,997 at 91% of the offering price of the
Units. The exercise price of the Options is also subject to adjustment based
upon the offering price of the Units. See "Security Ownership of Certain
Beneficial Owners and Management."
Recent Results. During fiscal 1995, the Company reduced its operating costs
and expenses. However, as discussed above, the termination of a first generation
smart payphone sales agreement with one of the Company's then significant RBOC
customers and the non-renewal of a refurbishment sales agreement with such RBOC,
which events occurred prior to the Restructuring, had a significant adverse
effect on the Company's sales. See "Business--Changing Product Mix." The
Company's cost and expense reductions together with non-recurring gains from the
settlement of litigation and restructuring credits related to the settlement of
terminated employment contracts and the termination of non-cancelable lease
agreements were not sufficient to offset the impact of the sales decline, and
the Company continued to operate at a loss. However, during fiscal 1995, the
Company developed a new smart payphone processor, and entered into a $21.3
million sales agreement with one of its significant customers to provide the
processor and other components to the customer over a period of three years. As
a result, the Company's sales reached $5.9 million for the three months ended
March 31, 1995. This sales agreement may be terminated at the option of the
customer upon prior notice to the Company. See "Business--Sales and
Markets--Domestic" and "Business--Changing Product Mix."
19
<PAGE>
The Company's sales performance continued to improve as the Company entered
into fiscal 1996. During the three months ended June 30, 1995, the Company's
sales rose to $6.4 million as compared to $4.9 million for the three months
ended July 1, 1994, and the Company incurred a net loss of $230,658 for the
three months ended June 30, 1995 as compared to net income of $1,390 for the
three months ended July 1, 1994, which included a gain from the settlement of
litigation of $261,022. Sales for the three months ended September 29, 1995
approximated $7.7 million as compared to approximately $5 million for the three
months ended September 30, 1994, and the Company generated a profit of $236,104
for the three months ended September 29, 1995 as compared to a net loss of
$357,752 for the three months ended September 30, 1994. Sales for the three
months ended December 29, 1995 approximated $9.6 million as compared to
approximately $4.5 million for the three months ended December 31, 1994, and the
Company generated a profit of $654,957 for the three months ended December 29,
1995 as compared to a loss of $456,040 for the three months ended December 31,
1994 ($67,004 for the Predecessor for the month ended October 30, 1994 and
$389,036 for the Company for the two months ended December 31, 1994). See "Risk
Factors--History of Prior Losses; Recent Results," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In December 1995, the Company entered into an amendment to a sales
agreement with one of its significant RBOC customers that provides for the sale
of approximately $12 million smart products and other components over an
eight-month period commencing November 1, 1995. This sales agreement may be
terminated at the option of the customer upon prior notice to the Company. See
"Business--Sales and Markets--Domestic" and "Business--Changing Product Mix."
Unless the context requires otherwise, Technology Service Group, Inc. and
its subsidiaries are referred to herein collectively as the "Company" or "TSG".
The term "Predecessor" refers to the Company for all periods prior to October
31, 1994, the Acquisition Date. The Company's principal executive offices are
located at 20 Mansell Court East, Suite 200, Roswell, Georgia 30076, and its
telephone number at that address is (770) 587-0208.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities offered hereby, after deducting $810,000 for underwriting discounts
and approximately $840,000 for other estimated expenses of the Offering,
including the Representative's non-accountable expense allowance, are expected
to be approximately $7,350,000 ($8,538,000 if the Underwriters' over-allotment
option is exercised in full).
The Company intends to use the net proceeds of this Offering initially to
repay revolving credit indebtedness outstanding under the Loan and Security
Agreement (the "Loan Agreement") between the Company and Fleet Capital
Corporation on or about the date the Offering is consummated, which indebtedness
was $7,746,529 at December 29, 1995. Such repayment will reduce the Company's
interest expense. Subsequently, the Company intends to draw down under its
revolving credit facility from time to time for the purposes described below.
Amounts borrowed by the Company under the Loan Agreement vary day to day
based upon the Company' s cash requirements and the value of the collateral
against which loans are made. Outstanding indebtedness under the Loan Agreement
bears interest at a rate of 11/2% (2% prior to March 1, 1996) above a base rate
announced from time to time by Citibank, N.A. The base rate and the interest
rate at December 29,1995 was 8.5% and 10.5%, respectively. At December 29, 1995,
outstanding indebtedness under the revolving credit facility consisted of
short-term debt of $5,546,529 and a term note in the amount of $2,200,000 due
November 30, 1997. Subsequently, such short-term indebtedness was reduced to
approximately $928,000 as of March 1, 1996. The Company intends to invest the
remaining net proceeds of this Offering, if any, not otherwise expended, in
short-term U.S. government obligations, high grade commercial paper or money
market funds until required for the purposes described below.
At December 29, 1995, additional financing available to the Company under
the Loan Agreement was approximately $2,111,000. If this Offering had been
consummated as of December 29, 1995, all of the net proceeds from this Offering
(exclusive of any net proceeds of the over-allotment option) would have been
used to repay outstanding short-term indebtedness under the Loan Agreement of
$5,150,000 at December 29, 1995 and long-term indebtedness under the Loan
Agreement of $2,200,000 at such date. After such repayments, the total financing
available to the Company under the Loan Agreement would have been approximately
$9,461,000 at December 29, 1995.
After applying the net proceeds of the Offering to the repayment of
indebtedness under the Loan Agreement, the Company intends to draw down funds
from time to time under its revolving credit facility (the "Funds") for the
following purposes:
Use of Funds Amount Percent
------------ ------ -------
1. Working capital and other
general corporate purposes ........ $3,413,000 36%
2. Repayment of subordinated
notes payable to stockholders ..... 2,800,000(1) 30
3. Research and development .......... 1,100,000 12
4. Sales and marketing ............... 1,000,000 11
5. Improvement of information
systems and purchase of
capital equipment ................. 800,000 8
6. Repayment of bank term note ....... 348,000(1) 3
---------- ---
$9,461,000(2) 100%
========== ===
- -------------
(1) The Company intends to repay this indebtedness upon consummation of the
Offering.
(2) Consists of reborrowings of $7,350,000 and unused availability of
$2,111,000 at December 29, 1995.
1. Working Capital and Other General Corporate Purposes
Approximately $3,413,000 of the Funds are intended to be used for working
capital and other general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Manufacturing, Assembly and Sources of Supply." Any proceeds received
from the exercise of the Underwriters' over-allotment option will be used to
further reduce revolving credit indetbedness and to supplement working capital.
21
<PAGE>
The allocation of the Funds set forth above represents the Company's best
estimate based upon its present plans and certain assumptions regarding general
economic and industry conditions and the Company's future revenues and
expenditures.
Based on the Company's operating plan, management believes that the
proceeds from this Offering, the funds available under its working capital
facility and anticipated cash flow from operations will be sufficient to meet
the Company's anticipated cash needs and finance its plans for expansion, for at
least twelve months from the date of this Prospectus. Thereafter, the Company
may require additional financing to meet its future cash needs. No assurance can
be given that the Company will be successful in obtaining additional financing
if it becomes necessary to do so, or that such additional financing will be
available on commercially reasonable terms, or at all. If the Company is unable
to obtain additional financing when and if needed, its ability to meet its cash
needs could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors--Possible Need
for Additional Financing."
2. Repayment of Subordinated Notes Payable to Stockholders
The Company intends to repay existing subordinated notes payable to
stockholders with outstanding balances aggregating $2,800,000 as of the date of
this Prospectus (see "Certain Relationships and Transactions"). The subordinated
notes payable to stockholders bear interest at a rate of 10% per annum, become
due on November 1, 1999 and may be prepaid, in whole or in part, prior to
November 1, 1999 without premium or penalty. The subordinated notes payable to
stockholders consist of a note payable to Wexford in the principal amount of
$2,361,082 dated October 31, 1994 and notes payable to Acor, S.A. in the
principal amounts of $208,216.73 dated October 31, 1994, $99,591.93 dated
October 31, 1994, $83,497.82 dated November 10, 1994 and $47,611.52 dated
December 23, 1994. See "Certain Relationships and Transaction" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
3. Research and Development
The Company intends to use approximately $1,100,000 of the Funds to
increase its engineering, research and development activities, including the
enhancement of existing products, the development of new products and the
modification of product designs to reduce manufacturing costs. See
"Business--Research and Development."
4. Sales and Marketing
The Company intends to use approximately $1,000,000 of the Funds to
increase its sales and marketing activities, primarily those directed at the
international market. The Company intends to use these funds for additional
personnel and associated expenses, to develop, print and distribute product
literature and to fund participation in trade shows. See "Business--Sales and
Markets."
5. Purchase of Information Systems and Equipment
The Company intends to use approximately $800,000 of the Funds to purchase
and install information systems, including financial management, material
planning and control and engineering documentation systems, and to purchase or
lease additional manufacturing, assembly and testing equipment. See
"Business--Manufacturing, Assembly and Sources and Supply."
6. Repayment of Bank Term Note
The Company intends to repay an existing term note outstanding under the
Loan and Security Agreement with an outstanding balance of $348,214 at December
29, 1995. The term note is payable in equal monthly installments of $7,738 and
one installment of $177,978 on November 30, 1997. The interest rate on the term
note is 11/2% (2% prior to March 1, 1996) above the base rate announced from
time to time by Citibank, N.A. The base rate and the interest rate at December
31, 1995 was 8.5% and 10.5%, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company will require the funds subsequently available to the Company
under the revolving credit facility to accomplish the use of Funds described
herein. If an event of default under the Loan Agreement were to occur, however,
22
<PAGE>
the Company's ability in this regard could be curtailed. In such an event, the
Company would seek alternative sources of working capital financing. There is no
assurance, however, that other sources of working capital financing would be
available to the Company on commercially reasonable terms, or at all. In such an
event, the anticipated use of Funds would be changed as necessary to fund the
Company's working capital requirements. See "Risk Factors--Possible Need for
Additional Financing" and "Risk Factors--Limitations on Borrowing; Certain
Covenants."
Proceeds from Possible Exercise of Redeemable Warrants
If all of the Redeemable Warrants are exercised, the Company would receive
aggregate proceeds of $5,500,000. The Company currently anticipates that it
would use such proceeds for working capital and general corporate purposes.
However, no assurance can be given that any Redeemable Warrants will be
exercised.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not currently intend to pay cash dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the continued
growth of its business. Pursuant to the terms of the Loan Agreement, the Company
is prohibited from paying cash dividends or other distributions on capital
stock, except stock distributions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
23
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
December 29, 1995 and as adjusted to reflect the sale and issuance of the
Securities offered hereby and the initial application of the estimated net
proceeds thereof as described in "Use of Proceeds."
December 29, 1995
------------------------------
Actual As Adjusted(2)(3)
----------- -----------------
Borrowings under revolving credit
agreement and current maturities
under long-term debt and capital
lease obligations (1) ..................... $ 5,878,334 $ 3,783,691
=========== ============
Long-term debt and capital lease obligations,
less current maturities (1) ............... $ 6,168,329 $ 912,972
----------- ------------
Stockholders' equity:
Preferred stock, $100 par value, 100,000
shares authorized, none issued
and outstanding ........................... -- --
Common Stock, $.01 par value, 10,000,000
shares authorized:
3,500,000 shares issued and
outstanding, actual;
4,500,000 shares issued and
outstanding, as adjusted ............... 35,000 45,000
Capital in excess of par value ................ 3,465,000 10,805,000
Accumulated deficit ........................... (405,178) (405,178)
Cumulative translation adjustment ............. (12,576) (12,576)
----------- ------------
Total stockholders' equity .................... 3,082,246 10,432,246
----------- ------------
Total capitalization .......................... $ 9,250,575 $ 11,345,218
=========== ============
- --------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and the
Consolidated Financial Statements, including notes thereto, for information
regarding the Company's outstanding debt and capital lease obligations.
(2) Excludes (i) 40,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $4.00 per share; (ii) 350,250
and 84,000 shares of Common Stock issuable upon exercise of stock options
outstanding under the Company's 1994 Omnibus Stock Option Plan (the "Stock
Plan") at exercise prices of $1.00 and $5.00 per share, respectively; (iii)
up to 200,750 additional shares that may be issued under the Stock Plan;
(iv) up to 100,000 shares of Common Stock that may be issued under the
Company's 1995 Employee Stock Purchase Plan (the "Employee Plan"); and (v)
up to 100,000 shares that may be issued under the Company's Non-Employee
Director Stock Option Plan (the "Director Plan"). See the Consolidated
Financial Statements, including notes thereto, "Description of Securities"
and "Management."
(3) Assumes that the net proceeds of the Offering are used to repay outstanding
indebtedness under the revolving credit facility and that the Company draws
down funds available under the revolving credit facility to repay the
Affiliate Notes in the amount of $2,800,000 and a bank term note of
$348,214. See "Use of Proceeds."
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<PAGE>
DILUTION
At December 29, 1995, the net tangible book (deficit) of the Company was
($1,522,993) or a deficit of ($.44) per share. The net tangible book value (or
deficit) per share represents the amount of the Company's total assets less the
amount of its intangible assets and liabilities, divided by the number of shares
of Common Stock outstanding. After giving effect to the sale of the Securities
offered hereby and the initial application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company at December 29,
1995 would have been $5,827,007, or $1.30 per share of Common Stock. This would
represent an immediate increase in net tangible book value of $1.74 per share to
the existing stockholders and an immediate dilution to the public investors of
$7.70 per share representing the difference between the offering price of a
share of Common Stock and the net tangible book value thereof after giving
effect to this Offering. The following table illustrates this per share
dilution:
Initial public offering price per share of Common Stock(1) $9.00
Net tangible book (deficit) per share of Common Stock
at December 29, 1995 ................................ $(.44)
Increase in net tangible book value per share of
Common Stock attributable to new investors .......... $1.74
-----
Pro forma net tangible book value per share of
Common Stock after the Offering ....................... 1.30
-----
Dilution of net tangible book value per share
of Common Stock to new investors ...................... $7.70
=====
- ---------------
(1) Does not include the purchase price of the Redeemable Warrants.
In the event that the Underwriters exercise the over-allotment option in
full, the pro forma net tangible book value after the Offering (less
underwriting discounts and estimated expenses of the Offering to be paid by the
Company) would be $1.51 per share, which would result in dilution to the public
investors of $7.49 per share.
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of Common Stock
purchased, the total consideration paid, the percentage of total consideration
paid, and the average price per share paid, by the existing stockholders of the
Company and the investors in this Offering:
<TABLE>
<CAPTION>
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing Stockholders(1)(2) ............. 3,500,000 78% $ 3,500,000 28% $ 1.00
New Investors ........................... 1,000,000 22% 9,000,000 72% $ 9.00
--------- --- ----------- ---
Total ................................... 4,500,000 100% $12,500,000 100%
========= === =========== ===
</TABLE>
- -------------
(1) Reflects the amounts paid for the acquisition of shares of Common Stock of
the Company in connection with the Acquisition, including contingent
consideration of $329,709 distributed in September 1995. See "The Company
--Development of the Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the notes thereto, for
information with respect to the Acquisition.
(2) Excludes (i) 40,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $4.00 per share; (ii) 350,250
and 84,000 shares of Common Stock issuable upon exercise of stock options
outstanding under the Stock Plan at exercise prices of $1.00 and $5.00 per
share, respectively; (iii) up to 200,750 additional shares that may be
issued under the Stock Plan; (iv) up to 100,000 shares of Common Stock that
may be issued under the Employee Plan; and (v) up to 100,000 shares that
may be issued under the Director Plan. See the Consolidated Financial
Statements, including notes thereto, "Description of Securities" and
"Management".
25
<PAGE>
SELECTED FINANCIAL DATA
On October 31, 1994, TSG Acquisition Corp. acquired all of the outstanding
capital stock of the Company for cash consideration of $2,396,381. In addition,
promissory notes payable to former stockholders at October 30, 1994 aggregating
$400,000, and related accrued interest and preference fees of $96,000, and
certain other obligations of the Company aggregating $277,910 were retired.
Further, additional consideration of $329,709, consisting of cash of $230,117
and a subordinated note of the Company in the principal amount of $99,592, was
placed in escrow. The escrow consideration, the distribution of which was
contingent upon compliance with indemnification provisions set forth in the
Purchase Agreement, was distributed to former stockholders in September 1995.
The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase price of $3,170,291, exclusive of contingent
consideration, was pushed down and allocated to the net assets acquired based
upon their fair values. The excess of the purchase price over the estimated fair
value of the net assets acquired of $3,853,877 was recorded as goodwill. Upon
distribution of the escrow consideration in September 1995, the aggregate
purchase price was increased to $3,500,000, which increased the excess purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $329,709. Prior to the Acquisition, the Company is sometimes
referred to the "Predecessor."
The selected financial data presented herein for the years ended March 29,
1991, April 3, 1992, April 2, 1993, and April 1, 1994, and for the seven months
ended October 30, 1994 and five months ended March 31, 1995 has been derived
from the Company's and the Predecessor's audited consolidated financial
statements. The selected financial data presented herein for the two months
ended December 31, 1994 and nine months ended December 29, 1995 has been derived
from the Company's unaudited consolidated financial statements. The selected
financial data for periods prior to October 30, 1994 relates to the Predecessor
and for periods subsequent to October 30, 1994 relates to the Company. The
financial data for the Predecessor is not comparable in certain respects to the
financial data of the Company due to the effects of the Acquisition, and a
previous acquisition during the year ended March 29, 1991. The selected
financial data presented herein should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, including the notes thereto, of the
Company and the Predecessor included elsewhere in this Prospectus. The audited
consolidated financial statements of the Company as of and for the years ended
March 29, 1991 and April 3, 1992 and as of April 2, 1993 and the Accountants'
Reports thereon are not included in this Prospectus.
The following schedule sets forth a summary of selected financial data for
the five fiscal years ended March 31, 1995 and for the two months ended December
31, 1994 and nine months ended December 29, 1995.
Statement of Operations Data
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------------------------------
Year Ended Seven Months
----------------------------------------------------------------------- Ended
March 29, April 3, April 2, April 1, October 30,
1991 1992 1993 1994 1994(1)
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ............................. $30,672,130 $ 29,310,095 $ 30,535,968 $ 31,048,706 $ 11,108,653
Cost of goods sold .................... 23,172,266 22,330,551 24,083,319 25,761,831 9,176,134
General and administra-
tive expenses ..................... 3,119,307 3,846,972 3,333,996 3,476,932 1,742,324
Marketing and selling
expenses .......................... 667,415 1,412,598 1,865,134 1,748,814 366,464
Engineering, research and
development expenses .............. 1,027,980 1,633,948 2,241,552 2,009,524 457,553
Restructuring charges
(credits) ......................... 321,124 -- -- 2,570,652 (534,092)
Litigation settlement ................. -- -- -- -- (261,022)
Loss provision (2) .................... -- 603,015 -- -- --
Interest expense ...................... 983,334 985,794 809,589 911,821 599,276
Other (income) expense ................ 13,935 68,749 200,875 54,557 (14,618)
Net income (loss) ..................... $ 1,361,519 $ (1,634,832) $ (1,998,497) $ (5,485,425) $ (423,366)
Income (loss) per common and common
equivalent share(3)(4) ............
Weighted average number of common
equivalent shares outstanding(3)(4)
<CAPTION>
Company
-------------------------------------------------
Five Months Two Months Nine Months
Ended Ended Ended
March 31, December 31, December 29,
1995(1) 1994(1) 1995(1)
----------- ----------- ------------
<S> <C> <C> <C>
Net sales ............................. $ 9,161,359 $ 3,261,335 $ 23,677,489
Cost of goods sold .................... 8,226,245 2,820,840 18,857,150
General and administra-
tive expenses ..................... 850,069 362,423 1,712,910
Marketing and selling
expenses .......................... 371,757 133,822 906,754
Engineering, research and
development expenses .............. 480,495 209,181 849,034
Restructuring charges
(credits) ......................... -- -- --
Litigation settlement ................. -- -- --
Loss provision (2) .................... -- -- --
Interest expense ...................... 356,624 140,825 705,880
Other (income) expense ................ (58,250) (16,720) (14,642)
Net income (loss) ..................... $(1,065,581) $ (389,036) $ 660,403
Income (loss) per common and common
equivalent share(3)(4) ............
Weighted average number of common $ (0.30) $ (0.11) $ 0.17
equivalent shares outstanding(3)(4)
3,541,778 3,541,778 3,870,889
</TABLE>
26
<PAGE>
Balance Sheet Data
<TABLE>
<CAPTION>
Predecessor
------------------------------------------------------------------------------------
March 29, April 3, April 2, April 1, October 30,
1991 1992(5) 1993 1994 1994
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets ........................... $ 12,206,339 $ 11,415,601 $ 14,213,270 $ 9,742,477 $ 7,579,857
Total assets ............................. 17,275,310 16,453,263 18,868,906 13,421,291 10,397,376
Borrowings under revolving
credit agreement ...................... 4,899,920 4,112,692 6,727,726 5,352,040 1,660,965
Current maturities under
long-term debt and capital
lease obligations(6) .................. 557,014 778,598 827,198 1,283,792 877,557
Current liabilities ...................... 9,308,484 8,532,628 12,942,935 13,006,714 8,190,910
Working capital (deficit) ................ 2,897,855 2,882,973 1,270,335 (3,264,237) (611,053)
Long-term debt and capital
lease obligations ..................... 3,656,226 2,062,671 2,068,287 957,104 3,627,596
Notes payable to
stockholders .......................... 1,200,000 -- -- -- 400,000
Other liabilities ........................ -- -- -- 862,517 --
Total liabilities ........................ 12,964,710 10,595,299 15,011,222 14,826,335 12,218,506
Accumulated deficit ...................... (15,331,155) (16,965,987) (18,964,484) (24,449,909) (24,873,275)
Stockholders' equity
(deficit) ............................. $ 4,310,600 $ 5,857,964 $ 3,857,684 $ (1,405,044) $ (1,821,130)
<CAPTION>
Company
----------------------------------------------
March 31, December 31, December 29,
1995 1994 1995
---------- ------------- -----------
<S> <C> <C> <C>
Current assets ........................... $8,551,369 $ 8,330,471 $15,224,061
Total assets ............................. 15,669,648 15,675,330 22,289,684
Borrowings under revolving
credit agreement ...................... 970,197 -- 5,546,529
Current maturities under
long-term debt and capital
lease obligations(6) .................. 813,917 996,877 331,805
Current liabilities ...................... 6,856,802 6,415,910 12,560,910
Working capital (deficit) ................ 1,694,567 1,914,561 2,663,151
Long-term debt and capital
lease obligations ..................... 3,532,867 3,263,850 3,368,329
Notes payable to
stockholders .......................... 2,800,000 2,800,000 2,800,000
Other liabilities ........................ 375,000 418,004 478,199
Total liabilities ........................ 13,564,669 12,897,764 19,207,438
Accumulated deficit ...................... (1,065,581) (389,036) (405,178)
Stockholders' equity
(deficit) ............................. $2,104,979 $2,777,566 $ 3,082,246
</TABLE>
- ----------------
(1) The results of operations and financial data for the periods presented may
not be indicative of the results of operations and financial data for the
full fiscal year.
(2) During the year ended April 3, 1992, the Company recorded a loss provision
of $603,015 as a result of an uncertainty with respect to the collection of
notes and advances receivable from the former general manager of the
Company's Taiwan division and a supplier affiliated with the general
manager. These notes and advances receivable were written off during fiscal
1994 upon settlement of litigation between the Company and the former
general manager and the supplier.
(3) Assuming the purchase and merger transaction had occurred on April 2, 1994,
the Company's and the Predecessor's net loss for the year ended March 31,
1995 would have approximated $1,599,000, or $.45 per common and common
equivalent share outstanding of 3,541,778 shares.
(4) Income (loss) per common and common equivalent share and the weighted
average number of common equivalent shares outstanding are not presented
for periods prior to the five months ended March 31, 1995 since such data
is not meaningful for periods prior to the Acquisition on October 31, 1994.
(5) A note receivable from a former executive in the amount of $250,000 at
April 3, 1992 has been reclassified to conform with the presentation used
at April 2, 1993.
(6) Current maturities under long-term debt and capital lease obligations at
April 1, 1994 includes subordinated notes payable to stockholders of
$400,000 which were retired in connection with the Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
27
<PAGE>
The following sets forth a summary of selected statement of operations data
(unaudited) for the quarters ended July 1, 1994 and September 30, 1994, for the
month ended October 30, 1994 and two months ended December 31, 1994 and for the
quarters ended June 30, 1995, September 29, 1995 and December 29, 1995.
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------------------------------- ---------------------------------------------
Quarter Ended One Month Two Months Quarter Ended(4)
------------------------------ Ended Ended ---------------------------------------------
July 1, September 30, October 30, December 31, June 30, September 29, December 29,
1994 1994 1994 1994(4) 1995 1995 1995
---------- ------------- ------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ........ $4,862,795 $5,045,289 $1,200,569 $3,261,335 $6,354,145 $7,737,680 $9,585,664
Net income (loss). $ 1,390(1) $ (357,752)(2) $ (67,004)(3) $ (389,036) $ (230,658) $ 236,104 $ 654,957
</TABLE>
- --------
(1) Includes a gain of $261,022 from the settlement of litigation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Includes restructuring credits of $25,493. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Includes restructuring credits of $508,599. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) Includes the effects of the Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
General
On October 31, 1994, TSG Acquisition Corp. acquired all of the outstanding
capital stock of the Company pursuant to the Purchase Agreement for aggregate
consideration of $3,170,291, exclusive of contingent consideration of $329,709
placed in escrow. The Acquisition was accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price was "pushed down" and
allocated to the net assets acquired based upon their fair values. The excess of
the purchase price over the estimated fair value of the net assets acquired of
$3,853,877 was recorded as goodwill. The escrow consideration, the distribution
of which was contingent upon compliance with indemnification provisions set
forth in the Purchase Agreement, was distributed to former stockholders in
September 1995. Upon distribution of the escrow consideration, the aggregate
purchase price became $3,500,000, which increased the excess of the purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $329,709. See the Company's Consolidated Financial Statements and
the notes thereto included elsewhere in this Prospectus.
In conjunction with the Acquisition, TSG Acquisition Corp. was merged into
the Company. The outstanding shares of the Company's capital stock were
cancelled and the outstanding shares of capital stock of TSG Acquisition Corp.
were exchanged for one share of the Company's common stock, $.05 par value (the
"merger share"). In addition, on October 31, 1994, the Company amended its
Certificate of Incorporation to reflect authorized capital consisting of 10
million shares of common stock, $.01 par value, and 100,000 shares of preferred
stock, $100 par value. Further, the Company entered into an investment agreement
with Wexford and certain former stockholders (collectively the "investors").
Pursuant to that investment agreement, the Company issued 3.5 million shares of
Common Stock in exchange for the merger share. Also, the Company borrowed $2.8
million from Wexford and Acor S.A. and issued the Affilate Notes to such
persons. See "Use of Proceeds" and "The Company--Development of the Company."
The accompanying analysis compares the results of operations of the
Predecessor for the years ended April 1, 1994 and April 2, 1993, the combined
results of operations of the Company and the Predecessor for the year ended
March 31, 1995 and the Predecessor for the year ended April 1, 1994, and the
results of operations of the Company for the nine months ended December 29, 1995
and the combined results of operations of the Predecessor and the Company for
the nine months ended December 31, 1994.
Because of the Acquisition, certain financial information described below
is not comparable in all respects. In addition, comparability is affected
because of certain purchase accounting adjustments made by the Company on
October 31, 1994. The purchase accounting adjustments made by the Company at
October 31, 1994 consisted of: (i) a net decrease in inventories of $44,734
consisting of a reduction of $491,397 attributable to a change in the method
used to estimate the amount of manufacturing overhead included in inventories to
a method based on labor factors rather than a method based upon a combination of
labor and material factors, offset by an increase in the basis of inventories of
$446,664 to reflect their estimated net realizable value; (ii) an increase in
the basis of property and equipment of $382,733 to reflect their estimated fair
value; (iii) an increase in debt obligations of $106,275 to reflect present
values of amounts to be paid determined at current interest rates; (iv) a net
increase in accrued liabilities of $124,859 to reflect the acquisition expenses
of TSG Acquisition Corp. to be paid by the Company, offset by a reduction of
accrued interest and preference fees of $96,000 retired in connection with the
Acquisition; (v) a reduction in accrued restructuring charges of $202,910
retired in connection with the Acquisition; (vi) a reduction of notes payable to
stockholders of $400,000 retired in connection with the Acquisition; (vii) a net
increase in other assets of $429,728 consisting of an increase in identifiable
intangible assets (consisting of product software, patents, customer contracts,
and unpatented technology) of $584,095 to reflect their estimated fair values,
offset by a reduction in goodwill and deferred debt issuance expenses of
$154,367 recorded by the Predecessor; and (viii) an increase in goodwill related
to the Acquisition of $3,853,877. The principal impacts of the purchase
29
<PAGE>
accounting adjustments on the Company's results of operations for the five
months ended March 31, 1995 consisted of a slight increase in depreciation due
to the increase in the basis of property and equipment and their estimated
useful lives, an increase in amortization expense of approximately $100,000 due
to the net increase in the basis of intangible assets, including goodwill, and
their estimated useful lives, and an increase in cost of goods sold of
approximately $235,000 due to the revaluation of inventories. The change in the
method used to estimate the amount of manufacturing overhead included in
inventories did not have a significant effect on the Company's results of
operations for the five months ended March 31, 1995.
Results of Operations
Nine Months Ended December 29, 1995
Compared to the Nine Months Ended December 31, 1994
Sales increased by $9,307,501 or 65%, to $23,677,489 for the nine months
ended December 29, 1995 (first nine months of fiscal 1996) from $14,369,988
($11,108,653 for the Predecessor for seven months ended October 30, 1994 and
$3,261,335 for the Company for the two months ended December 31, 1994) for the
nine months ended December 31, 1994 (first nine months of fiscal 1995). Sales of
smart payphone products and components during the first nine months of fiscal
1996 approximated $15.1 million as compared to $3.3 million during the first
nine months of fiscal 1995. Sales attributable to refurbishment and conversion
services and related payphone components approximated $8.1 million during the
first nine months of fiscal 1996 versus $9.7 million during the first nine
months of fiscal 1995. Sales of wireless payphone products and components
consisting primarily of export sales approximated $561,000 during the first nine
months of fiscal 1996 versus $1.4 million during the first nine months of fiscal
1995. The $11.8 million increase in sales of smart payphone products and
components during the first nine months of fiscal 1996 as compared to the
corresponding period last year is primarily attributable to an increase in smart
product and electronic lock sales volume pursuant to a $21.3 million sales
agreement executed during the later part of fiscal 1995. Pursuant to this sales
agreement, the Company agreed to provide and the customer agreed to purchase
$21.3 million of smart processors and other components over a three-year period.
However, as of the date of this Prospectus, the customer has purchased
approximately 65% of committed volume under the terms of the sales agreement,
and the Company does not anticipate shipping the remaining volume under such
agreement during the 1996 calendar year. See "Business--Sales and
Markets--Domestic" and "Business--Changing Product Mix." Sales of GemStar
products and electronic locks during the first nine months of fiscal 1996
aggregated $11.1 million. Sales attributable to GemStar products and electronic
lock products and an increase in volume of Gemini products were offset by a
reduction in sales volume of Inmate products, which the Company believes is
primarily attributable to the saturation of the inmate institution market. The
16% decline in sales attributable to refurbishment and conversion services and
related payphone components during the first nine months of fiscal 1996 as
compared to the first nine months of fiscal 1995 is primarily attributable to a
reduction in the volume of the Company's service business. The Company believes
that programs instituted by the RBOCs to convert their installed base of public
payphones to smart configurations as well as competition has and may continue to
have an adverse impact on the Company's service business. The decline in the
Company's wireless product sales during the first nine months of fiscal 1996 as
compared to the first nine months of fiscal 1995 is primarily due to a decrease
in export volume to Mexico, which is attributable to the devaluation of the
Mexican peso during fiscal 1995. The Company believes, but cannot ensure, that
the economic conditions in Mexico will stabilize, and that the Company will
re-establish its export sales to Mexico during fiscal 1997.
Cost of products sold increased by $6,860,176, or 57%, to $18,857,150 (80%
of sales) during the first nine months of fiscal 1996 as compared to $11,996,974
($9,176,134 for the Predecessor for the seven months ended October 30, 1994 and
$2,820,840 for the Company for the two months ended December 31, 1994) or 83% of
sales during the first nine months of fiscal 1995. The increase in cost of
products sold is primarily attributable to the 65% increase in sales. The
decrease in production costs as a percent of sales is primarily attributable to
the increase in the volume of business.
30
<PAGE>
General and administrative expenses decreased by $391,837, or 19%, to
$1,712,910 during the nine months ended December 29, 1995 from $2,104,747
($1,742,324 for the Predecessor for the seven months ended October 30, 1994 and
$362,423 for the Company for the two months ended December 31, 1994) during the
nine months ended December 31, 1994, primarily due to cost reductions associated
with the Restructuring. General and administrative expenses during the nine
months ended December 31, 1994 included acquisition expenses of the Predecessor
of $166,000 and amortization of goodwill and other intangible assets of the
Company of approximately $40,000. Amortization of goodwill and other intangible
assets during the nine months ended December 29, 1995 approximated $196,000.
Marketing and selling expenses increased by $406,468, or 81%, to $906,754
during the first nine months of fiscal 1996 as compared to $500,286 ($366,464
for the Predecessor for the seven months ended October 30, 1994 and $133,822 for
the Company for the two months ended December 31, 1994) during the first nine
months of fiscal 1995. The increase is primarily due to royalties attributable
to sales of GemStar and Gemini products, and an elimination of royalties during
the six months ended September 30, 1994 pursuant to a November 9, 1994 amendment
to the royalty provisions of an asset purchase agreement dated January 11, 1991.
Engineering, research and development expenses increased by $182,300, or
27%, to $849,034 for the first nine months of fiscal 1996 as compared to
$666,734 ($457,553 for the Predecessor for the seven months ended October 30,
1994 and $209,181 for the Company for the two months ended December 31, 1994)
for the first nine months of fiscal 1995 primarily due to an expansion of
engineering resources and product development activities.
Interest expense decreased to $705,880 for the nine months ended December
29, 1995 as compared to $740,101 ($599,276 for the Predecessor for the seven
months ended October 30, 1994 and $140,825 for the Company for the two months
ended December 31, 1994) for the nine months ended December 31, 1994 primarily
due to a 3/4% reduction of the interest rate under the Loan and Security
Agreement between the Company and its bank that became effective on October 31,
1994.
The Company generated net income of $660,403 during the nine months ended
December 29, 1995 as compared to a net loss of $812,402 ($423,366 for
Predecessor for the seven months ended October 30, 1994 and $389,036 for the
Company for the two months ended December 31, 1994) during the nine months ended
December 31, 1994. However, the results of the Predecessor during the seven
months ended October 30, 1994 includes a gain from the recognition of a
litigation settlement of $261,022, a gain from the restructuring of debt of
$59,781 and restructuring credits of $534,092. The results of the Company during
the nine months ended December 29, 1995 include the effects of the Acquisition
consisting primarily of amortization of intangible assets, including goodwill,
of $196,000 and an increase in cost of goods sold of approximately $186,000. The
results of operations for the seven months ended October 30, 1994 included
acquisition expenses of $166,000. The results of operations for the two months
ended December 31, 1994 included amortization of intangible assets of
approximately $40,000.
Year Ended March 31, 1995 Compared to the Year Ended April 1, 1994
Sales declined by $10,778,694 or 35%, to $20,270,012 ($11,108,653 for the
Predecessor during the seven months ended October 30, 1994 and $9,161,359 for
the Company during the five months ended March 31, 1995) for the year ended
March 31, 1995 (fiscal 1995) from $31,048,706 during the year ended April 1,
1994 (fiscal 1994). Sales of smart payphone products and components during
fiscal 1995 approximated $6.6 million as compared to $9.0 million during fiscal
1994. Sales attributable to refurbishment and conversion services and related
payphone components approximated $12.3 million during fiscal 1995 versus $21.2
million during fiscal 1994. Sales of wireless payphone products and components
consisting primarily of export sales approximated $1.4 million in fiscal 1995
versus $833,000 in fiscal 1994. The 27% decline in sales of smart payphone
products and components and the 42% decline in sales attributable to
refurbishment and conversion services and related payphone components resulted
primarily from a decrease in the volume of business due to the termination of a
sales agreement for a first generation smart product and the non-renewal of a
refurbishment sales agreement between the Company and one of the RBOCs during
the latter part of 1994 (see "Business -- Changing Product Mix"). The volume
reductions in fiscal 1995 resulting from the termination and non-renewal of
these agreements were offset somewhat by sales under the terms of a sales
agreement between the Company and one of the RBOCs executed in December 1994.
31
<PAGE>
This agreement provides for the Company to supply, over a three-year period, a
minimum of $21.3 million of smart processors and other components to one of the
Company's significant customers at specified prices (see "Business--Sales and
Markets--Domestic" and "Business--Changing Product Mix"). Sales pursuant to the
terms of this agreement during the five months ended March 31, 1995 approximated
$2.6 million. The increase in the Company's wireless product sales in fiscal
1995 as compared to fiscal 1994 is attributable to an increase in export volume.
However, during the third quarter of fiscal 1995, the devaluation of the Mexican
peso had an adverse impact on export sales to one of the Company's primary
foreign customers.
Cost of products sold decreased by $8,359,452, or 32%, to $17,402,379
($9,176,134 for the Predecessor during the seven months ended October 30, 1994
and $8,226,245 for the Company during the five months ended March 31, 1995) in
fiscal 1995 as compared to fiscal 1994 and represented 86% of sales in fiscal
1995 versus 83% of sales in fiscal 1994. The decrease in cost of products sold
is primarily attributable to a 35% decrease in sales, which was offset by a net
increase in production costs during fiscal 1995. Higher production costs as a
percentage of sales, damages of $200,000 attributable to a product recall
initiated in April 1995 (see "Liquidity and Capital Resources," below) and the
effects of the Acquisition consisting primarily of an increase in cost of goods
sold of approximately $235,000 for the five months ended March 31, 1995 offset
decreases in provisions for obsolete and excess inventory of approximately
$758,000 and warranty expense of approximately $347,000 related to reserves
established in fiscal 1994.
In connection with a restructuring initiated during fiscal 1994 (the "1994
Restructuring"), the Company closed one of its manufacturing facilities, three
satellite office locations and relocated its corporate headquarters from
Pennsylvania to Georgia. Primarily as a result of such restructuring, the
Company's general and administrative personnel and other operating expenses
declined by $884,539, or 25%, to $2,592,393 ($1,742,324 for the Predecessor
during the seven months ended October 30, 1994 and $850,069 for the Company
during the five months ended March 31, 1995) in fiscal 1995 as compared to
$3,476,932 in fiscal 1994. Cost reductions attributable to the 1994
Restructuring were offset somewhat by Acquisition expenses of approximately
$166,000 during the seven months ended October 30, 1994 and amortization expense
of approximately $100,000 during the five months ended March 31, 1995.
Marketing and selling expenses declined by $1,010,593, or 58%, to $738,221
($366,464 for the Predecessor during the seven months ended October 30, 1994 and
$371,757 for the Company during the five months ended March 31, 1995) in fiscal
1995 as compared to $1,748,814 during fiscal 1994. This reduction in marketing
and selling expenses is attributable to personnel and other operating expense
reductions resulting from the 1994 Restructuring and the curtailment of
participation at trade shows during fiscal 1995. In addition, royalty expense
during fiscal 1995 declined by approximately $188,000 as a result of an
amendment to the royalty provisions of an asset purchase agreement dated January
11, 1991 that eliminated royalty obligations for the six months ended September
30, 1994.
Engineering, research and development expenses declined by $1,071,476, or
53%, to $938,048 ($457,553 for the Predecessor during the seven months ended
October 30, 1994 and $480,495 for the Company during the five months ended March
31, 1995) in fiscal 1995 as compared to $2,009,524 during fiscal 1994. The
reduction in engineering, research and development expenses is attributable to
personnel and other operating expense reductions resulting from the 1994
Restructuring and the refocus of research and development activities towards
specific products which the Company believes, but cannot assure, have
significant market potential.
During the five months ended March 31, 1995, the Company settled severance
obligations pursuant to employment contracts terminated in fiscal 1994 and
negotiated the termination of certain non-cancelable lease obligations with
respect to facilities closed in connection with the 1994 Restructuring. The
severance and lease obligations were settled on terms more favorable than
estimated during the year ended April 1, 1994, which resulted in the recognition
of restructuring credits of $248,684 and $274,659, respectively, during the
seven months ended October 30, 1994. Restructuring credits recognized during the
seven months ended October 30, 1994 aggregated $534,092.
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Interest expense increased by $44,079, or 5%, to $955,900 ($599,276 for the
Predecessor during the seven months ended October 30, 1994 and $356,624 for the
Company during the five months ended March 31, 1995) in fiscal 1995 from
$911,821 in fiscal 1994 primarily as a result of interest and preference fees
related to $400,000 of subordinated notes payable to former stockholders which
were retired in connection with the Acquisition. Otherwise, interest rate
fluctuations and a rate reduction associated with an October 31, 1994 amendment
to the Loan and Security Agreement between the Company and its bank offset the
impact of higher debt balances during fiscal 1995 as compared to fiscal 1994.
During the seven months ended October 30, 1994, the Company settled
litigation against a supplier to recover costs and damages attributable to
defective components supplied to the Company, and realized a gain of
approximately $261,000, net of legal fees of $56,000.
As a result of the foregoing, the Company's net loss decreased by
$3,996,478, from $5,485,425 in fiscal 1994 to $1,488,947 in fiscal 1995
($423,366 for the Predecessor during the seven months ended October 30, 1994 and
$1,065,581 for the Company during the five months ended March 31, 1995). The
results of the Predecessor during the seven months ended October 30, 1994
include the recognition of restructuring credits and the gain from recognition
of the litigation settlement of $534,092 and $261,022, respectively, and
expenses of approximately $166,000 incurred in connection with the Acquisition.
The results of the Company during the five months ended March 31, 1995 included
the recognition of product recall damages of $200,000 and the effects of the
Acquisition consisting primarily of an increase in cost of goods sold of
approximately $235,000 and amortization of intangible assets, including
goodwill, of approximately $100,000.
Year Ended April 1, 1994 Compared to the Year Ended April 2, 1993
Sales increased by $512,738, or 2%, to $31,048,706 during the year ended
April 1, 1994 (fiscal 1994) from $30,535,968 during the year ended April 2, 1993
(fiscal 1993). Sales of smart payphone products and components during fiscal
1994 approximated $9.0 million as compared to $7.8 million during fiscal 1993.
Sales attributable to refurbishment and conversion services and related payphone
components approximated $21.2 million in fiscal 1994 versus $22.2 million in
fiscal 1993. Sales of wireless payphone products and components consisting
primarily of export sales approximated $833,000 in fiscal 1994 versus $584,000
million in fiscal 1993. The 15% increase in sales of smart payphone products and
components in fiscal 1994 as compared to fiscal 1993 was primarily attributable
to an increase in volume under a first generation smart product sales agreement
with one of the Company's then significant RBOC customers. However, during the
third quarter of fiscal 1994, the Company's sales volume under the terms of such
sales agreement declined substantially and in the fourth quarter, the agreement
was terminated by the RBOC (see "Business -- Changing Product Mix"). The slight
decline in sales attributable to refurbishment and conversion services and
related payphone components from fiscal 1993 to fiscal 1994 was primarily
attributable to lower service volumes, which was related to changes in customer
business practices, as well as the non-renewal of one of the Company's
significant refurbishment sales agreements during the latter part of fiscal 1994
(see "Business -- Changing Product Mix"). The 43% increase in the Company's
wireless product sales in fiscal 1994 as compared to fiscal 1993 is attributable
to an increase in export volume to Mexico and the establishment of a
distribution relationship in Korea. See "Business--Sales and Markets".
Cost of products sold increased by $1,678,512, or 7%, in fiscal 1994 as
compared to fiscal 1993 and represented 83% of sales in fiscal 1994 versus 79%
of sales in fiscal 1993. The increase in cost of products sold is primarily
attributable to the increase in sales and increases in provisions for obsolete
and excess inventory of $989,000 and warranty expense of $250,000 related
primarily to estimated losses attributable to the termination and non-renewal of
the above-mentioned sales agreement and estimated additional warranty claims
related to one of such contracts.
General and administrative expenses increased by approximately 4% to
$3,476,932 in fiscal 1994 from $3,333,996 in fiscal 1993. The increase is
primarily related to an investigation into alleged environmental contamination
at one of the Company's former facilities (see "Risk Factors--Potential
Environmental Liabilities") and an increase in resources devoted to information
systems.
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Marketing and selling expenses declined by approximately 6% to $1,748,814
in fiscal 1994 from $1,865,134 in fiscal 1993 primarily as a result of a
reduction of international marketing activities initiated during fiscal 1993.
Engineering, research and development expenses declined by approximately
10%, and represented 6.5% of sales in fiscal 1994 as compared 7.3% of sales in
fiscal 1993. This reduction in engineering, research and development expenses is
primarily related to a reduction of personnel associated with the development of
certain wireless payphone products which were substantially completed in fiscal
1993 or curtailed in fiscal 1994.
Interest expense increased by $102,232, or 13%, to $911,821 in fiscal 1994
from $809,589 in fiscal 1993 as a result of a slight increase in interest rates
and an increase in average monthly debt balances under a revolving debt
agreement between the Company and its bank. See "Liquidity and Capital
Resources," below.
In February 1994, the Company initiated the 1994 Restructuring to
consolidate its business and reduce its costs and expenses. In connection with
such restructuring, the Company recorded a restructuring charge of $2,570,652
consisting of estimated severance obligations and payments pursuant to the terms
of terminated employment contracts of $1,089,251, loss provisions of $296,875
representing a note receivable and related accrued interest due from a former
executive, estimated future noncancellable lease payments and write-downs of
facility assets to estimated net realizable value of $894,526, a loss provision
of $150,000 related to the termination of certain product lines and other
estimated plant shut-down costs of $140,000.
During fiscal 1993, the Company ceased efforts to market certain
non-regulated payphone products and recorded a loss provision of $150,000
related to the write-down to estimated net realizable value of assets associated
with the ability to provide rating capability to that segment of the payphone
market. As a result, other charges declined from $200,875 in fiscal 1993 to
$54,557 in fiscal 1994.
As a result of the aforementioned cost and expense increases, consisting
primarily of production costs and the fiscal 1994 restructuring charges, the
Company's net loss increased by $3,486,928, from $1,998,497 in fiscal 1993 to
$5,485,425 in fiscal 1994.
Liquidity and Capital Resources
The Company finances its operations primarily through borrowings and,
although the Company and its Predecessor have a recent history of net losses
from the public communication business, cash flow from operations.
The Loan Agreement provides financing to the Company under a revolving
credit agreement and term and installment notes of up to $9 million.
Concurrently with the Acquisition, the Loan Agreement was amended. Pursuant to
the amendment, $2.2 million of debt outstanding under the revolving credit
agreement was converted into a term note payable on November 30, 1997, the
interest rate on amounts borrowed under the terms of the Loan Agreement was
reduced by 3/4% and the term of the Loan Agreement was extended from May 31,
1995 to November 30, 1997. At March 31, 1995 and December 29, 1995, the Company
had borrowed an aggregate of $970,197 and $5,546,529, respectively, under the
revolving credit agreement and $2,857,857 and $2,563,214, respectively, under
term and installment notes, including the $2.2 million term note due November
30, 1997. At December 29, 1995, the term and installment notes consisted of a
term note with an outstanding balance of $2.2 million, a term note with an
outstanding balance of $348,214 and an installment note with an outstanding
balance of $15,000. As of the date of this Prospectus, outstanding indebtedness
under the Loan Agreement bears interest at a variable rate per annum equal to
11/2% above a base rate quoted by Citibank, N.A. The interest rate was reduced
from 2% above a base rate quoted by Citibank, N.A. on March 1, 1996. The base
rate at December 31, 1995 was 8.5% per annum. Amounts borrowed under the
revolving credit agreement and the term and installment notes are secured by
substantially all assets of the Company, including accounts receivable,
inventories and property and equipment. The Loan Agreement expires on November
30, 1997, and is renewable annually for one-year periods unless terminated by
the bank upon an occurrence of an event of default or by the Company upon at
least 90 days notice. See "Use of Proceeds."
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The Company has also established a cash management program with its bank
pursuant to which the Company funds drafts as they clear the bank. Accordingly,
the Company maintains bank overdrafts representing outstanding drafts and
utilizes the cash management account as a source of funding.
The Loan Agreement contains conditions and covenants that prevent or
restrict the Company from engaging in certain transactions without the consent
of the bank, including merging or consolidating, payment of subordinated
stockholder debt obligations, declaration or payment of dividends, and
disposition of assets, among others. Additionally, the Loan Agreement requires
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 conditions and covenants or the occurrence of an event of default, if
not waived or corrected, could accelerate the maturity of the borrowings
outstanding under the Loan Agreement.
At April 1, 1994, the Company was in default of certain conditions and
covenants set forth in the Loan Agreement, including cash flow and net worth
covenants. Although the Loan Agreement was amended in June 1994 to provide less
restrictive financial covenants, the Company was in default of the amended cash
flow covenant soon thereafter. Accordingly, the outstanding obligations pursuant
to bank term and installment notes were classified as current liabilities in the
Company's consolidated financial statements as of April 1, 1994. In addition,
the conditions of default existed at October 30, 1994 prior to the Acquisition.
However, the October 31, 1994 amendment to the Loan Agreement, as further
amended on March 31, 1995, provided less restrictive covenants which enabled the
Company to be in compliance. Although the Company is in compliance with the
covenants set forth in the Loan Agreement as of the date of this Prospectus,
there is no assurance that the Company will be able to remain in compliance with
such covenants in the future.
The Loan Agreement contains provisions that require the Company to deposit
all cash receipts into a lock box account for repayment of amounts borrowed
under the revolving credit agreement. The Company is able to borrow funds under
the revolving credit agreement up to an aggregate amount based on specified
percentages of accounts receivable and inventories deemed to be eligible
collateral by the bank, less amounts outstanding under the $2.2 million term
note due November 30, 1997. During fiscal 1993 and fiscal 1994 and the first
seven months of fiscal 1995 prior to the Acquisition, the Company generally
maintained its outstanding borrowings under the revolving credit agreement at
the maximum amount permitted. Financing available to the Company during these
periods was not sufficient to fund the working capital, capital expenditure and
debt service requirements of the Company, and the Company was unable to meet its
accrued liability and supplier obligations as they became due.
At April 1, 1994, the Company was in default of the terms of unsecured
promissory notes with outstanding balances aggregating $425,536 as a result of
its failure to make certain royalty payments. However, on November 9, 1994, the
Company entered into an amendment agreement which brought the Company into
compliance with the terms of the note agreements. Pursuant to the amendment
agreement, the Company executed a non-interest bearing promissory note in the
principal amount of $206,595 representing unpaid royalties as of October 30,
1994. The note is payable in nineteen equal monthly installments of $10,873
commencing in December 1994.
During fiscal 1993, the Company generated $2,941,673 of cash from financing
activities and used $2,102,697 and $667,606 of cash to fund operating and
investing activities, respectively. During fiscal 1993, the Company used
$709,167 of cash to fund operating losses, net of non-cash charges, and used
cash to fund increases in accounts receivable and inventories of $1,627,799 and
$1,005,640, respectively, and prepaid expenses of $237,438. The Company's
capital expenditures amounted to $676,212 and principal payments on long-term
debt and capital lease obligations amounted to $657,174. An increase in amounts
borrowed under the revolving credit agreement of $2,615,034, proceeds of
$632,137 pursuant to an August 1992 amendment to an installment note between the
Company and its bank and an increase in bank overdrafts of $351,676 were not
sufficient to fund the above-mentioned cash requirements and, in addition
thereto, the Company's accrued liability and supplier obligations as they became
due. Accordingly, the Company delayed payments of accrued liability obligations
and payments to suppliers, which provided cash of $1,394,997 during fiscal 1993.
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During fiscal 1994, the Company generated $3,081,294 of cash from operating
activities and used $297,026 and $3,014,745 of cash to fund investing and
financing activities, respectively. During fiscal 1994, the Company used
$618,928 of cash to fund operating losses, net of non-cash charges, but was able
to generate cash from reductions in accounts receivable and inventories of
$2,019,659 and $582,102, respectively, and prepaid expenses of $357,377. The
Company's capital expenditures amounted to $309,851 and principal payments on
long-term debt and capital lease obligations amounted to $929,117. As a result
of the reductions in accounts receivable and inventories, the Company repaid
$1,375,686 of amounts borrowed under the revolving credit agreement. Also, the
Company repaid bank overdrafts of $709,942. The Company continued to delay the
payment of accrued liability and suppliers obligations and accrued restructuring
changes which provided cash of $762,275 during fiscal 1994.
The Company's liquidity deficiencies continued into fiscal 1995. In April
1994, amounts borrowed under the revolving credit agreement between the Company
and its bank exceeded the maximum amount permitted. However, the Company and its
bank entered into an amendment that provided an overadvance of $300,000 to the
Company that was repaid by May 31, 1994 in accordance with the terms of the
amendment. In addition, in June 1994, the Company borrowed $400,000 from its
preferred stockholders and issued a promissory note payable on demand bearing
interest at a rate of 10% per annum. Concurrently with the issuance of the
subordinated promissory note, the Company and its bank entered into an amendment
to the Loan Agreement and the Company borrowed $402,500 pursuant to an amended
installment note.
During the seven months ended October 30, 1994, the Company generated
$914,820 of cash from operating activities and used $9,840 and $824,025 of cash
to fund investing and financing activities, respectively. During the seven
months ended October 30, 1994, the Company used $159,419 of cash to fund
operating losses, net of non-cash charges, but was able to generate cash from
reductions in accounts receivable and inventories of $577,671 and $1,387,946,
respectively, and prepaid expenses of $66,940. The Company's capital
expenditures were reduced to $21,481 and principal payments on long-term debt
and capital lease obligations amounted to $459,084. As a result of the
reductions in accounts receivable and inventories, the Company repaid $1,491,074
of amounts borrowed under the revolving credit agreement. An increase in bank
overdrafts provided cash of $323,633. Although the inability of the Company to
meet its accrued liability and supplier obligations as they became due
continued, the Company used $965,672 of cash to reduce accounts payable and
accrued liability obligations and accrued restructuring charges during the seven
months ended October 30, 1994.
Pursuant to the October 31, 1994 investment agreement entered into in
connection with the Acquisition, the Company borrowed $2.8 million from Wexford
and Acor S.A. and issued subordinated promissory notes due November 1, 1999 that
bear interest at a rate of 10% per annum. The initial proceeds of $2,569,298
were used to retire debt outstanding under the revolving credit agreement, which
left an outstanding obligation under a new $2.2 million term note of $1,291,667.
Between October 31, 1994 and March 31, 1995, the Company borrowed the balance
available under the $2.2 million term note ($908,333) and reborrowed $970,196
under its revolving credit agreement. See "The Company--Development of the
Company."
In December 1994, the Company sold the rights to certain product software
for an aggregate purchase price of $500,000. The Company received back an
exclusive irrevocable perpetual right to sublicense the software in connection
with the sale of related products. In return, the Company agreed to pay
royalties on sales of licensed products to other customers. Such royalties would
be payable commencing if, and only if, laws, regulations or judicial actions
occur which would permit the purchaser of the software to receive such royalty
payments. The Company is obligated to repay, three years from the date of sale,
a portion of the purchase price up to a maximum amount of $375,000, which is
reflected as deferred revenue in the Company's Consolidated Financial Statements
included elsewhere in this Prospectus. The actual amount of any repayment is
dependent upon the amount of aggregate royalties paid pursuant to the license
agreement. The amount of repayment will equal: (i) $375,000 if aggregate
royalties paid amount to less than $125,000; (ii) $250,000 if aggregate
royalties paid are greater than $125,000 but less than $250,000; or (iii)
$125,000 if aggregate royalties paid are greater than $250,000 but less than
$375,000. If aggregate royalties paid during the first three years of the
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agreement exceed $375,000, the Company is not required to repay any portion of
the purchase price. As of the date of this Prospectus, the Company is not
obligated to pay and has not paid any royalties under the agreement.
The October 31, 1994 investor debt financing and the proceeds from the
software sale enabled the Company to stabilize its liquidity position. During
the five months ended March 31, 1995, the Company generated $1,747,638 of cash
from financing activities and used $1,597,674 and $59,956 of cash to fund
operating and investing activities, respectively. During the five months ended
March 31, 1995, the Company used $358,182 of cash to fund operating losses, net
of non-cash charges, and used $329,469 and $764,211 of cash to fund increases in
accounts receivable and inventories, respectively. The Company's capital
expenditures amounted to $59,956 and principal payments on long-term debt and
capital lease obligations amounted to $482,307. The Company continued to reduce
its accounts payable and accrued liability obligations and accrued restructuring
charges, which resulted in a use of cash of $618,352 in the aggregate.
During the nine months ended December 29, 1995, the Company generated cash
of $4,020,111 from financing activities and used $4,072,975 and $164,593 of cash
to fund operating and investing activities, respectively. During the nine months
ended December 29, 1995, the Company generated a profit of $660,403, and
generated $1,734,779 in cash, net of non-cash charges. The Company borrowed
$4,576,332 under its revolving credit agreement and generated cash of $222,022
from bank overdrafts. Cash used to fund increases in accounts receivable and
inventories amounted to $5,779,384 and $1,077,648, respectively. The Company's
capital expenditures amounted to $164,593 and principal payments on long-term
debt and capital lease obligations amounted to $778,243. A net increase in the
Company's supplier and accrued liability obligations and accrued restructuring
charges provided cash of $1,168,761. The Company expended $140,651 of cash to
fund the acquisition of a patent license and the expenses of the Offering during
the nine months ended December 29, 1995.
The Company has not entered into any significant commitments for the
purchase of capital assets. However, the Company intends to purchase and install
information systems and capital equipment, including printed circuit board
assembly equipment and other manufacturing equipment, to advance its prototype
manufacturing and product testing capabilities during the eighteen months
following the date of the Prospectus. In addition, the Company intends to expand
its manufacturing capabilities through the purchase of capital equipment in the
future as required to meet the needs of its business. The Company expects to use
approximately $800,000 of the net proceeds of this offering to fund anticipated
capital expenditures during the next eighteen months (see "Use of Proceeds").
The Company believes, based on its current plans and assumptions relating to its
operations, that its sources of capital, including capital available under its
revolving credit line, cash flow from operations, and the proceeds of this
Offering will be adequate to satisfy its anticipated cash needs, including
anticipated capital expenditures, for at least the next twelve months following
consummation of the Offering. However, there can be no assurance that capital
expenditures will be made as planned or that additional capital expenditures
will not be required. The Company also believes, based on its current plans and
assumptions relating to its operations, that its sources of capital will be
adequate to satisfy its anticipated cash needs, including capital expenditures,
for fiscal 1998. However, in the event that the Company's plans or the basis for
its assumptions change or prove to be inaccurate, or cash flow and sources of
capital prove to be insufficient to provide for the Company' s cash requirements
(due to unanticipated expenses, loss of sales revenues, problems, operating
difficulties or otherwise), the Company would be required to seek additional
financing. In such an event, there can be no assurance that additional financing
will be available to the Company on commercially reasonable terms, or at all.
See "Risk Factors -Possible Need for Additional Financing" and "Risk
Factors--Forward Looking Statements."
Extension of credit to customers and inventory purchases represent the
principal working capital requirements of the Company, and significant increases
in accounts receivable and inventory balances could have an adverse effect on
the Company's liquidity. The Company's accounts receivable, less allowances for
doubtful accounts, at December 29, 1995 and March 31, 1995 amounted to
$8,390,725 and $2,670,086, respectively, as compared to $2,941,943 at April 1,
1994. Accounts receivable at December 29, 1995, March 31, 1995 and April 1, 1994
consists primarily of amounts due from the RBOCs. The increase in accounts
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receivable at December 29, 1995 as compared to March 31, 1995 is attributable to
the Company granting extended credit terms to one of its customers. Such
accounts receivable were $3.6 million at December 29, 1995, and were
subsequently collected in February 1996. The Company's inventories, less
allowances for potential losses due to obsolescence and excess quantities
amounted to $6,586,809 and $5,526,513 at December 29, 1995 and March 31, 1995,
respectively, as compared to $6,624,471 at April 1, 1994. 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. The
Company markets a wide range of services and products and the requirements of
its customers vary significantly from period to period. Accordingly, inventory
balances may vary significantly.
In October 1994, the Company entered into a contract manufacturing
agreement that provides for the production of certain smart payphone processors.
Pursuant to the terms of the manufacturing agreement, the Company committed to
purchase $12.2 million of product over an eighteen-month period beginning in
December 1994. In addition, in November 1994, the Company entered into a dealer
agreement that commits the Company to purchase approximately $3.5 million of
electronic lock devices over a two-year period. See "Business--Manufacturing,
Assembly and Sources of Supply." Purchases under the terms of these agreements
fluctuate based on delivery requirements established by the Company. The Company
initially scheduled purchases pursuant to these agreements based on anticipated
quantities required to meet its sales commitments (see "Business--Changing
Product Mix"). As of March 1, 1996, the Company had acquired approximately 75%
and 77%, respectively, of committed purchase volume pursuant to these purchase
agreements. However, the Company presently anticipates that scheduled purchases
through December 1996 will exceed sales requirements as a result of changes in
customer delivery requirements. Although the Company is encouraging its customer
to accelerate purchases and is seeking to reschedule deliveries pursuant to such
agreements, an increase in inventories related to such agreements is anticipated
and such increase could approximate as much as $2.0 million. See
"Business--Manufacturing, Assembly and Sources of Supply."
The Company committed to supply to one of its significant RBOC customers a
minimum of $21.3 million of smart processors and components at specified prices
over a three-year period pursuant to a December 1994 sales agreement. This
agreement also provides for penalties and damages in the event the Company is
unable to meet specified performance criteria. In December 1995, the Company
entered into an amendment to a sales agreement with another significant RBOC
customer that provides for the sale of approximately $12 million of smart
products and other components over a period of eight months commencing November
1, 1995. Both of these sales agreements may be terminated at the option of the
customer upon prior notice to the Company. The termination of these or any of
the Company's sales agreements could have a material adverse effect on the
Company's business and, therefore, its liquidity. Further, any assessment of
penalties and damages under the Company's sales contracts could have a material
adverse effect on the Company's operating results and liquidity. See
"Business--Sales and Markets--Domestic" and Business--Changing Product Mix."
In April 1995, the Company initiated a recall of products due to
contamination introduced into the manufacturing process by the Company's
contract manufacturer. Although the Company's contract manufacturer was
responsible for the repair or replacement of the recalled product, the Company
incurred liquidated damages under the terms of the sales agreement with its
customer in the amount of $200,000. The damages were paid by an $8.00 price
reduction over the next 25,000 units shipped after July 1, 1995. This liability
was recorded in the Company's Consolidated Financial Statements at March 31,
1995. Also, the Company agreed to extend its warranty on up to 5,000 units
shipped under the terms of the sales agreement through December 31, 1998.
However, the Company does not anticipate that it will incur significant warranty
costs as a result of the extended warranty. See "Business--Sales and
Markets--Domestic" and "Business -- Changing Product Mix."
During October 1994, the Company, its bank and a contract manufacturer
entered into an escrow agreement as security for the payment of the Company's
obligations to the contract manufacturer. In May 1995, the Company issued common
stock purchase warrants that provide the contract manufacturer with the right to
purchase 40,000 shares of the Common Stock at a price of $4.00 per share for a
period of five years in return for extension of credit of $1.5 million and
45-day payment terms to the Company. This agreement had a significant favorable
impact on the Company's liquidity. However, if the Company defaults with respect
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to the payment terms, the Company will be required to utilize the escrow account
previously established, which could have a significant adverse effect on the
Company's liquidity. See "Business--Manufacturing, Assembly and Sources of
Supply."
The Company is the defendant in a suit against the Company to collect
approximately $400,000 of unpaid obligations recorded in the Company's
consolidated financial statements at March 31, 1995. The Company believes that
the supplier supplied defective components that contributed to the termination
of a first generation smart product sales contract during fiscal 1994. Although
the Company believes that it has an offsetting claim, there is no assurance that
the suit can be resolved in the Company's favor. Since the unpaid obligations
are recorded in the Company's consolidated financial statements, it is the
opinion of management that the ultimate outcome of this proceeding will not have
a material effect on the Company's results of operations or financial position.
See "Legal Proceedings and Disputes."
Change in Independent Auditors
On November 1, 1994, the Company's Board of Directors dismissed Price
Waterhouse LLP as its independent auditor and retained Deloitte & Touche LLP as
its independent auditor. The reports of Price Waterhouse LLP on the consolidated
financial statements for the years ended April 1, 1994 and April 2, 1993
included an explanatory paragraph relating to the Company's ability to continue
as a going concern. In connection with its audits for the years ended April 1,
1994 and April 2, 1993 and through November 1, 1994, there were no disagreements
with Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to the satisfaction of Price Waterhouse LLP,
would have caused them to make reference thereto in their reports on the
Company's consolidated financial statements for such periods.
Net Operating Loss Carryforwards
As of March 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $21.1 million to offset future taxable
income. Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards is limited after an ownership
change, as defined in such Section 382, to an annual amount equal to the value
of the loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term tax-exempt rate in effect
during the month the ownership change occurred. Such an ownership change
occurred on October 31, 1994 and could occur in the future. As a result, the
Company will be subject to an annual limitation on the use of its net operating
losses of approximately $204,000. This limitation only affects net operating
losses incurred up to the ownership change and does not reduce the total amount
of net operating losses which may be taken, but limits the amount which may be
used in a particular year. Therefore, in the event the Company achieves
profitability, such limitation would have the effect of increasing the Company's
tax liability and reducing net income and available cash resources of the
Company if the taxable income during a year exceeded the allowable loss carried
forward to that year. In addition, because of such limitations, the Company will
be unable to use a significant portion of its net operating loss carryforwards.
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BUSINESS
General
The Company is engaged in the design, development, manufacture and
marketing of public communication products consisting of payphone components,
electronic payphone products, microprocessor-based wireline and wireless
payphone products and related payphone software management systems. The
Company's products include smart payphone products sold under the "Gemini",
"Inmate", "GemStar" and "GemCell" trademarks. Smart payphone products are based
upon microprocessor technology and perform a variety of functions, including
calling card, debit card and credit card control, data storage, call progress
detection, call rating and maintenance, diagnostic and coin administration
functions. The Company is also a provider of payphone and payphone component
repair, refurbishment and upgrade conversion services to the regulated telephone
operating companies in the United States, which consist of the seven RBOCs and
other local exchange carriers. The Company markets its products and services
primarily to the seven RBOCs in the United States. The seven RBOCs include
Ameritech Services Inc., Bell Atlantic, BellSouth Telecommunications Inc.,
NYNEX, Pacific Telesis Inc., SWB and U.S. West. The Company also markets and
sells its products and services to inter-exchange carriers ("IXC") and cellular
providers in certain international markets. The Company has derived the vast
majority of its revenues from sales to four of the RBOCs. The Company has also
entered the international market place for wireline and cellular payphone
products which it believes provides an opportunity for growth.
The Public Payphone Industry
Regulatory Background. Public telecommunication services, including "coin"
or "pay" telephone service, in the United States are presently provided by
regulated telephone operating companies, including those owned by the RBOCs,
referred to as local exchange carriers ("LECs"), AT&T and independent payphone
providers. The operations of AT&T and the local exchange carriers are subject to
extensive regulation by the Federal Communications Commission ("FCC") and state
regulatory agencies (see "Government Regulation," below). Virtually all services
offered by LECs, including payphone services, are provided in accordance with
tariffs filed with appropriate regulatory agencies, including the FCC.
Independent payphone providers are subject to regulations of state regulatory
agencies.
The majority of pay telephones ("payphones") in service are owned and
operated by the regulated telephone operating subsidiaries of the seven RBOCs
which were formed as part of the divestiture by AT&T in 1984 (the "AT&T
Divestiture"). It is believed that the RBOCs control approximately 1.5 million
of an estimated 2.1 million payphones in service. The remaining installed base
of payphones are owned and operated by the large independent telephone operating
companies (such as GTE), other local exchange carriers and independent payphone
providers.
Subsequent to the AT&T Divestiture until 1988, the payphone industry
comprised primarily regulated telephone operating companies (including the
RBOCs) and AT&T. AT&T maintained the coinless payphones in the United States and
the coin payphones were retained entirely by the regulated telephone operating
companies. These payphones remained in the regulated rate base, and
long-distance traffic generated from these devices was sent to the
inter-exchange carrier chosen by the telephone company.
In June 1984, the FCC approved the operation of independently owned
payphones, which theoretically permitted independent payphone providers to enter
the industry. However, barriers to entry into the industry by private payphone
providers were substantial. The RBOCs had in place and available the services of
the central offices to provide payphone service, including call rating and
routing information, the "bong" tone that signals callers to input calling card
numbers, and collection/return signaling for the payphone to collect or return
coins. These services were not required to be made available to independent
payphone providers and placed them at a disadvantage. Also, since the RBOCs
selected the inter-exchange carrier to carry long-distance traffic generated by
payphones, independent payphone operators were generally unable to generate
revenues from non-coin long-distance payphone calls until 1988 upon judicial
rulings that equal access applied to payphones.
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Development of Smart Payphones. The payphone historically deployed by the
RBOCs was essentially a mechanical device that performed the functions of a
normal residential telephone, with the additional ability to hold and collect or
refund coins. In this conventional payphone system, all of the intelligence
required to provide service is located at the central office or other network
locations of the long distance or local exchange carrier which is supplied to
the payphone via a "coin line."
Regulatory actions, together with the development of technologically
advanced microprocessor-based payphones that perform the functions of the
central office within the telephone, have enabled independent payphone operators
to enter the industry and compete effectively with the regulated telephone
operating companies. Microprocessor-based technology has provided independent
payphone providers with the capability to route and determine the proper charges
for calls ("rate") and to deploy payphones containing maintenance diagnostics
and reporting features, coin administration features, and station message detail
recording and reporting features. These features enable independent payphone
providers to either route calls to Alternate Operator Services ("AOS") or to
store and retrieve call data and billing information thereby allowing the owner
to share in the long-distance revenues generated by the phone, reduce the cost
of maintenance and collection, and to monitor coin pilferage, among other
things.
In response to the competitive pressures from independent payphone
providers, many of the RBOCs and other local exchange carriers have begun to
upgrade their payphone base with microprocessor-based technology, which are
referred to in the industry as "smart" payphones. The Company's prospects for
future and continued profitability are largely dependent on such trend
continuing. See "Risk Factors."
Domestic Regulatory Outlook. On February 8, 1996, the President signed into
law the Telecommunications Act of 1996 (the "Telecommunications Act"), the most
comprehensive reform of communications law since the enactment of the
Communications Act of 1934. The Telecommunications Act eliminates longstanding
legal barriers separating LECs, long distance carriers, and cable television
companies and preempts conflicting state laws in an effort to foster greater
competition in all telecommunications market sectors, improve the quality of
services and lower prices.
The Telecommunications Act expressly supersedes the consent decree which
led to the AT&T Divestiture, including the line-of-business restrictions that
prohibited the RBOCs from providing inter-exchange services and from
manufacturing telecommunications equipment. The RBOCs are now permitted to
provide inter-exchange service outside their local service areas and to seek
approval from the FCC to provide inter-exchange service within their local
service areas based upon a showing that they have opened their local exchange
markets to competition. After the FCC has given its approval to a request to
provide in-region inter-exchange service, the RBOC may also engage in the
manufacture and provision of telecommunications equipment and the manufacture of
customer premises equipment. Such manufacturing enterprises must be conducted
through separate affiliates for at least three years after the date of enactment
of the Telecommunications Act. In addition, an RBOC may not discriminate in
favor of equipment produced or supplied by an affiliate but rather must make
procurement decisions based on an objective assessment of price, quality,
delivery and other commercial factors.
The Company believes that as a result of the reform legislation, the public
communications industry will undergo fundamental changes, many of which may
affect the Company's business. The legislation is likely to increase the number
of providers of telecommunications services, including perhaps providers of
payphone services. This increase in the number of providers is likely to
stimulate demand for new payphone equipment. In such event, the Company believes
that existing payphone providers, including the RBOCs, could seek to enhance
their technology base in order to compete more effectively with each other and
with new entrants. In addition, as the local exchange and intrastate long
distance markets are opened to competition, inter-exchange carriers seeking to
serve these markets may deploy greater numbers of payphones to capture local and
intrastate traffic. The Company believes that, in such an environment payphone
technology could continue to evolve, perhaps into "Public Access Terminals"
providing a gateway to a network for voice, data and video and information
superhighway applications. There can be no assurance, however, that these trends
will develop, or that if they do develop, they will have a beneficial impact on
the payphone market generally or on the Company's business in particular. See
"Risk Factors--Changing Regulatory."
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The International Outlook. Internationally, it is estimated that there are
several million payphones in the installed base. Public communication services
in foreign countries are presently provided by large government controlled
postal, telephone and telegraph companies ("PTTs"), former PTTs that have been
privatized for the purpose of investing in and expanding telecommunication
networks and services, and cellular carriers. The Company believes that a
perceived trend toward privatization and liberalization of the international
telecommunication industry is opening the international markets, previously
dominated by monopoly and government infrastructure, to increased competition.
In addition, many countries are allowing private firms to construct cellular
networks and compete with national telecommunication authorities. It is believed
that some of the large United States based telecommunications companies,
including certain RBOCs, have invested in telecommunication opportunities abroad
including the acquisition of interests in the privatized PTTs and consortiums
for the acquisition of licenses and construction of cellular networks to provide
cellular communication services.
Presently, the density of payphone installations in many foreign countries
on a per capita basis is far less than that in the United States. The Company
believes that many of these countries are seeking to expand and upgrade their
telecommunications systems and are funding programs to provide communication
services to the public. The expansion programs include the construction of
wireless networks, and the Company believes that wireless payphone service will
become one of the primary avenues of providing communication services to the
public in certain foreign markets. The Company believes that large scale
payphone deployment programs are underway in Mexico, Argentina, Indonesia, China
and elsewhere, and that the international public communications industry will
continue to evolve and be a significant growth industry over the next several
decades to the extent that privatization and the investment in and expansion of
both wireline and wireless networks progresses.
Although foreign markets are believed to be a potential source of
significant demand for the Company's products, there are impediments to the
Company's ability to penetrate such markets, including resource limitations,
regulations and the normal difficulties attendant on conducting international
business. See "Risk Factors."
Products and Services
The Company manufactures and markets "coin" and "coinless" pay telephone
("payphone") products that connect to and operate as integral parts of domestic
and foreign public telecommunication networks. The Company also markets payphone
and payphone component repair, refurbishment and conversion upgrade services to
the regulated telephone companies in the United States. The Company's products
include payphones equipped with non-smart payphone electronics or smart payphone
processors (the primary electronic assemblies or "engines" of payphones) that
connect to wireline telecommunication networks ("wireline payphones") and
payphones equipped with a smart processor or a specially designed cellular
processor that connects to cellular telecommunication networks ("wireless
payphones"). The Company also supplies non-smart payphone electronic retrofit
kits, smart payphone retrofit kits and payphone components (including, among
other things, dials, handsets, chrome doors, payphone electronics and
processors) required to both manufacture payphones and repair and/or upgrade
deployed payphones. In addition, the Company markets "CoinNet", payphone
management software required to remotely manage and communicate with the
Company's smart and cellular payphone processors. A significant portion of the
Company's revenues is derived from the sale of smart payphone processors and
payphone retrofit kits to certain RBOCs that are upgrading their installed base
of payphones with technologically advanced processors.
The Company's wireline coin payphones are designed based upon the Western
Electric configuration developed for use in the Bell system versus the GTE
configuration developed for the independent telephone companies and also used by
some of the independent payphone providers. The Western Electric configuration
uses a housing ("case") with a left sided coin slot and coin return bucket
versus the GTE configuration with a right sided coin slot and coin return
bucket. The Company's Western Electric housings are acquired from an
unaffiliated Taiwan corporation under a Manufacturing Rights Agreement dated
September 16, 1991 (see "Manufacturing, Assembly and Sources of Supply," below).
These housings are also acquired from the secondary or "aftermarket" for
payphone components within the United States. Housings acquired in the
"aftermarket" are reconditioned as part of the refurbishment services offered by
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the Company, as further described below. Payphones manufactured with
reconditioned housings are generally referred to as "hybrids". The Company's
coinless wireline and wireless payphones are manufactured in several different
configurations, including the Western Electric configuration, depending on the
application. The Company's coin payphones and hybrids are supplied with
electronic coin mechanisms supplied by unaffiliated domestic companies. See
"Manufacturing, Assembly and Sources of Supply," below.
The Company's wireline payphone products were originally developed
specifically for the regulated telephone operating companies in the United
States. However, the Company has begun to expand its business into the
international market, and has adapted its smart wireline payphone technology for
those foreign countries with telecommunication networks similar to the United
States. The majority of foreign countries follow the standards of the
Consultative Committee for International Telephone and Telegraph ("CCITT") as
compared to the U.S. network standard. One of the primary technical network
differences in the payphone industry between the countries following the CCITT
standards and those following the U.S. network relates to call rating. The
Company does not presently offer a product that operates with networks following
the CCITT standards. However, the Company has commenced the design and
development of a smart payphone processor capable of operating with networks
following either standard. This technology would enable the Company to compete
in foreign countries that follow the CCITT standard (see "Research and Product
Development", below). The Company's new smart payphone processor is currently in
the prototype design stage. The Company has scheduled the development project
for completion during fiscal 1997, and anticipates, but cannot ensure, that the
new smart payphone processor will be available to market by the end of fiscal
1997.
The following table outlines products currently offered by the Company:
PRODUCT DESCRIPTION
GEMINI SYSTEM II(R) The Gemini System II(R) ("Gemini") product is a
sophisticated microprocessor-based smart payphone
processor which is programmable to operate in either a
regulated mode or a deregulated mode. The regulated
mode uses the rating and answer supervision services
provided by the central office ("CO") and associated
network. In contrast, rating and answer supervision
services are performed within the processor when
programmed to operate in the deregulated mode.
Programmable billing, reporting and operating cost
reduction features offered with the Gemini product
include: (i) station message detail recording, which
provides for the storage of all call data within the
phone; (ii) maintenance reporting and diagnostics,
which provides for remote diagnosis of payphone and
component operating status via telemetry; (iii) coin
administration, which provides coin accounting
capability and reporting of coin box status; (iv) call
routing, which provides for the routing of calls to the
programmed IXC; and (v) credit card billing and
auditing, which provides the ability to bill credit
card calls and to identify invalid cards or card
numbers. The Gemini product is also interfaced with an
electronic lock to control and to permit remote
monitoring of collection activities. Programmable
revenue enhancement features offered with the Gemini
product include: (i) voice, messaging, which enables
the user to record a message to the called party rather
than allow the call to go uncompleted; and (ii) usage
based pricing, which administrates local call costing
on the basis of time. The features available with the
Gemini product are designed to enable customers to
enhance revenue streams and to reduce costs of
operation and maintenance through the scheduling of
maintenance and collection activities. All programming,
retrieval, reporting and telemetry features are
performed remotely using the Company's payphone
software management system.
GEMSTAR The GemStar product is a microprocessor-based smart
payphone processor designed for regulated applications
which require the rating and answer supervision
functions performed by the CO network. The GemStar
product offers the primary cost reduction and reporting
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features of the Gemini product, including maintenance
reporting and diagnostics and coin administration. With
added memory, the GemStar product also provides station
message detail recording. The GemStar product is also
interfaced with an electronic lock to control and to
permit remote monitoring of collection activities.
INMATE The InMate product is a microprocessor-based smart
payphone processor designed for the prison segment of
the market where cost reduction and revenue enhancement
features as well as other specialized features are
required. The InMate product offers station message
detail recording, maintenance reporting and
diagnostics, voice messaging, usage based pricing and
call routing. In addition, specialized features
include: (i) outgoing call restriction, which can
restrict calls to specified numbers; (ii) call
duration, which limits the time duration of calls; and
(iii) personal identification numbers, which permit
valid user access only. Coin Administration features
are not provided in this coinless environment.
GEMCELL The GemCell product is a microprocessor-based cellular
payphone processor that interfaces to a cellular
transceiver for use in domestic and international
wireless networks. The GemCell product was designed
with all the primary features available with the Gemini
product except coin administration. Instead, the
GemCell product was designed to accept debit, "prepay"
or credit cards as the form of payment. The GemCell
product is not currently marketed in the United States.
COINNET The CoinNet product is a remote payphone software
management system which operates on personal computers
in a multi-tasking environment. This proprietary
software product provides the Company's customers with
the ability to manage networks of installed payphones
interactively. Downloading software changes, retrieving
station message detail recording data, maintenance and
diagnostics data and coin box data are a few of the
functions of this Unix or MSDOS-based software system.
PAYPHONES The Company offers its payphones in a wide range of
electronic and smart configurations depending upon the
application requirements of its customers. The
Company's wireline payphones include coin (or token)
payphones and/or coinless payphones, including credit
card applications. The Company's wireless, coinless
payphones are offered in fixed configurations as well
as configurations for mobile deployment, such as taxis,
trains and buses. The Company's smart wireline payphone
technology derives power strictly from the telephone
line, eliminating the need for external power sources.
The Company's wireless payphones are powered by
commercial electric line power or by a solar powered
platform so that they can be deployed without network
wiring and cabling.
CELLULAR
ASSISTANCE PHONE The Company also offers a specialized Cellular
Assistance Phone designed to provide emergency phone
service in specific applications, such as along
highways and in remote areas. The Cellular Assistance
Phone is provided with a cellular transceiver and a
solar powered platform for deployment without network
wiring and cabling. The features of the Cellular
Assistance Phone are limited to those required for
emergency situations and permit the user to
automatically dial a preset emergency assistance
number. With the exception of three units sold to the
U.S. Army, the Cellular Assistance Phone is not
currently marketed in the United States.
PAYPHONE
COMPONENTS Payphone components supplied by the Company include,
among others, non-smart payphone electronics, touchtone
dials, handsets, coin relays, and volume amplification
assemblies. These components are manufactured at the
Company's facilities to Bellcore specifications.
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The Company negotiates the sales prices of its products with each customer
based on many factors including volume, configuration, and required features,
among others, and prices of the Company's products vary accordingly. The list
prices of the Gemini System II products, GemStar products and Inmate products
range from $299 to $799 per unit. The Company's GemCell product is generally
incorporated into payphones which have list prices ranging from $1,399 to $1,999
per unit. The list prices of the Company's smart and electronic payphones range
from approximately $999 to $1,499 per unit. The list prices of the Company's
Cellular Assistance Phone ranges from $1,500 to $3,800. The sales prices of the
Company's payphone components and services are dependant upon the nature of
services rendered or the component provided and range from less than ten dollars
to several hundred dollars. The Company's payphone management software is
generally provided at no charge or a nominal one-time license fee. Such software
is licensed to users in perpetuity for a limited geographic area.
Services
The Company provides payphone repair, refurbishment and upgrade conversion
services for its customers. Refurbishment services involve the rebuilding of
payphone components and sets to "like new" condition. Upgrade conversion
services include the modification of payphone components and sets to an updated
or enhanced technology.
Sales and Markets
Domestic. The Company markets its payphone products and services
predominately to the RBOCs (see "Business--General" and "Business--Changing
Product Mix"). In fiscal years 1993, 1994 and 1995, sales to RBOCs accounting
for greater than 10% of the Company's sales aggregated 81%, 73% and 72%,
respectively, of the Company's sales revenues. During fiscal 1993, Bell
Atlantic, BellSouth Tele-communications, Inc., NYNEX and SWB accounted for $5
million, $10.4 million, $4.5 million and $4.9 million, respectively, of the
Company's sales. During fiscal 1994, Bell Atlantic, BellSouth
Telecommunications, Inc. and NYNEX accounted for approximately $6.1 million,
$10.5 million and $5.8 million, respectively, of the Company's sales. During
fiscal 1995, Ameritech Services, Inc., Bell Atlantic, SWB and NYNEX accounted
for approximately $2.8 million, $5.8 million, $3.8 million and $2.2 million,
respectively, of the Company's sales. During the nine months ended December 29,
1995, Bell Atlantic, NYNEX and SWB accounted for approximately $4.5 million,
$3.6 million and $12.4 million, respectively, of the Company's sales.
The Company competes for and enters into non-exclusive supply contracts to
provide products, components and services to the RBOCs. The Company has entered
into sales agreements to provide smart products to Ameritech Services, Inc. and
U.S. West. The Company has entered into sales agreements to provide payphone
components to Ameritech Services, Inc., BellSouth Telecommunications, Inc., Bell
Atlantic, NYNEX and SWB. The Company has entered into sales agreements to
provide repair, refurbishment and conversion services to Ameritech Services,
Inc., Bell Atlantic, NYNEX and SWB. These agreements have terms ranging from two
to three years, are renewable at the option of and subject to the procurement
process of the particular RBOC, contain fixed sales prices for the Company's
products and services with limited provisions for cost increases and expire at
various dates from July 1996 to March 1999. These sales agreements are
frameworks for dealing on open account and do not specify or commit the
Company's customers to purchase a specific volume of products or services. If
orders are made, however, the Company has agreed to fill such orders in
accordance with the customer's contract specifications. The agreements are
generally subject to termination at the option of the customer upon 30 days
notice to the Company, or if the Company defaults under any material provision
of the agreement, including provisions with respect to performance. In addition,
the Company has entered into sales agreements to provide smart products to NYNEX
and SWB. The terms of these sales agreements (the "firm commitment sales
agreements"), however, require the customers to purchase specific quantities of
smart products and other components from the Company at specified prices,
subject to the cancellation provisions thereof. See "Changing Product Mix,"
below.
The inability of the Company to maintain its relationships with its RBOC
customers, particularly with one of its significant customers, would have a
material adverse effect on the Company's business. See "Risk Factors--Dependence
on Key Customers."
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The Company is dependent upon its third party contract manufacturers to
supply smart products and electronic locks to customers and to meet its sales
commitments pursuant to its firm commitment sales agreements. See
"Manufacturing, Assembly and Sources of Supply," below.
The Company sells its products and services directly to its customers. The
Company involves a wide-range of personnel in its sales and marketing activities
including its Vice President of Sales and Marketing, two experienced sales
directors, three service technicians, its Operations and Plant Vice Presidents,
its engineering staff, its quality managers and its President and CEO. The
Company's engineering staff and service technicians provide support and
technical services over the telephone without charge, and the Company provides
field engineering support services during the initial deployment of products and
when customers encounter unusual or technical problems. The Company's commitment
to service and support throughout its organization is directed at maintaining
strong relationships with customers' operating, technical and administrative
personnel. The Company also conducts training seminars and provides assistance
to customers in the installation and set-up of the Company's payphone software
management system.
International. Internationally, the Company markets its smart wireline and
wireless payphones in foreign markets, primarily consisting of Korea and Mexico.
The Company's wireless payphones have been deployed in Korea, Mexico, Venezuela,
and Guatemala. The Company's smart "Gemini" payphone is deployed in China. The
Company markets its products in these foreign markets primarily under
distributor and reseller relationships. The Company has established distributor
relationships in Venezuela, for the South American markets, and in Korea and
China. The Company presently sells its products in Central American markets,
both directly and through an independent sales representative. The Company's
largest foreign customers presently include cellular service providers in Mexico
and Korea.
The Company's export sales during fiscal 1993, 1994 and 1995 approximated
$551,000, $798,000 and $1.4 million, respectively. The Company's export sales
during the nine months ended December 29, 1995 approximated $558,000. The
Company's export sales are currently denominated in U.S. dollars. Accordingly,
the Company's business is not presently subject to any significant exposure from
foreign currency risk. However, there is no assurance that the Company will be
able to continue to export its products for U.S. dollars or that its business
will not become subject to significant exposure to foreign currency risks in the
future. The Company's export sales are subject to the effects of political and
economic conditions of foreign markets. During fiscal 1995 and the first nine
months of fiscal 1996, the Company's export sales to Mexico were adversely
affected by the devaluation of the Mexican peso during the latter part of fiscal
1995, when the Company's largest foreign customer ceased importing the Company's
wireless products. In response, the Company intends to commence the design of a
lower-cost prepay wireless payphone.
The Company has focused its international marketing efforts on the
providers of cellular telecommunication services in Central and South America.
In January 1996, the Company entered into a letter agreement with its
Korean distributor to sell 2,000 Gemini payphones for re-export to China.
However, there is no assurance that the Company will be able to comply with the
customers specifications and supply such payphones on a timely basis, or at all.
Pursuant to the letter agreement, the parties agreed in principle to enter into
a manufacturing and technology transfer agreement that, if entered into, will
enable the Korean distributor to manufacture Gemini products for sale on a
non-exclusive basis in the Far East, including China. Upon consummation of the
manufacturing and technology transfer agreement, the Company shall receive
royalties equal to $50 per unit with respect to Gemini products manufactured and
sold by the distributor. However, there is no assurance that the proposed
relationship will result in any meaningful sales or royalties to the Company.
Changing Product Mix
The Company's business is shifting from repair and service to the provision
of smart payphone products. The Company's sales of smart payphone products
consisting primarily of processors and payphone retrofit kits increased to
approximately $15.1 million during the nine months ended December 31, 1995 as
compared to $6.6 million in fiscal 1995 and $9.0 million in fiscal 1994.
Although the Company's sales of smart payphone products declined to
approximately $6.6 million in fiscal 1995 as compared to fiscal 1994, the
decline was attributable primarily to the termination of a first generation
smart payphone sales agreement between the Company and one of its then
significant RBOC customers caused by technical and delivery problems experienced
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by the Company. In addition, such RBOC failed to renew a refurbishment sales
agreement with the Company during the latter part of fiscal 1995. See "Risk
Factors -- Dependence on Key Customers." The Company, however, continues to
supply certain payphone components to such RBOC. Sales to this RBOC customer
accounted for 34% of the Company's sales during the year ended April 1, 1994, 6%
of sales during the seven months ended October 30, 1994, 10% of sales during the
five months ended March 31, 1995 and 4% of sales during the nine months ended
December 29, 1995. See "Risk Factors--Dependence on Key Customers."
During the initial stages of the roll out of the Company's first generation
smart product during fiscal 1993, the Company's contract manufacturer was unable
to deliver product in accordance with the customer's delivery schedule due to
material shortages and product testing limitations and constraints. In addition,
during the course of the contract, the Company redesigned the product and
selected another contract manufacturer. This contract manufacturer delivered the
product to the Company that later manifested certain hardware problems and
failures that the Company attributed to defective components. These problems
ultimately led to the termination of the smart product sales agreement referred
to above (see "Management's Discussion of Financial Condition and Results of
Operations"). The Company has disqualified the manufacturers that provided the
alleged defective components to the Company's contract manufacturer and believes
that, through improved design and engineering, it has resolved the hardware and
software problems that it experienced with its first generation smart product.
The Company has recently selected its current contract manufacturer to produce
the current generation of such printed circuit board assemblies, and such
products have not experienced similar problems (see "Manufacturing, Assembly and
Sources of Supply," below). The Company is currently involved in a dispute with
the contract manufacturer and is involved in litigation with one of the
disqualified component manufacturers. See "Legal Procedures and Disputes" below.
In December 1994, the Company entered into a sales agreement with SWB
pursuant to which the Company agreed to supply and SWB agreed to purchase $21.3
million of smart processors and other components, including electronic locks,
over a three-year period at specified prices. The agreement also includes a
"most favored customer" clause, pursuant to which the Company has agreed to
provide SWB price and other terms at least as favorable to the customer as those
extended by the Company to other customers for the products in question. The
agreement contains certain covenants and conditions relating to product quality
and delivery requirements, among others. The agreement provides for penalties
and damages in the event that the Company is unable to comply with certain
performance criteria. See "Business--Manufacturing, Assembly and Sources of
Supply." Upon a default by the Company with respect to such covenants and
conditions, SWB has the right to cancel the agreement or reduce its purchase
commitment, provided such default is not cured within a 20-day notice period. In
addition, SWB may in any event terminate the agreement upon at least 30 days
notice. However, upon such a termination, SWB has agreed to purchase all
finished goods then held by the Company and to pay contractor and supplier
cancellation and restocking charges, if any, plus a nominal profit percentage
above the cost of such materials. Because SWB has the right to terminate the
contract on 30 days notice as described above, there can be no assurance that
the Company will ultimately sell $21.3 million of smart processors and other
components pursuant to such contract. The Company is dependent upon its third
party manufacturers to supply products required to meet its sales commitment
under the terms of the agreement (see "Manufacturing, Assembly and Sources of
Supply," below). As of the date of this Prospectus, the Company estimates that
SWB has acquired approximately 65% of committed volume under such sales
agreement. However, as a result of changes in the customer's delivery
requirements, the Company does not anticipate shipping the remaining volume
pursuant to the terms of the agreement during the 1996 calendar year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In December 1995, the Company entered into an amendment to a sales
agreement with NYNEX pursuant to which the Company agreed to supply and NYNEX
agreed to purchase approximately $12 million of smart products and other
components over a eight-month period at specified prices. The agreement also
includes a "most favored customer" clause, pursuant to which the Company has
agreed to provide NYNEX price and other terms at least as favorable to the
customer as those extended by the Company to other customers for the products in
question. The agreement contains certain covenants and conditions relating to
product quality and delivery requirements, among others. Upon a default by the
Company with respect to such covenants and conditions, NYNEX has the right to
cancel the contract, provided such default is not cured within a 14-day notice
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period. Either party may terminate the agreement upon default by the other party
of any material provision of the agreement provided such default is not cured
within a 10-day notice period. In addition, NYNEX has the right to cancel prior
to shipment any and all orders under the agreement and, in such event, would be
liable to the Company only for the cost of goods not otherwise usable or
saleable by the Company. Because NYNEX has the right to terminate orders under
the contract as described above, there can be no assurance that the Company will
ultimately sell the $12 million of products under such contract. The Company is
dependent upon its third party manufacturers to supply products required to meet
its sales commitment under the terms of the agreement (see "Manufacturing,
Assembly and Sources of Supply," below).
The Company's service business revenues, including sales of electronic
payphones and payphone components, declined from approximately $22.2 million in
fiscal 1993 to approximately $21.2 million in fiscal 1994 and to approximately
$12.3 million in fiscal 1995. Although a significant portion of the fiscal 1995
decline in service business revenues was attributable to the non-renewal of a
refurbishment sales agreement with one of the Company's RBOC customers discussed
above, the Company believes that as the RBOCs upgrade their payphone base with
new technology, their need for repair and refurbishment services and non-smart
electronic payphone products will decline.
Competition
The Company believes that it is a significant provider of payphone products
and payphone repair services to the regulated telephone operating companies in
the United States. The Company operates in a highly competitive environment and
competes against numerous domestic and foreign providers of payphones and
payphone repair services that have financial, management and technical resources
substantially greater than those of the Company. In addition, there are many
other firms which have the resources and ability to develop and market products
which could compete with the Company's products.
The Telecommunications Act lifts the AT&T consent decree's restriction on
the manufacturing of telecommunications equipment by the RBOCs. After the FCC
finds that the RBOC has opened its local exchange market to competition, the
RBOC, through a separate affiliate, may manufacture and provide
telecommunications equipment and may manufacture customer premises equipment. As
a result of the legislation, the Company could face new competitors in the
manufacture of payphones and payphone components. These new competitors will
probably include one or more of the RBOCs, as well as Lucent Technologies, the
newly created equipment and technology spin-off of AT&T. The RBOCs and AT&T have
financial, management and technical resources substantially greater than the
Company. However, the RBOCs lack manufacturing expertise, and the legislation
does not permit them to create joint manufacturing operations with each other.
The Company believes that these factors may lead to the RBOCs to seek
non-affiliated manufacturing enterprises, such as the Company, with which to
collaborate. In addition, the legislation provides that as long as Bellcore is
an affiliate of more than one RBOC, Bellcore may not engage in manufacturing
telecommunications equipment or customer premises equipment. The
Telecommunications Act also incorporates numerous safeguards to ensure that
standards setting organizations conduct themselves fairly and requires the FCC
to establish a dispute resolution process for equipment manufacturers involved
in conflicts over standards setting. See "Risk Factors--Competition."
The Company believes that the primary competitive factors affecting its
business with the RBOCs are quality, price, service and delivery performance.
The Company competes aggressively with respect to the pricing of its products
and services, and although the Company's contractual agreements with the RBOCs
generally provide the Company with the ability to increase prices if
manufacturing costs increase, the Company attempts to reduce its manufacturing
costs rather than increase its prices. The Company also attempts to maintain
inventory at levels which enable the Company to provide immediate service and to
fulfill the delivery requirements of its customers. The Company also provides
weekly pick-up and delivery services to most of its RBOC customers to ensure
timely performance.
The Company believes that its principal competitors in the United States
include Protel Inc., Elcotel, Inc., Intellicall, Inc., Lucent and International
Totalizing Systems, Inc., and with respect to repair and refurbishment services,
Restor Industries, Inc. The Company also competes with numerous foreign
companies marketing products in the United States, including Northern Telecom,
Inc. However, the Company does not believe that foreign competitors have been
able to successfully penetrate the regulated payphone industry in the United
States. Some of the Company's competitors, including Protel Inc., Intellicall,
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Inc. and Elcotel, Inc. supply payphone products to independent payphone
providers which compete with the regulated telephone companies. The Company does
not presently supply its products to independent payphone providers.
Internationally, the Company competes with numerous foreign competitors,
all of which have financial, management and technical resources substantially
greater than the Company. These foreign competitors market payphone products
predominately to the PTT's and thereby dominate the international payphone
market. The Company believes that the primary competitive factors affecting its
international business are the ability to provide products that meet the
specific application requirements of the customers, quality and price.
The Company expects that a number of personal communications technologies
will become increasingly competitive with payphone services provided by the
regulated telephone companies and independent payphone providers. Such
technologies include radio-based paging services, cellular mobile telephone
services, and personal communication services. However, the Company believes
that the payphone industry will continue to be a major provider of
telecommunications access.
Prior to 1984, the regulated telephone companies held a monopoly in the
United States payphone market, and they continue to have a dominant share of the
payphone market. The regulated telephone companies have financial, marketing,
management and technical resources substantially greater than those of private
payphone providers. The Company believes that the regulated telephone companies
will continue to experience increasing competition from independent payphone
providers. Accordingly, the Company believes, but cannot ensure, that they can
be expected to upgrade their technology base and protect their market share.
The Company believes that wireless payphone services will become one of the
primary avenues of providing communication services to the public in many of the
developing nations in South America and Central America and that these markets
represent a significant growth opportunity. Many of the cellular licenses
awarded to companies in foreign markets to provide services in competition with
national communication authorities have been awarded to consortiums and
companies in which the RBOCs have invested. The Company believes that an
opportunity exists to expand its market channel within the RBOC arena by
deployment of its wireless payphone technology to international wireless
concerns affiliated with the RBOCs. The Company intends to continue to invest in
the development of wireless products and hardware for non-coin technologies
including prepay and debit cards and smart ("chip") cards.
Manufacturing, Assembly and Sources of Supply
The Company's repair, refurbishment and conversion services are performed
and most of the Company's products are assembled at the Company's manufacturing
facilities in Paducah, Kentucky and Orange, Virginia. In addition, certain
components including low-density electronic circuit board assemblies, dials and
handsets, are manufactured at the Company's facilities. Other components are
purchased from various distributors and manufacturers, including contract
manufacturers engaged by the Company.
On October 21, 1994, the Company entered into a manufacturing agreement
with Avex Electronics, Inc., a large contract manufacturer, that provides for
the production of the Company's Gemstar circuit board assemblies and the Gemstar
payphone processor. Pursuant to the terms of the manufacturing agreement, the
Company committed to purchase $12.2 million of assemblies over an eighteen-month
period beginning in December 1994. Purchases under the terms of the contract
fluctuate based on delivery requirements established by the Company. The
agreement may be terminated by either party for default upon a material breach
of the terms of the agreement by the other party, provided such breach is not
cured within 30-day notice period. Further, the Company may terminate the
agreement at any time. However, upon a termination of the agreement by the
Company, the Company is obligated to purchase inventories held by the
manufacturer and pay vendor cancellation and restocking charges, and a
reasonable profit thereon. The Company has also engaged the contract
manufacturer to manufacture the printed circuit board assemblies for the
Company's Gemini processors. The Company is dependent upon the contract
manufacturer to manufacture and supply products required to meet sales
commitments under the terms of its firm commitment sales agreements (see "Sales
and Markets--Domestic" and "Changing Product Mix," above).
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The Company has entered into several teaming agreements with Control
Module, Inc., a manufacturer of electronic lock devices, to market the products
to certain RBOCs and other telephone companies. The teaming agreements provide
for the award of exclusive dealer contracts to the Company when customers award
purchase contracts to the Company. On November 18, 1994, the Company executed an
exclusive dealer agreement to supply the electronic lock devices to one of the
Company's significant RBOC customers, that commits the Company to purchase
approximately $3.5 million of electronic lock devices at specified prices over a
two-year period. The purchase volume of electronic lock devices varies based on
delivery requirements established by the Company. The dealer agreement expires
after the Company's purchase of the committed volume or after 30 months,
whichever occurs first. The agreement may be terminated by either party for
default upon a material breach of the terms of the agreement by the other party,
provided such breach is not cured within a 30-day notice period. Further, the
Company may terminate its orders under the agreement upon 45 days notice.
However, upon a termination of outstanding orders by the Company, the Company is
obligated to purchase inventories held by the manufacturer and pay vendor
cancellation and restocking charges. The Company is dependent upon the
electronic lock manufacturer to supply products required to meet sales
commitments under the terms of one of its firm commitment sales agreements (see
"Sales and Markets--Domestic" and "Changing Product Mix," above).
Pursuant to its agreements with Avex Electronics, Inc. and Control Module,
Inc. discussed above, the Company is obligated to acquire certain product
inventory in a prescribed time period. The Company presently anticipates that
scheduled purchases under such contracts through December 1996 will exceed sales
requirements as a result of changes in the Company's customer delivery
requirements. Although the Company is encouraging its customer to accelerate
purchases and is seeking to reschedule deliveries pursuant to such agreements,
an increase in inventories related to such agreements is anticipated and such
increase could approximate as much as $2.0 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Changing Product Mix."
On September 16, 1991, the Company entered into a Manufacturing Rights
Agreement (the "Manufacturing Agreement') with Commtek Industries, Inc., an
unaffiliated Taiwan corporation. Pursuant to the Manufacturing Agreement, the
Company granted the Taiwan corporation the exclusive right to utilize the assets
owned by the Company's foreign division for a period of five years to
manufacture many of the non-electronic components and assemblies for the
Company's products in factories based in the Pacific Rim. The Company entered
into the Manufacturing Agreement because it determined that continued operation
of the business was not economical due to the capital commitments required
therefor. The Company agreed to purchase a minimum aggregate annual volume of
$2.5 million during the first year of the agreement and $3 million for each year
thereafter. The Manufacturing Agreement provided for the payment of an annual
fee of $57,155 to the Company through March 31, 1995. The Taiwan corporation is
required to pay royalties to the Company based upon sales to customers other
than the Company. The Manufacturing Agreement also provides that the Company
receives a 20% discount from prices charged to other customers.
The majority of the Company's products in terms of revenues contain
components or assemblies that are purchased from single sources (including those
discussed above). The Company believes that there are alternative sources of
supply for most of the components and assemblies currently purchased from single
sources. Some of the components and assemblies used by the Company for which
there are not immediately available alternative sources of supply are provided
to the Company under standard purchase arrangements. If a shortage or
termination of the supply of any one or more of such components or assemblies
were to occur, however, the Company's business could be materially and adversely
affected. In such event, the Company would have to incur the costs associated
with redesigning its products to include available components or assemblies or
otherwise obtain adequate substitutes, which costs could be material. Also, any
delays with respect to redesigning products or obtaining substitute components
could adversely affect the Company's business.
The Company attempts to maintain inventory levels adequate to meet the
delivery requirements of its customers. However, the Company's business is
subject to the risk of an interruption in supply that could have a significant
impact on its operations. Suppliers of certain electronic parts and components
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to the Company and its contract manufacturers occasionally place their customers
on allocation for those parts. Therefore, there can be no assurance that the
Company's business will not be adversely impacted by allocations and a limited
supply of such electronic components.
The Company's operations are also subject to risks associated with
defective assemblies. In April 1995, the Company determined that GemStar
processors shipped in March 1995 were subject to failure due to contamination
introduced into the manufacturing process by the Company's contract
manufacturer. Accordingly, the Company recalled approximately 5,500 units for
repair or replacement by the contract manufacturer. Although the contract
manufacturer was responsible for the repair or replacement of the recalled
units, the Company was required to pay liquidated damages to its customer under
the terms of the sales contract in the amount of $200,000. This liability was
recorded in the Company's consolidated financial statements at March 31, 1995.
Also, the Company agreed to extend its warranty on up to 5,000 units shipped
under the contract through December 31, 1998.
The recall and associated shipment delays created by the recall had an
adverse impact on the Company's operating results during the first quarter of
fiscal 1996. However, the Company was able to maintain a satisfactory
relationship with the affected customer. During the nine months ended December
29, 1995, the contract manufacturer and the Company repaired or replaced the
recalled units. In addition, the Company continued to ship products to its
customer in accordance with the terms of the sales agreement. The contamination
introduced into the manufacturing process was created by a change in the
manufacturing process and the use of a new material without the Company's prior
knowledge. The Company and the contract manufacturer have since taken steps,
including quality control measures, to assure that the processes and materials
used in the manufacturing process of the Company's products do not adversely
affect product quality or performance. Although the Company believes that the
problems have been adequately addressed and has continued its relationship with
the contract manufacturer, there can be no assurance that such events will not
occur in the future, either with this manufacturer or others.
Warranty and Service
The Company provides warranties of 90 days with respect to repair,
refurbishment and conversion services and from one to three years on its
products. Under the Company's warranty program, the Company repairs or replaces
defective parts and components at no charge to its customers. The Company's
contract manufacturers provide warranties on the electronic circuit board
assemblies ranging from 90 days to 120 days. Under warranties provided by
contract manufacturers, defective electronic circuit board assemblies are
replaced or repaired at no charge to the Company.
The Company's technical service and engineering staffs provide support
services over the telephone to customers who have installation or operational
questions. The Company also provides field engineering support services during
the initial deployment of the Company's products and when customers encounter
unusual conditions or problems.
The Company generally enters into repair agreements with respect to its
smart products under which the Company agrees to perform non-warranty repair
services at specified prices. The Company also provides repair, refurbishment
and conversion services under agreements with its customers. See "Products and
Services" and "Sales and Markets," above.
Licenses, Patents and Trademarks
The Company has developed the software and engineering designs incorporated
in its smart payphone products from technology acquired in 1991. The engineering
designs incorporated in the Company's electronic products and components were
internally developed by the Company. The Company owns eight United States
patents relating to payphone components, its smart payphone platform, the Gemini
product, and other technology which expire between April 2010 and May 2014. The
Company has filed and has outstanding one patent application at the date of this
Prospectus with respect to payphone components and wireless technology. Although
the Company believes that its patents and trademarks are important to its
business, it does not believe that patent protection or trademarks are critical
to the operation or success of its business. There can be no assurance that the
Company's products do not infringe upon proprietary rights held by others. See
"Risk Factors -- Patents and Technology; Certain Royalties."
The Company regards its manufacturing processes and circuit designs as
proprietary trade secrets and confidential information. To protect this
information, the Company relies largely upon a combination of agreements with
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its contract manufacturers, confidentiality procedures, and employee agreements.
However, there can be no assurance that the Company's trade secrets will not be
disclosed or misappropriated.
Pursuant to the terms of an asset purchase agreement entered into on
January 11, 1991, the Company is obligated to pay royalties equal to 3.5% of
sales of smart processors and related components to a company affiliated with
certain officers and employees of the Company who were formerly officers and
employees of PCS. On November 9, 1994, the Company entered into an amendment
agreement that provided for the elimination of royalties for the period from
April 2, 1994 to September 30, 1994. In return, the term of the royalty
obligation was extended from December 31, 1995 to June 30, 1996.
In October 1995, the Company entered into a patent license agreement
effective as of September 1, 1995 that provided the Company with a non-exclusive
paid up license to manufacture and market products embodying certain patented
telephone inventions. The Company paid a non-refundable patent license fee of
$375,000 consisting of $33,000 in cash upon execution of the agreement, $242,000
of deposit payments made pursuant to the terms of a previous agreement and
$100,000 of future services. Previous deposit payments made by the Company in
the amount of $242,000 were charged to operations during the years ended April
2, 1993 and April 1, 1994 due to an uncertainty surrounding their realization.
Accordingly, the patent license was recorded at an amount of $133,000 consisting
of the $33,000 cash payment and the liability of $100,000 with respect to future
services. Pursuant to a letter agreement, the Company agreed to render the
future services over a period of five years in return for the licensors
agreement to provide accurate rate data to the Company for a five-year period.
On March 14, 1996, the patent licensing agreement was amended pursuant to a
letter agreement, and the Company paid to the licensor $100,000 in return for
the licensor's agreement to cancel the Company's obligation to provide future
services.
Prior to the Restructuring, the Company entered into a license agreement
providing the Company with the exclusive rights to certain algorithm software
that is the subject of a patent application. The Company is obligated to pay
license fees aggregating $200,000 at the rate of $50,000 annually over a
four-year period commencing on the date the patent is issued. The agreement also
provides for the payment of royalties on products incorporating the licensed
software. If the patent issues, minimum royalties will range between $125,000 to
$500,000 annually for the life of the patent. The term of the license agreement
will correspond to the term of the patent. As of the date of this Prospectus,
the patent has not been issued, and the Company has not sold any products
incorporating the licensed software. The Company had believed that the algorithm
software would be a marketable enhancement to its smart products. However, the
licensed algorithm has not been incorporated into any of the Company's products,
nor does the Company have any present plans to incorporate the algorithm into
any of its products. Also, management does not believe, but cannot assure, that
a patent for the algorithm will be issued due to existing prior art. If a patent
were to be issued, however, royalties would be payable as described above
regardless of whether or not the algorithm is incorporated into the Company's
products.
Design and Product Development
The Company's engineering department is staffed with software, electrical
and mechanical engineering professionals. Their activities are dedicated to the
development of new products, enhancements to the Company's deployed product
line, including the CoinNet management system, and enhancements to improve
product reliability. Their efforts are also directed to reducing product costs
through new manufacturing methods. During fiscal 1993, 1994 and 1995, the
Company expended approximately $2.2 million, $2 million and $938,000,
respectively, on engineering, research and development activities, primarily for
Gemstar, Gemini and Gemcell products. The Company believes that new products and
product enhancements will increase its market opportunities and are essential to
its long-term growth, particularly in international wireline markets. The
Company's ability to fund future research and development activities will be
dependent upon receiving the net proceeds of this Offering and its ability to
generate cash in excess of its operating needs. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations" and "Use of
Proceeds".
Properties
The Company's administration, sales, marketing and engineering activities
are located at its headquarters in approximately 11,800 square feet of office
space, the lease for which expires on December 31, 1997.
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The Company's payphone assembly operations, low-density printed circuit
board assembly operations and its repair, refurbishment and conversion service
operations are performed at two leased facilities, consisting of an
approximately 100,000 square-foot facility in Paducah, Kentucky and an
approximately 53,400 square-foot facility in Orange, Virginia.
The Company's Paducah, Kentucky facility is leased pursuant to the terms of
a capital lease dated November 30, 1990. The lease has an initial term of five
and one-half years and is renewable for two additional five-year periods
beginning May 31, 1996. In March 1996, the initial five and one-half year term
of the lease agreement was extended by a year pursuant to the terms of a letter
agreement. The Company has an option to acquire the facility at the end of the
lease term, including the renewal periods, at a cost of $10,000.
The Orange, Virginia facility is leased pursuant to the terms of an
operating lease agreement dated August 1, 1986. The lease had an initial term of
five years and was renewed for an additional five-year term on August 1, 1991.
The lease agreement expires on July 31, 1996.
The Company believes its facilities are adequate for its business.
Employees
At March 18, 1996, the Company had 248 full-time employees of which 175 are
direct labor, 41 are engaged in manufacturing support activities, 17 are engaged
in administrative, sales and finance activities and 15 are engaged in
engineering and engineering support activities. In addition, the Company has one
part time employee, one temporary employee and one independent contractor
engaged in sales and sales support activities, and two temporary employees
engaged in engineering support activities.
The direct labor personnel located at the Company's Paducah, Kentucky
facility (94 persons) are represented by the International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America pursuant to an
October 26, 1993 collective bargaining agreement. The agreement expires on
October 26, 1996 and is automatically renewable for additional one year periods
thereafter unless terminated by either party upon 60 days notice prior to the
renewal date. The Company considers its relations with its employees and the
Union to be satisfactory.
Backlog
The amount of the Company's backlog is subject to large fluctuations
because the Company's business depends upon a small number of customers and
large orders. The Company calculates its backlog by including only items for
which there are purchase orders with firm delivery schedules. Contractual
commitments are not included in backlog until purchase orders are received by
the Company. At March 29, 1996, the backlog of all products and services was
approximately $3.8 million as compared to approximately $4.0 million at March
31, 1995. The Company's objective is to ship orders within 30 days and,
therefore, the Company does not expect its backlog, other than orders with
scheduled deliveries under contractual commitments, to exceed monthly sales
levels. Accordingly, the Company's backlog at any given date is not indicative
of future revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Seasonality
The Company's sales are generally stronger in the spring, summer and fall
months when the weather does not interfere with the maintenance and installation
of payphone equipment by the Company's customers. Accordingly, reduced sales
volumes could adversely affect the Company's results of operations during
certain periods of the year. However, the Company may also receive large
year-end orders from its customers for shipment in December.
Government Regulation
The Company is involved in several environmental monitoring and clean up
activities in various states. See "Risk Factors -- Potential Environmental
Liabilities."
The Company's operations are subject to certain Federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with applicable regulations promulgated by the Occupational Safety
and Health Administration and the Environmental Protection Agency and
corresponding state agencies which pertain to health and safety in the work
place and the use, discharge and storage of chemicals employed in its
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operations, respectively. Current costs of compliance with such regulations are
not material to the Company. However, the adoption of new or modified
requirements, not presently anticipated could create additional expense for the
Company.
Certain of the Company's products must comply with FCC rules. The FCC
regulates under Part 15 of its rules the operation and marketing of devices
which emit radiofrequency energy, whether intentionally or unintentionally, and
which do not require an individual license. The marketing of such devices is
also regulated under Part 2 of the FCC's rules. The FCC regulates the direct
connection of terminal equipment to the public switched telephone network and
the marketing of such equipment under Part 68 of its rules. Parts 15 and 68
establish technical standards and procedural and labeling requirements for
equipment subject to these rules. Certain modifications to equipment subject to
these rules must also comply with these technical standards and procedural and
labeling requirements. Manufacturers of products subject to Part 68 also must
implement a continuing compliance program under which products currently in
production must be tested every six months to assure continued compliance with
the applicable technical standards.
Coin-line products operated in a regulated mode by the RBOCs are exempt
from the requirements of Part 68 but may be subject to Part 15 if they emit
radiofrequency energy. In addition, certain types of devices sold as components
or subassemblies are exempt from the technical standards and procedural and
labeling requirements of Parts 15 and 68. If such components or subassemblies
are incorporated into and marketed as part of systems or sets subject to Part 15
or Part 68, however, such systems or sets must comply with the applicable rules.
As described in more detail below, the Company has not complied fully with the
requirements of Parts 15 and 68.
The vast majority of the Company's payphone products are coin-line products
operated in a regulated mode by RBOCs which are exempt from registration under
Part 68 of the FCC's rules. However, the Company is required to verify through
testing that these products comply with the radiofrequency radiation standards
set forth in Part 15 of the FCC's rules. The Company has completed the
verification process for some but not all of its currently marketed coin-line
products and is in the process of verifying those coin-line products which were
not previously verified.
The Company's Gemini product is subject to the verification procedure of
Part 15 of the FCC's rules and is subject to Part 68 of the rules when marketed
by the Company to private payphone operators as part of a completed set
operating in the deregulated mode. Although most of the Gemini products have
been sold to regulated telephone companies and are therefore exempt from Part
68, the Company began marketing the Gemini product to private payphone operators
approximately two years ago. The Gemini product has undergone a number of
revisions intended to improve its performance. An earlier revision of the Gemini
product was verified under Part 15 and registered under Part 68, and a
modification to the product was registered in July 1993. Subsequent
modifications to this product have not been registered or verified, and the
Company has not conducted continuing compliance tests on these later versions of
the product and has not supplied the required labels on completed sets. The
Company is in the process of verifying and registering the revisions of the
Gemini product currently installed by or being marketed to private payphone
operators, preparing labels to be affixed to completed sets sold to private
payphone operators, and reactivating its continuing compliance program.
The Company's InMate product is subject to the requirements of Part 15 and
68 of the FCC's rules. The product was verified in July 1991 and registered in
August 1992. The last continuing compliance test was conducted on the InMate
product in March 1993. The Company is in the process of updating the
verification and registration and preparing labels for this product.
The Company is currently reviewing the compliance status of all of its
payphone products and may discover additional instances in which a product
subject to Part 15 or Part 68 has not been verified or registered or has not
been subjected to continuing compliance testing. The Company intends through
this process to bring all of its products into full compliance with the FCC's
rules. The FCC has authority under the Communications Act of 1934, as amended,
and its rules to impose penalties for non-compliance with the requirements of
Parts 15 and 68. These penalties may include, from least to most severe, issuing
a letter of admonition, imposing a fine, or revoking a registration. The
Company, through its counsel, has had informal discussions with staff members of
the FCC concerning the penalties, if any, the FCC would be likely to impose for
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instances of non-compliance, such as the Company's, with Parts 15 and 68 of the
rules. Although these discussions were in general terms and are non-binding on
the FCC, the Company believes that the FCC is not likely to impose penalties
upon the Company for its non-compliance with the rules and that in the event
penalties were imposed by the FCC, such penalties would not have a material
adverse impact upon the Company. The Company bases this belief on the small
percentage of the Company's products subject to the Part 68 registration
requirement, the Company's overall history of compliance, the Company's
self-discovery and self-disclosure to the FCC of instances of non-compliance,
and the Company's implementation of remedial measures to ensure full compliance
with the rules. There can be no assurance that the FCC will not impose penalties
on the Company for its non-compliance with the rules or that such penalties, if
imposed, would not have a material adverse impact upon the Company.
The Company's customers in the United States, the local exchange carriers,
operate in an industry that is subject to extensive regulation by the FCC and
state regulatory agencies. Most state public utility commissions have
established rules and regulations governing intrastate telecommunication
services, including provision of pay telephone service.
Although dramatic regulatory changes, particularly those created by recent
legislative actions (see "Business--The Public Communications Industry," above),
have occurred and may continue to occur, the Company believes that the
telecommunications industry will continue to be regulated in some form by
Federal and/or state authorities. There can be no assurance that changes in
regulations affecting the telecommunications industry, if proposed and adopted,
would not have an adverse impact on the operations of the Company's customers
and, therefore, on the operations of the Company.
Legal Proceedings and Disputes
On July 5, 1994, Multitek Circuitronics, Inc. ("Multitek") filed suit
against the Company in United States District Court for the Northern District of
Illinois Eastern Division to collect unpaid obligations of approximately
$400,000. The Company disputes that any sums are owed and claims that Multitek
supplied defective printed circuit boards to the Company and one of its contract
manufacturers that contributed to the termination of a first generation smart
payphone sales agreement between the Company and one of its then significant
RBOC customers in fiscal 1994. Management intends to defend and pursue the
Company's positions vigorously. There is no assurance, however, that the suit
can be resolved in the Company's favor. The unpaid obligations, however, have
been recorded in the Company's financial statements. Accordingly, it is the
opinion of management of the Company that the ultimate disposition of the
proceeding, even if unfavorable to the Company, will not have an adverse
material effect on the Company's results of operations or financial position.
In October 1994, the contract manufacturer that delivered the defective
first generation smart products to the Company (see "Changing Product Mix")
discontinued operations prior to the scheduled contract termination date. In
April 1995, the contract manufacturer formally terminated the Company's
manufacturing contract as of the scheduled termination date. Pursuant to the
terms of the manufacturing contract, the Company was committed to acquire the
manufacturer's inventories related to the Company's products. The Company is
presently involved in a dispute with the contract manufacturer with respect to
such inventories, which approximate $l million, unpaid obligations of the
Company of approximately $265,000, unpaid obligations of the contract
manufacturer of approximately $125,000 due to the Company, and other matters
including an alleged claim of lost profits by the contract manufacturer of
approximately $916,000 related to the Company's minimum contract purchase
commitment and alleged claims of lost business and expenses of the Company due
to the delivery of defective products and the termination of a significant smart
product sales agreement (see "Changing Product Mix," above). The Company is
attempting to settle the dispute with the manufacturer and claims that the
manufacturer supplied defective product and that it breached the agreement by
discontinuing operations prior to the scheduled termination date. However, there
is no assurance that the dispute can be settled in the Company's favor, or at
all. Also, there is no assurance that the dispute will not escalate into
litigation. Should the dispute escalate into litigation, the Company intends to
defend and pursue its positions vigorously. However, there is no assurance that
the outcome of the dispute or potential litigation related thereto will not have
a material adverse effect on the Company's financial position or results of
operations.
55
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of directors, executive
officers and other significant employees of the Company and the positions and
offices held by each of the persons named.
Name Age Position
- ----- --- -------
Directors and Executive Officers
Charles E. Davidson .......... 43 Director
Robert Morgan Davies ......... 45 Director
Olivier Roussel .............. 48 Director
David R.A. Steadman .......... 58 Chairman of the Board of Directors
Vincent C. Bisceglia ......... 41 Director, President and
Chief Executive Officer
Darold Bartusek .............. 49 Vice President, Sales and Marketing
William H. Thompson .......... 43 Vice President Finance,
Chief Financial Office and Secretary
Allen Vogl ................... 47 Vice President, Engineering
Winton Schriner .............. 49 Vice President, Operations
Significant Employees
Ned Rebich ................... 55 Vice President, Plant Operations
David Acocello ............... 40 Controller
Larry Au ..................... 37 Director of Engineering
Griff Martin ................. 39 Director of Sales
Marilyn Sakelaris ............ 49 Director of Customer Service
Following the consummation of the offering, the Company may increase the
independent membership of the Board of Directors by up to two directors.
Mr. Davidson has served as a director of the Company since November 1,
1994. Since 1994, he has served as Chairman of the Board of Wexford Capital
Corporation, which acts as the investment manager to several private investment
funds. Since November 1, 1995, Mr. Davidson has also served as Chairman of
Wexford Management Corporation, a private investment management company. From
1984 to 1994, he was a partner of Steinhardt Partners, L.P., a private
investment firm. From 1977 to 1984, Mr. Davidson was employed by Goldman, Sachs
& Co., serving as Vice President of corporate bond trading. Mr. Davidson is
Chairman of Board of DLB Oil & Gas and Resurgence Properties, Inc., and of
Presidio Capital Inc. and is a Director of Wahlco Environmental Systems, Inc.,
an environmental equipment and services company. He holds a B.A degree and an
M.B.A. degree from the University of California at Los Angeles.
Mr. Davies has been a director of the Company since November 1, 1994. Since
1994, Mr. Davies has been a Vice President of Wexford Capital Corporation, which
acts as the investment manager to several private investment funds. Since
November 1, 1995, Mr. Davies has served as Executive Vice President of Wexford
Management Corporation, a private investment management company. From September
1993 to May 1994, he was a Managing Director of Steinhardt Enterprises, Inc., an
investment banking company, and from 1987 to August 1993, he was Executive Vice
President of The Hallwood Group Incorporated, a merchant banking firm. Mr.
Davies is a director of Oakhurst Company, Inc. a holding company and its
majority-owned, publicly-traded subsidiary, Steel City Products, Inc., a
distributor of auto parts, and of Wahlco Environmental Systems, Inc., an
environmental equipment and services company.
Mr. Roussel has served as a director of the Company since 1986. Mr. Roussel
has served Acor S.A., a private investment company, as Chairman and President
since 1975. From 1974 to 1977, he served as Vice President of Nobel-Bozel and
from 1977 to 1982 as Assistant General Manager of Heli-Union. Mr. Roussel was a
56
<PAGE>
Director of Roussel-Uclaf from 1975 to 1982 and Chairman of Eminence S.A from
1987 to 1990. He presently serves as Chief Operating Officer and Director of
Vacsyn S.A., a biotechnology company, and as a Director of Bollore Technologies,
a public company listed on the Paris Stock Exchange.
Mr. Steadman has served as the Company's Chairman since November 1, 1994
and as a consultant since March 1994. He has served as President of Atlantic
Management Associates, Inc., a management services firm, since 1988. From 1990
to 1994, Mr. Steadman served as President and Chief Executive Officer of Integra
- - A Hotel and Restaurant Company ("Integra"), and from 1987 to 1988 as Chairman
and Chief Executive Officer of GCA Corporation, a manufacturer of automated
capital equipment used in the production of integrated circuits by
semi-conductor device manufacturers. Integra filed a petition for relief under
chapter 11 of the United States Bankruptcy Code in July, 1992 and emerged from
such proceeding in March, 1994. Mr. Steadman was a Vice President of Raytheon
Company, a defense electronics manufacturer, from 1980 to 1987, and served as
President of Raytheon Ventures, a venture capital division of Raytheon from 1985
to 1987. Mr. Steadman is a Director of Vitronics Corporation, a manufacturer of
reflow soldering ovens for the electronics industry, Kurzweil Applied
Intelligence, Inc., a voice recognition software company, Aavid Thermal
Technologies, Inc., a provider of thermal management products for the
semiconductor industry, and Wahlco Environmental Systems, Inc., an environmental
equipment and services company.
Mr. Bisceglia has served as a director and as President and Chief Executive
Officer of the Company since February 1994. He has served the Company in various
capacities since 1986, including consultant, Vice President of Sales and
Marketing and Executive Vice President. From 1982 to 1986, Mr. Bisceglia was
employed as Executive Vice President of Transaction Management, Inc., a
manufacturer of point-of-sale systems. Between 1978 and 1982, he held senior
marketing positions with National Semiconductor-DTS and Siemens-Nixdorf Computer
Corporation. Mr. Bisceglia holds a M.B.A. degree from Suffolk University and a
B.B.A. degree from the University of Massachusetts.
Mr. Bartusek has served the Company in various capacities since 1991
including Vice President of Sales and Marketing, Vice President of Worldwide
Sales and Vice President and General Manager of the Company's Smart Product
Business. From August 1989 to January 1991, Mr. Bartusek served as Vice
President of Marketing of the Public Communication Systems Division of Executone
Information Systems, Inc., a supplier of smart payphone systems. From 1973 to
1988, Mr. Bartusek served GTE Communication Systems Corporation in various
capacities including Director of Public Communications and Director of
Advertising and Sales Promotion. Mr. Bartusek holds a B.B.A. degree from Mankato
State University.
Mr. Thompson has served the Company in various capacities since July 1990
including Secretary, Vice President of Finance and CFO and Vice President of
Finance. Prior to joining the Company, Mr. Thompson was employed by Cardiac
Control Systems, Inc., a publicly-held medical device manufacturer, as
Controller and as Vice President of Finance from May 1983 to May 1988 and as
Executive Vice President of Operations and Finance from May 1988 to June 1990.
Between June 1974 and May 1983, he held various positions, most recently Audit
Manager, with Price Waterhouse LLP, certified public accountants. He is a
certified public accountant in the State of Florida and holds a B.S. degree in
accountancy from Florida State University.
Mr. Vogl has served the Company since 1981 in various capacities including
Vice President of Engineering and Executive Vice President and Chief Scientist.
Between 1972 and 1981, he was employed in various engineering and research and
development capacities by Harris Corporation and Storage Technology Corporation.
Mr. Schriner was recently appointed Vice President of Operations of the
Company. Previously he served the Company as Director of Contract Manufacturing
since August 1994. From 1991 to 1993, he served the Company in various
capacities including Vice President of Operations, Director of Marketing and
Director of Engineering. Prior to joining the Company, he served BellSouth
Telecommunications Company for a period of 12 years in various management
capacities with duties ranging from public communications to strategic planning
and executive support. He holds a B.S. degree in Industrial Education and an
M.S. degree in Vocational Rehabilitation from the University of Wisconsin.
57
<PAGE>
Mr. Rebich has served the Company since 1986 in various manufacturing
management positions, including Vice President of Plant Operations, Vice
President and General Manager of the Company's Service Business, Director of
Operations and General Manager. Between 1981 and 1986, Mr. Rebich served
Comdial, a business communications company, in various operating positions,
including General Manager. Prior to that, he held various operating positions,
including Manager of Quality, Quality Engineer and Manufacturing Supervisor,
with Stromberg-Carlson over a period of 19 years.
Mr. Acocello has served the Company in various capacities since 1985
including Controller, Director of Treasury, Assistant Controller and Accounting
Manager. He has served the Company as Controller or Director of Treasury since
1990. Prior to joining the Company, Mr. Acocello served Zales Corporation as an
accountant for a period of two years and Trinity Industries, Inc. as an
accounting manager and accountant for a period of three years. He holds a B.B.A.
degree from St. Bonaventure University and an associate degree in Applied
Science from State University of New York Agricultural & Technical College.
Mr. Au has served as the Director of Engineering of the Company since March
1994. From January 1991 to March 1994, he served the Company in various
capacities including Director of Marketing, Sales Manager and Director of
Network Services. From April 1990 to January 1991, he served as Director of
Network Services of the Public Communication Systems Division of Executone
Information Systems, Inc., a supplier of smart payphone systems. Prior to that,
he was employed by GTE Communications Systems Corporation for a period of 13
years in various sales and marketing and technical positions.
Mr. Martin joined the Company in May of 1995 as Director of Sales. From
1989 through 1995, he held sales management positions at MCI and LCI
International, both publicly held long distance carriers. Mr. Martin's
telecommunications experience began in 1981 with GTE, where he held several
sales and prospect marketing positions in GTE's public communications division.
Mr. Martin served GTE until 1989 when he joined MCI. He holds a BS degree in
Business Administration from California State University, Pomona.
Ms. Sakelaris has served as Director of Customer Service since November
1990, joining the Company in September 1986 as Manager of Customer Service.
Between January 1980 and 1986, Ms. Sakelaris served as Controller and Office
Manager of Transaction Management, a point of sales manufacturer, and Contrex,
Inc., a start-up, vision technology company.
Compensation of Directors
Directors are elected at the annual meeting of stockholders to serve during
the ensuing year or until a successor is duly elected and qualified. Under the
Director Plan, non-employee directors automatically will be granted
non-qualified options to purchase 10,000 shares of Common Stock upon the
consummation of this Offering and thereafter, on each September 1 of any year in
which such person is serving as a non-employee director, he or she will receive
non-qualified stock options to purchase an additional 3,000 shares of Common
Stock. Any non-employee director who is first appointed or elected after the
commencement of this Offering will receive a non-qualified stock option to
purchase 3,000 shares of Common Stock upon such appointment or election and an
additional option to purchase 3,000 shares of Common Stock on each anniversary
of his or her election, provided that he or she is then serving as a
non-employee director. Options granted upon consummation of the offering become
exercisable six months from the date the Offering is consummated. All other
options are exercisable on the anniversary of the date of grant. All options
will expire ten years after grant date. Vesting is accelerated in the event of a
change of control of the Company. The exercise price of all options will be
equal to the fair market value of the Common Stock on the date of grant. In
addition, Directors are reimbursed for their costs incurred in attending Board
of Director meetings.
Pursuant to a Chairman's Agreement with the Company, Mr. Steadman, Chairman
of the Board of Directors, provides consulting services to the Company and
advises the Company on general business matters, operational matters, and
financial matters. See "Certain Relationships and Transactions."
On October 31, 1994, the Company and Mr. Steadman entered into a Chairman's
Agreement for a term commencing on October 31, 1994 and ending on December 31,
1997. Pursuant to the terms of the agreement, Mr. Steadman provides consulting
services to the Company on general business matters, operational matters, and
financial matters and participates as a member of any Executive Committee and
58
<PAGE>
the Compensation Committee established by the Board, and receives compensation
therefor of $5,000 per month, in addition to reimbursement of business expenses.
Further, with respect to services performed outside of the New England area, Mr.
Steadman receives additional compensation of $500 per day or part thereof.
However, Mr. Steadman's maximum compensation in any one month cannot exceed
$7,500. Mr. Steadman is also entitled to participate in employee benefit plans
made available to other senior executives of the Company including family
medical insurance coverage, group life insurance coverage, in any 401(k)
retirement plan maintained by the Company and disability coverage on the same
basis as such other senior executives. Pursuant to the terms of the Chairman's
Agreement and the Company's 1994 Omnibus Stock Plan, the Company granted to Mr.
Steadman a non-qualified option to purchase 50,000 shares of Common Stock at an
exercise price of $1.00 per share. On February 5, 1996, the Board of Directors
granted to Mr. Steadman a non-qualified option to purchase 15,000 shares of
Common Stock at an exercise price of $5.00 per share. The options become
exercisable in four equal installments annually over a three-year period
beginning on the date of grant. As of the date of this Prospectus, options to
purchase 28,750 shares of Common Stock are exercisable by Mr. Steadman. Prior to
execution of the Chairman's Agreement, Atlantic Management Associates, Inc., of
which Mr. Steadman is President, provided consulting services to the Company
during the seven months ended October 30, 1994 similar to those provided under
the Chairman's Agreement. In addition, Atlantic Management Associates, Inc.
assisted the Company and its stockholders in their efforts to attract a buyer
for the equity of the Company, and received a success fee in connection with the
Acquisition of $75,000 as compensation for such services. During fiscal 1995,
the Company paid Atlantic Management Associates, Inc. $43,000 for consulting
services, excluding expenses of $7,386, rendered prior to the date of the
Chairman's Agreement. During fiscal 1995, the Company paid Mr. Steadman and
Atlantic Management Associates, Inc. $30,231, excluding expenses of $9,419, for
services rendered under the terms of the Chairman's Agreement. During the nine
months ended December 29, 1995, the Company paid Mr. Steadman and Atlantic
Management Associates, Inc. $50,154, excluding reimbursed expenses of $7,649,
for services rendered under the terms of the Chairman's Agreement. During the
year ended March 29, 1996, the Company paid Mr. Steadman and Atlantic Management
Associates, Inc. $66,000, excluding reimbursed expenses of $9, 007, for services
rendered under the terms of the Chairman's Agreement. The Chairman's Agreement
may be terminated and Mr. Steadman may be removed from the Board by the
shareholders at any time. If Mr. Steadman is removed from the Board for cause,
he is entitled to receive compensation for services rendered through the date of
termination. If Mr. Steadman is removed from the Board for reasons other than
cause, he is entitled to receive compensation for the remaining term of the
Chairman's Agreement or for a period of six months, whichever is greater. Mr.
Steadman may terminate the Chairman's Agreement upon 90 days written notice. See
"Executive Compensation."
Committees
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee was formed at the initial meeting of
the Board of Directors on November 1, 1994. The Audit Committee, consisting of
Mr. Davies and Mr. Steadman, was formed on July 18, 1995. The Audit Committee
periodically meets with representatives of the Company's independent auditors
and the Company's management to obtain an assessment of the Company's financial
condition and results of operations, the results and scope of the annual audit
and other services provided by the Company's independent auditors. The Audit
Committee met on July 28, 1995 in connection with the audits of the Company's
financial statements for the seven months ended October 30, 1994 and for the
five months ended March 31, 1995. The Compensation Committee, which currently
consists of Mr. Steadman, Mr. Davidson and Mr. Davies, meets periodically to
review and determine compensation arrangements for senior management. In
addition, the Compensation Committee is responsible for administering the 1994
Omnibus Stock Plan and the 1995 Employee Stock Purchase Plan. The Compensation
Committee met five times from November 1, 1994 to the date of this Prospectus.
All members of the Compensation Committee attended the meetings. Mr. Davidson
was appointed to the Compensation Committee and the Audit Commitee on February
5, 1996. On February 5, 1996, the Board of Directors established a Stock Plans
Committee consisting of Mr. Davidson and Mr. Davies. Such directors did not
receive options pursuant to the Company's 1994 Omnibus Stock Plan during the
preceding year. Prior to November 1, 1994, the Board of Directors of the Company
performed the responsibilities of the Audit Committee and the Compensation
Committee.
59
<PAGE>
Indemnification of Officers and Directors
Under the Company's Certificate of Incorporation, as amended on October 31,
1994, the Company shall indemnify to the fullest extent permitted under and in
accordance with the laws of the State of Delaware any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director, officer,
employee or agent of or in any other capacity with another corporation,
partnership, joint venture, trust or enterprise, against expenses, including
attorneys' fees, judgements, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Expenses, including attorneys' fees, incurred in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall (in
the case of any action, suit or proceeding against a director of the Company) or
may (in the case of any action, suit or proceeding against an officer, trustee,
employee or agent) be paid by the Company in advance of the final disposition of
such action, suit or proceeding as authorized by the Board upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Company as authorized in the Certificate of Incorporation. No director shall be
personally liable to the Company or any stockholder for monetary damages for
breach of fiduciary duty as a director, except for any matter in respect of
which such director (a) shall be liable under Section 174 of the Delaware
General Corporation Law or any amendment thereto or successor provision thereto,
or (b) shall be liable by reason that, in addition to any and all other
requirements for liability, he: (i) shall have breached his duty of loyalty to
the Company or its stockholders; (ii) shall not have acted in good faith or, in
failing to act, shall not have acted in good faith; (iii) shall have acted in a
manner involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct or
a knowing violation of law; or (iv) shall have derived an improper personal
benefit.
60
<PAGE>
Executive Compensation
The following table sets forth the compensation paid by the Company for
services performed on the Company's behalf during the fiscal years ended March
31, 1995 and March 29, 1996 with respect to the Company's President and Chief
Executive Officer and the Company's other executive officers whose compensation
exceeded $100,000 during the years ended March 31, 1995 and March 29, 1996.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation All Other
Name and Salary Bonus Other Annual Options Compensation
Principal Position Year (1) (2) (3) Compensation (in Shares) (6)(7)
--------------- ----- --------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
David R.A. Steadman,
Chairman of the Board
of Directors ................ 1996 $ 66,000 $ -- $ -- 15,000 $ 6,972
1995 73,231 75,000 -- 50,000 3,024
Vincent C. Bisceglia
President and
Chief Executive Officer ..... 1996 147,200 -- 26,915(4) -- 5,827
1995 121,970 52,500 37,405(4) 150,000 3,890
Allen Vogl, Vice
President,
Engineering ................. 1996 108,400 -- 31,824(4) 15,000 6,289
1995 103,814 35,000 38,269(4) 15,000 5,605
William H. Thompson,
Vice President
Finance, CFO and
Secretary ................... 1996 107,536 -- -- 10,000 5,967
1995 102,986 35,000 40,147(5) 30,000 5,735
Darold Bartusek, Vice
President, Sales
& Marketing ................. 1996 104,000 -- -- 15,000 6,129
1995 99,600 17,500 -- 15,000 5,277
</TABLE>
- -------------
(1) Effective April 1, 1994, the annual salaries of the Company's executive
officers and other employees with an annual salary in excess of $50,000,
were reduced by 10%. On November 1, 1994, the Board of Directors authorized
the reinstatement of annual salary amounts existing prior to the April 1,
1994 salary reduction.
(2) The annual salary reported in this Summary Compensation Table for Mr.
Steadman represents amounts paid to Mr. Steadman or Atlantic Management
Associates, Inc. for consulting services rendered to the Company. The
amount reported excludes business expense reimbursements to Mr. Steadman
and Atlantic Management Associates, Inc. See "Compensation of Directors."
(3) Bonuses during the year ended March 31, 1995 include a $75,000 success fee
paid to Atlantic Management Associates, Inc. in connection with the
Purchase and Merger transaction on October 31, 1994 and executive bonuses
paid pursuant to the terms of Executive Retention Agreements entered into
between the executive officers named in this Summary Compensation Table,
among others, and the Company effective as of June 8, 1994. The purposes of
the Executive Retention Agreements were to retain the executives in the
employ of the Company during the Company's efforts to effect a change in
ownership of the Company and to provide incentive to further the objectives
of the Company's stockholders. The Executive Retention Agreements provided
for the payment of such bonuses upon a change in control of the Company
based upon a specified percentage set forth in the respective Executive
Retention Agreement applied to the value of a transaction which resulted in
a change in ownership. On October 31, 1994, a change in ownership of the
Company as contemplated under the terms of the Executive Retention
Agreements occurred, and the Board of Directors authorized payment of the
retention bonuses as of November 1, 1994. See "Certain Relationships and
Transactions" and "The Company-- Development of the Company." Also, see
"Compensation of Directors."
(4) The Company reimburses or pays on the behalf of Mr. Bisceglia and Mr. Vogl
travel expenses to and from the Company and their respective residences, in
addition to temporary living and all other business expenses incurred on
the Company's behalf. Other compensation reported in this Summary
Compensation Table represents the estimated incremental costs to the
Company relating to reimbursements and payments of travel expenses to and
from the Company and their respective residence and temporary living
expenses.
(5) Represents reimbursement of relocation costs and expenses incurred by Mr.
Thompson with respect to his relocation from Pennsylvania to Georgia in
connection with the relocation of corporate headquarters.
(6) Other compensation includes the cost to the Company with respect to
split-dollar universal life insurance and long-term disability insurance
provided to executive officers of the Company.
(7) Excludes compensation received by the executive officers with respect to
term life, medical and dental benefits pursuant to the Company's group
insurance plan available to all full-time employees of the Company.
61
<PAGE>
The following table sets forth options to purchase the Company's Common
Stock ("options") granted to the executive officers named in the Summary
Compensation Table during the fiscal year ended March 29, 1996 together with the
percentage of such options to the total number of options granted to directors,
executive officers and employees of the Company during the year ended March 29,
1996, the exercise price and expiration date of options granted to the named
executive officers, and the potential realized value at assumed annual rates of
stock price appreciation for the option term.
Option Grants During Last Fiscal Year Ended March 29, 1996
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
----------------------------- ---------------------------
% of Total
Options Options to Exercise
Granted Employees Price Expiration 5% 10%
Name (in Shares) (1) During Year ($ per Share) Date (in $) (in $)
------ ------------ ----------- ------------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David R.A. Steadman (2) .... 15,000 17% $5.00 February 2006 $ 41,373 $117,837
Darold Bartusek ............ 15,000 17% 5.00 February 2006 41,373 117,837
Allen Vogl ................. 15,000 17% 5.00 February 2006 41,373 117,837
William H. Thompson ........ 10,000 11% 5.00 February 2006 27,583 78,558
</TABLE>
- ----------------
(1) The options granted to the named individuals are exercisable in four equal
annual installments beginning on the date of grant and expire 10 years from
the date of grant.
(2) Mr. Steadman's options become exercisable in their entirety in the event
that neither Wexford nor one of the investment funds controlled by Wexford
owns at least 51% of the Company's outstanding voting stock. In addition,
in the event that shares of the Company's capital stock are sold at a per
share price less than the exercise price, the exercise price of Mr.
Steadman's options shall be reduced to such lesser price and the number of
unexercised options shall be increased to the extent that the total
purchase price of unexercised options shall equal the total purchase price
of unexercised options before such transaction. Also, Mr. Steadman's
options are not subject to cancellation upon termination of employment
unless such termination is for cause or results from voluntary resignation.
Further, the option agreements provide that in the event Mr. Steadman's
employment is terminated for reasons other than cause, or on or before the
third anniversary of the grant date, if the Company's stock is not traded
on a national securities exchange or on the Nasdaq National Market System,
then upon the written request of Mr. Steadman, the Company shall purchase
unexercised options held by them at a price equal to the difference between
the market value of the underlying stock and the option exercise price.
The following table sets forth, as to the executive officers named in the
Summary Compensation Table, the number of exercisable options and the number of
unexercisable options outstanding at March 29, 1996 and the value of outstanding
exercisable and unexercisable in-the-money options as of March 29, 1996 based on
an estimated fair market value of $5.00 per share.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money Options at
Options at Fiscal Year End Fiscal Year End
--------------------------------- ----------------------------
Name Exercisable(1) Unexercisable(1) Exercisable Unexercisable
----- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
David R.A. Steadman(2) ... 28,750 36,250 $100,000 $100,000
Vincent C. Bisceglia(2) .. 75,000 75,000 300,000 300,000
Darold Bartusek .......... 11,250 18,750 30,000 30,000
Allen Vogl ............... 11,250 18,750 30,000 30,000
William H. Thompson ...... 17,500 22,500 60,000 60,000
</TABLE>
- --------------
(1) The options granted to the named individuals are exercisable in four equal
annual installments beginning on the date of grant and expire 10 years from
the date of grant.
(2) Mr. Steadman's and Mr. Biscegia's options become exercisable in their
entirety in the event that neither Wexford nor one of the investment funds
controlled by Wexford owns at least 51% of the Company's outstanding voting
stock. In addition, in the event that shares of the Company's capital stock
are sold at a per share price less than the exercise price, the exercise
price of Mr. Steadman's and Mr. Biscegia's options shall be reduced to such
lesser price and the number of unexercised options shall be increased to
the extent that the total purchase price of unexercised options shall equal
the total purchase price of unexercised options before such transaction.
Also, Mr. Steadman's and Mr. Biscegia's options are not subject to
cancellation upon termination of employment unless such termination is for
cause or results from voluntary resignation. Further, the option agreements
provide that in the event Mr. Steadman's or Mr. Biscegia's employment is
terminated for reasons other than cause, or on or before the third
anniversary of the grant date, if the Company's stock is not traded on a
national securities exchange or on the Nasdaq National Market System, then
upon the written request of Mr. Steadman or Mr. Biscegia, the Company shall
purchase unexercised options held by them at a price equal to the
difference between the market value of the underlying stock and the option
exercise price.
62
<PAGE>
During the years ended March 31, 1995 and March 29, 1996, none of the
options granted to the directors and executive officers of the Company were
exercised.
Compensation Committee Interlocks and Insider Participation
Prior to the formulation of the Compensation Committee, the Company's
former Board of Directors, including Mr. Bisceglia, President and Chief
Executive Officer, Mr. Roussel and Mr. William Geary, a representative of one of
the former stockholders of the Company, participated in deliberations concerning
executive compensation during fiscal 1995. Mr. Roussel and Mr. Geary did not
serve the Company as executive officers or employees during the year ended March
31, 1995, nor were they former executive officers or employees of the Company.
The Board of Directors elected by the stockholders on November 1, 1994
established the Compensation Committee at their initial meeting on November 1,
1994. Mr. Steadman is a member of the Compensation Committee and provides
consulting services to the Company pursuant to the terms of the Chairman's
Agreement. Mr. Steadman, Mr. Davidson and Mr. Davies, the other member of the
Compensation Committee, do not serve, nor have they formerly served, as
executive officers or employees of the Company. No executive officer of the
Company serves or served on the compensation committee of another entity during
fiscal 1995 and no executive officer of the Company serves or served as a
director of another entity who has or had an executive officer serving on the
Board of Directors of the Company. Mr. Davidson was appointed to the
Compensation Committee on February 5, 1996.
Employment Agreements
On October 31, 1994, the Company and Mr. Bisceglia entered into an
employment agreement for a term commencing on October 31, 1994 and ending on
December 31, 1997, subject to certain termination provisions. Pursuant to the
agreement, Mr. Bisceglia serves as the President and Chief Executive Officer and
as a director of the Company. Mr. Bisceglia receives an annual base salary of
$147,200 per year, which is subject to annual review for merit and other
increases at the discretion of the Board of Directors as of January 1, 1996 and
each year thereafter. Pursuant to the terms of the agreement, Mr. Bisceglia is
entitled to the same benefits made available to the other senior executives of
the Company on the same terms and conditions as such executives. The agreement
provides that the Company will reimburse and/or pay on Mr. Bisceglia's behalf up
to $4,000 per month of temporary living expenses, including travel to and from
the Company and Mr. Bisceglia's residence, until the Company requires Mr.
Bisceglia to relocate, at the Company's expense, to the Company's headquarter
location. Mr. Bisceglia is also entitled to receive an incentive bonus for each
fiscal year during the term of the agreement equal to 2% of the operating
profits of the Company, defined as net income before taxes, amortization and
depreciation, interest, gains and losses arising from revaluation of assets, and
charges or allocations by a parent or affiliated company except to the extent
that such charges are for expenses that directly relate to the operations of the
Company. Mr. Bisceglia also received, pursuant to the terms of the Employment
Agreement, options to purchase 150,000 shares of Common Stock at an exercise
price of $1.00 per share under the Company's 1994 Omnibus Stock Plan. Such
options become exercisable in four equal annual installments commencing on the
date of grant. Notwithstanding, the options become exercisable in the event of a
change in ownership of the Company or upon a sale of substantially all of the
assets of the Company. The options expire ten years from the date of grant,
unless earlier terminated upon termination of Mr. Bisceglia's employment for
cause or upon Mr. Bisceglia's resignation. The agreement contains provisions
that require the Company, at the option of Mr. Bisceglia, to purchase
unexercised options at market value if Mr. Bisceglia's employment is terminated
by the Company for reasons other than cause. Otherwise, the options remain in
effect until their expiration date. Also, if the agreement is terminated by the
Company without cause, Mr. Bisceglia is entitled to receive the amount of
compensation and to receive benefits remaining under the term of the agreement
or for a six month period, whichever is greater. The agreement automatically
renews for additional one-year periods unless the Company provides 180-day
notice of non-renewal or Mr. Bisceglia provides 120-day notice of termination on
December 31, 1997, or any date subsequent thereto. Pursuant to the agreement,
Mr. Bisceglia shall be indemnified by the Company with respect to claims made
against him as a director, officer, and/or employee of the Company or 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.
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1994 Omnibus Stock Plan
On November 1, 1994, the Board of Directors adopted the 1994 Omnibus Stock
Plan ("the Stock Plan"), which was approved by the Company's shareholders on
November 2, 1994. The Stock Plan provides the Board or a committee of the Board
(the "Committee') with the authority to grant to officers and employees of the
Company incentive stock options within the meaning of Section 422 of the
Internal Revenue Code and to grant to directors, officers, employees and
consultants of the Company non-qualified stock options and restricted stock
which do not qualify as incentive stock options. In the event the Company
registers any class of securities pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, each member of the Committee shall be a
"disinterested person" as defined in Rule 16b-3 under that Act. The aggregate
number of shares of Common Stock approved for issuance pursuant to the Stock
Plan on November 1, 1994 was 385,000.
On May 10, 1995, the Board of Directors increased the number of shares of
Common Stock which may be issued pursuant to the Stock Plan to 635,000 shares.
Further, the Stock Plan was amended to add a provision providing that the
maximum number of shares with respect to which options may be granted to any one
employee under the Stock Plan shall not exceed 300,000 shares. The Committee's
authority to grant options under the Stock Plan expires on November 1, 2004. As
of February 5, 1996, options to acquire a total of 434,250 shares had been
granted.
Options, which may be incentive stock options and non-qualified options,
are rights to purchase a specified number of shares of Common Stock at a price
fixed by the Committee. A restricted stock grant is a grant of a given number of
shares of Common Stock which are subject to restriction against transfer and to
the risk of forfeiture during a period set by the Committee. The Committee may
determine option periods, the number of shares of Common Stock subject to
options granted and such other terms and conditions under which options may be
exercised. The Committee also may determine at which times options or restricted
stock may be granted, the purchase price of restricted stock and options,
whether an option shall be an incentive stock option or a non-qualified option,
whether restrictions such as repurchase rights are to be imposed on shares
subject to options and to restricted stock, and the nature of such restrictions.
Incentive stock options may not be granted to directors unless they are
employees of the Company. The per-share option price of incentive stock options
granted pursuant to the Stock Plan shall not be less than the per-share fair
market value, as determined by the Board, of the Company's Common Stock as of
the date of grant, or 110% of fair 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. Option periods shall not exceed ten
years from the date options are granted, or five years with respect to incentive
stock options to employees owning 10% or more of the total voting power of all
classes of the Company's stock. Options granted under the Stock Plan generally
expire 60 days after termination of employment or at the end of the option
period determined by the Committee in the option agreement, whichever is
earlier. The Committee has the authority to accelerate the date of exercise of
an option or any installment thereof, unless, in the case of incentive stock
options, such acceleration would violate the annual vesting limitations
contained in Section 422(d) of the Internal Revenue Code. Payment of the option
price must be made in full at the time of exercise in cash, or in the discretion
of the Committee, in Common Stock, recourse notes bearing interest at no less
than the lowest applicable Federal rate per annum, as defined in Section 1274(d)
of the Internal Revenue Code, or any combination thereof. The exercise prices of
options granted pursuant to the Stock Plan are subject to adjustment upon any
subdivision, combination, merger, reorganization, merger, splits, split-up,
liquidation, or the like, to reflect such subdivision, combination or exchange.
The number of shares of Common Stock received upon the exercise of options
granted pursuant to the Stock Plan is subject to adjustment upon declarations of
stock dividends between the date of grant and the date of exercise of options.
Also, the number of shares of Common Stock authorized for issuance pursuant to
the Stock Plan shall be adjusted upon the occurrence of such events.
The Committee may also grant restricted stock under the Plan. The Committee
has the authority to determine the number of shares of Common Stock to be issued
and to the extent, if any, to which they shall be issued in exchange for cash
and/or other consideration. Shares issued pursuant to restricted stock may not
be sold, assigned, transferred, pledged, or otherwise disposed of, except by the
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laws of descent and distribution, or as otherwise determined by the Committee
for a period as determined by the Committee from the date restricted stock is
granted. The Company has the right to repurchase the Common Stock at such price
as determined by the Committee on the date of grant. The Company's repurchase
rights shall be exercisable on such terms set forth in the Restricted Stock
Agreement upon the termination of services of the grantee prior to expiration of
the restriction on transfer of the shares, upon failure of the grantee to pay to
the Company income taxes required to be withheld in respect of the restricted
stock or under such other circumstances as the Committee in its discretion may
determine.
1995 Employee Stock Purchase Plan
On May 10, 1995, the Board of Directors approved the adoption of the 1995
Employee Stock Purchase Plan (the"Employee Plan"). The Employee Plan provides
the Board of Directors with the authority to grant to the Company's officers and
employees options to purchase 100,000 shares of Common Stock at a 15% discount
as compared to the public market price. However, no shares may be issued prior
to an initial public offering of the Company's Common Stock and the receipt of
an opinion of counsel that all applicable securities laws have been complied
with. The rights granted under the Employee Plan are exercisable for an offering
period as determined by the Board of Directors, which may not exceed 27 months.
No employee may be granted an option under which the employee's right to
purchase shares under the Employee Plan first become exercisable at a rate in
excess of $25,000 in fair market value (determined at the date of grant) in any
calendar year. Also, an employee may not purchase shares in excess of 10% of his
or her compensation. The Board of Directors is authorized to administer the
Employee Plan until a Stock Plan Committee is appointed by the Board upon the
consummation of this Offering. The Employee Plan was approved by the
shareholders of the Company on December 26, 1995.
1995 Non-Employee Director Stock Option Plan
On May 10, 1995, the Board of Directors approved the adoption of the 1995
Non-Employee Director Stock Option Plan (the"Director Plan"), which was approved
by the Company's stockholders on December 26, 1995. The Director Plan provides
for automatic annual grants to non-employee directors of options to purchase
shares of Common Stock. A maximum of 100,000 shares of Common Stock are
authorized for issuance under this plan. The Board of Directors is authorized to
administer the Director Plan until a Stock Plan Committee is appointed by the
Board upon the consummation of this Offering. See "Management--Compensation of
Directors."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the date of this Prospectus, the
number of shares of the Company's outstanding Common Stock beneficially owned by
(i) each person who is known by the Company to beneficially own more than 5% of
the outstanding Common Stock, (ii) each director of the Company and each
executive officer named in the Summary Compensation Table (see "Management"),
and (iii) all of the Company's directors and executive officers as a group.
Except as noted below, the address for each such person is c/o Technology
Service Group, Inc., 20 Mansell Court East, Suite 200, Roswell, GA 30075.
Beneficial Ownership
Percentage Beneficially
Owned (1)
-------------------------
Name and Address of Number of Before After
Beneficial Owner Shares (2) Offering Offering (3)
---------------- ---------- -------- ------------
Wexford Partners Fund, L.P.
411 W. Putnam Avenue
Greenwich, CT 06830 .......... 2,730,000(4)(5) 78% 61%(9)
Acor, S.A.
17, Rue du Colisee
Paris, France 75008 .......... 507,500(6) 15% 11%(9)
Firlane Business Corp.
Box 202
1211 Geneva 12 Switzerland ... 262,500 8% 6%(9)
David R.A. Steadman
17 Pebble Beach Drive
Bedford, NH 03110 ............ 28,750 * *
Vincent C. Bisceglia ............. 75,000 2% 2%
Allen Vogl ....................... 11,250 * *
William H. Thompson .............. 17,500 * *
Darold Bartusek .................. 11,250 * *
Charles E. Davidson .............. 2,730,000(4) 78% 61%(9)
Robert M. Davies ................. 2,730,000(5) 78% 61%(9)
Olivier Roussel .................. 507,500(6) 15% 11%(9)
All officers and directors as a
group (nine persons) ......... 3,392,500(7)(8) 93% 73%(9)
- -------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by other persons) and
which are exercisable within 60 days of the date of this Prospectus have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(2) The named directors and executive officers of the Company do not own any of
the outstanding shares of Common Stock of the Company as of the date of
this Prospectus. The number of shares of Common Stock beneficially owned by
each of the named directors and executive officers represent the number of
shares of Common Stock underlying options granted pursuant to the 1994
Omnibus Stock Plan which are exercisable within 60 days of the date of this
Prospectus.
(3) Assumes the issuance of 1,000,000 shares of Common Stock pursuant to this
offering.
(4) Such shares are owned by Wexford Partners Fund, L.P., of which Mr. Davidson
is an affiliate. Mr. Davidson disclaims beneficial ownership of such
shares.
(5) Such shares are owned by Wexford Partners Fund, L.P. of which Mr. Davies is
an affiliate. Mr. Davies disclaims beneficial ownership of such shares.
(6) Such shares are owned by Acor, S.A., of which Mr. Roussel is Chairman and
President. Mr. Roussel disclaims beneficial ownership of such shares.
(7) Includes 2,730,000 shares held by Wexford Partners Fund, L.P, of which Mr.
Davidson and Mr. Davies are principals, each of whom disclaim beneficial
ownership of Wexford's shares.
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(8) Includes shares held by Acor, S.A. of which Mr. Roussel disclaims
beneficial ownership.
(9) The Company, Wexford, Acor S.A., Firlane Business Corp. (the directors and
officers of Firlane Business Corp. are Pierre-Jose Loze, Jean-Louis Kaiser
and Zoila De Las Casas) and ATTI (the Managing Director of ATTI is
MeesPierson Trust (Curacao) N.V.) have entered into the Stock Purchase
Agreement. See "The Company--Development of the Company--Proposed Stock
Purchase Agreement." Assuming the Company issues 1,000,000 shares of Common
Stock pursuant to this Offering and ATTI acquires shares of Common Stock
and Options pursuant to the Stock Purchase Agreement, the number of shares
of outstanding Common Stock beneficially owned by Wexford, Acor S.A.,
Firlane Business Corp. and ATTI would be 2,444,286 shares, 454,386 shares,
235,028 shares and 549,450 shares, respectively, or 54%, 10%, 5% and 12%,
respectively, of the outstanding Common Stock after this Offering (assuming
that each of such persons is beneficial owner of the shares of Common Stock
subject to the Options). If the Options were exercised in full, Wexford
would own 2,301,425 (51%) shares, ACOR would own 454,386 (10%) shares,
Firlane would own 235,028 (5%) shares, and ATTI would own 549,450 shares
(12%). Also, the number of shares of outstanding Common Stock beneficially
owned by Mr. Davies and Mr. Davidson would be 2,444,286 shares or 54% of
the outstanding Common Stock after this Offering, and the number of shares
outstanding Common Stock beneficially owned by Mr. Roussel would be 454,386
shares or 10% of the outstanding Common Stock after this Offering. Also,
assuming ATTI appoints a representative to the Board of Directors of the
Company, the number of shares outstanding Common Stock beneficially owned
by all directors and officers as a group, which would consist of 10
persons, would be 3,599,372 shares or 74% of the outstanding Common Stock
after this Offering. In connection with the Stock Purchase Agreement, the
parties entered into an Amended and Restated Stockholders' Agreement. See
"Certain Relationships and Transactions."
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
Pursuant to the terms of an asset purchase agreement with respect to the
acquisition of PCS entered into on January 11,1991, the Company is obligated to
pay royalties equal to 3.5% of sales of microprocessor-based components to OAB,
Inc. Mr. Bartusek and certain other employees of the Company who were employees
of PCS are stockholders in OAB, Inc. Royalty expense under this agreement
approximated $301,000 and $247,000 during the years ended April 1, 1994 and
April 2, 1993, respectively, and amounted to $3,900 during the seven months
ended October 30, 1994 and $93,578 during the five months ended March 31, 1995.
Royalty expense under the terms of the agreement approximated $372,000 during
the nine months ended December 29, 1995. The agreement expires on June 30, 1996.
The Company has outstanding promissory notes payable to OAB, Inc. bearing
interest at a rate of 10% per annum. Outstanding indebtedness pursuant to such
notes aggregated $425,536, $203,077 and $21,074 at April 1, 1994, March 31, 1995
and December 29, 1995, respectively. Also, the Company executed a non-interest
bearing note of $206,595 on November 9, 1994 representing unpaid royalties as of
October 30, 1994. This note is payable in nineteen equal monthly installments of
$10,873 and had an outstanding balance of $163,101 at March 31, 1995 and $65,241
at December 29, 1995. Interest paid to OAB, Inc. during the year ended March 31,
1995 aggregated $48,934.
On October 31, 1994, the Company and Mr. Steadman entered into a Chairman's
Agreement for a term commencing on October 31, 1994 and ending on December 31,
1997. Pursuant to the terms of the agreement, Mr. Steadman provides consulting
services to the Company on general business matters, operational matters, and
financial matters and participates as a member of any Executive Committee and
the Compensation Committee established by the Board, and receives compensation
therefor of $5,000 per month, in addition to reimbursement of business expenses,
in lieu of any other fees paid to directors of the Company. Further, with
respect to services performed outside of the New England area, Mr. Steadman
receives additional compensation of $500 per day or part thereof. However, Mr.
Steadman's maximum compensation in any one month cannot exceed $7,500. Prior to
execution of the Chairman's Agreement, Mr. Steadman provided consulting
services, as President of Atlantic Management Associates, Inc., to the Company
during the seven months ended October 30, 1994 similar to those provided under
the Chairman's Agreement. In addition, Atlantic Management Associates, Inc.
assisted the Company and its stockholders in their efforts to attract a buyer
for the equity of the Company, and received a success fee in connection with the
Acquisition of $75,000 representing the compensation for such services. During
fiscal 1995, the Company paid Atlantic Management Associates, Inc. $43,000 for
consulting services, excluding expenses of $7,386, rendered prior to the date of
the Chairman's Agreement. During fiscal 1995, the Company paid Mr. Steadman and
Atlantic Management Associates, Inc. $30,231, excluding expenses of $9,419, for
services rendered under the terms of the Chairman's Agreement. During the nine
months ended December 29, 1995, the Company paid Mr. Steadman and Atlantic
Management Associates, Inc. $50,154, excluding reimbursed expenses of $7,649,
for services rendered under the terms of the Chairman's Agreement. During the
year ended March 29, 1996, the Company paid Mr. Steadman and Atlantic Management
Associates, Inc. $66,000, excluding reimbursed expenses of $9,007. See
"Management."
On October 31, 1994, TSG Acquisition acquired all of the outstanding
capital stock of the Company pursuant to an Agreement and Plan of Merger dated
October 11, 1994 between Wexford, TSG Acquisition, the Company and the majority
holders of the Company's preferred and common stock including Acor S.A. and
Firlane Business Corp. The consideration paid by TSG Acquisition aggregated $3.5
million including contingent consideration of $329,709 placed in escrow and
distributed to former stockholders in September 1995. The aggregate
consideration consisted of $3,004,000 to acquire the outstanding capital stock
of the Company and $496,000 to retire a $400,000 subordinated master promissory
note payable to former stockholders and related accrued interest and preference
fees of $96,000 representing 5% of the outstanding principal for each month that
the note was outstanding. Aggregate cash payments to former stockholders,
including the contingent consideration of $329,709 and the retirement of the
subordinated master promissory note, accrued interest and preference fees of
$496,000, amounted to $3,222,090. Consideration of $277,910 was withheld from
amounts paid to former stockholders to pay liabilities of the Company including
a success fee of $75,000 payable to Atlantic Management Associates, Inc. (see
"Management -- Compensation of Directors" and "Management -- Executive
Compensation") and the settlement of a dispute with respect to a terminated
employment contract of a former executive of $202,910.
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On October 31, 1994, the Company entered into an Investment Agreement with
Wexford, Acor S.A. and Firlane Business Corp. (collectively the "investors").
Acor S.A. and Firlane Business Corp. were former stockholders of the Company.
Pursuant to the Investment Agreement, the Company issued an aggregate of 3.5
million shares of common stock, $.01 par value, at a price of $1.00 per share
(based on the Acquisition consideration paid by Wexford) in exchange for the
merger share. Wexford, Acor S.A. and Firlane Business Corp. received 2,730,000,
507,500 and 262,500 shares of common stock, respectively, pursuant to the terms
of the Investment Agreement. The consideration paid by Wexford, Acor S.A. and
Firlane Business Corp. amounted to $2,730,000, $507,500 and $262,500,
respectively. Also, the Company borrowed $2.8 million from Wexford and Acor S.A.
and issued subordinated promissory notes due November 1, 1999 that bear interest
at a rate of 10% per annum. The Company issued a 10% interest bearing
subordinated note to Wexford in the principal amount of $2,361,082 dated October
31, 1994. The Company also issued a 10% interest bearing subordinated promissory
notes to Acor S.A. in the principal amounts of $208,216.73 dated October 31,
1994, $99,591.93 dated October 31, 1994, $83,497.82 dated November 10, 1994 and
$47,611.52 dated December 23, 1994. See "Security Ownership of Certain
Beneficial Owners and Management."
In connection with the purchase and merger transaction, Acor S.A.
received aggregate consideration of $702,037, including $99,200 of principal and
related accrued interest and preference fees pursuant to the subordinated master
promissory note, and $680,843 in respect of Series C preferred stock, before a
pro rata share of the Atlantic Management Associates, Inc. success fee of
$16,715 and the settlement obligation of $61,291. Firlane Business Corp.
received aggregate consideration of $211,881, including $111,600 of principal
and related accrued interest and preference fees pursuant to the subordinated
master promissory note, and $115,551 in respect of Series C preferred stock,
before a pro rata share of the Atlantic Management Associates, Inc. success fee
of $4,868 and the settlement obligation of $10,402. See "Security Ownership of
Certain Beneficial Owners and Management."
Also on October 31, 1994, the Company, Wexford, Acor S.A. and Firlane
Business Corp. entered into a Stockholders' Agreement pursuant to which Acor
S.A. and Firlane Business Corp. granted Wexford a right of first refusal with
respect to any proposed sale by Acor S.A. or Firlane Business Corp. of any
Common Stock owned by them. In addition, Acor S.A. and Firlane Business Corp.
agreed that they would sell all or a proportionate amount of their Common Stock
to a third party in the event that Wexford requests them to do so in connection
with any such sale by Wexford. On its part, Wexford agreed, in connection with
any sale of its Common Stock to a third party, to include a proportionate amount
of the Common Stock owned by Acor S.A. and Firlane Business Corp., if requested
to do so. In addition, the Stockholders Agreement provides that Wexford, Acor
S.A. and Firlane Business Corp. have piggy-back registration rights with respect
to their shares of Common Stock in the event of any offering by the Company of
its Common Stock (other than in connection with exchange offers or stock option
or similar plans). Wexford, Acor S.A. and Firlane Business Corp. are not selling
any shares in this offering and each of them has agreed not to sell shares of
Common Stock for at least 12 months from the effective date of the Registration
Statement of which this Prospectus is a part without the prior written consent
of the Underwriter.
Effective June 8, 1994, the Board of Directors authorized and the Company
executed executive retention agreements with executive officers. The purpose of
the executive retention agreements were to retain the executives in the employ
of the Company during the Company's efforts to effect a change in ownership of
the Company and to provide incentive to further the objectives of the Company's
stockholders. The executive retention agreements provided for the payment of
bonuses upon a change in control of the Company based upon a specified
percentage set forth in the respective executive retention agreement applied to
the value of a transaction which resulted in a change in ownership. On November
1, 1994, the Company's Board of Directors approved the payment of such retention
bonuses as a result of the consummation of the Acquisition. The Company paid
bonuses to Mr. Bisceglia of $52,500, Mr. Vogl of $35,000, Mr. Thompson of
$35,000, Mr. Bartusek of $17,500, Mr. Wright of $17,500 and Mr. Rebich of
$17,500. See "Management -- Executive Compensation."
Mr. Davidson is the Chairman of the Board and chief executive officer of
Wexford Capital Corporation which acts as the investment manager to several
private investment funds, including Wexford Partners Fund, L.P., the principal
stockholder of the Company. Mr. Davies is a Vice President of Wexford Capital
Corporation and is an officer of various other affiliates of such corporation.
Mr. Roussel is Chairman and President of Acor, S.A., a private investment firm
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and a stockholder of the Company. See "Business -- Management" and "Security
Ownership of Certain Beneficial Owners and Management."
Wexford, Acor, S.A. and Firlane Business Corp. are each stockholders of the
Company. See "Security Ownership of Certain Beneficial Owners and Management."
Acor, S.A. and Firlane Business Corp. were stockholders of the Company prior to
the Acquisition. Wexford and Acor, S.A. are parties to an Investment Agreement
pursuant to which they acquired $2,361,082 and $438,918, respectively of 10%
interest bearing Subordinated Notes of the Company. Such entities are also party
to a Stockholders' Agreement, pursuant to which Wexford, Acor, S.A. and Firlane
were granted certain "piggy-back" registration rights and other co-sale rights.
Wexford, Acor, S.A. and Firlane Business Corp. are shareholders of the
Company (see "Security Ownership of Certain Beneficial Owners and Management").
Except for the consideration received by such stockholders in connection with
the Acquisition, the Company did not make any payments to such shareholders
during the year ended March 31, 1995. However, at March 31, 1995, interest
accrued pursuant to the subordinated promissory notes amounted to $98,325 with
respect to Wexford and $17,358 with respect to Acor S.A. At December 29, 1995,
interest accrued pursuant to the subordinated promissory notes amounted to
$39,459 with respect to Wexford and $8,181 with respect to Acor S.A. During the
nine months ended December 29, 1995 and year ended March 29, 1996, the Company
paid interest to Wexford of $236,755 and to Acor S.A. of $43,092.
The Company, Wexford, Acor S.A., Firlane Business Corp. and ATTI have
entered into the Stock Purchase and Option Agreement prior to the Offering.
Pursuant to the terms of the Stock Purchase Agreement, Wexford, Acor S.A. and
Firlane Business Corp. will sell to ATTI and ATTI will purchase an aggregate of
366,300 shares of Common Stock at a price of $8.14 per share and options to
purchase an additional 183,150 shares Common Stock exercisable at a price of
$11.00 per share (the "Options") at a price of $.10 per Option. Wexford will
sell 285,714 shares and Options to purchase 142,857 shares. Acor, S.A. will sell
53,114 shares and Options to purchase 26,557 shares. Firlane Business Corp. will
sell 27,472 shares and Options to purchase 13,736 shares. Consideration to be
received by Wexford, Acor S.A. and Firlane Business Corp. pursuant to the terms
of the Stock Purchase Agreement will be $2,339,998, $435,004 and $224,995,
respectively. Consummation of the transaction is subject to the consummation of
this Offering and other customary conditions. The number of shares of Common
Stock and Options to be received by ATTI is subject to adjustment based upon an
aggregate sales price to ATTI of $2,999,997 at 91% of the offering price of the
Units. The exercise price of the Options is also subject to adjustment based
upon the offering price of the Units. ATTI is also entitled, and the other
stockholders have agreed to elect, to appoint a representative to the Board of
Directors within 90 days after consummation of the transaction. ATTI has also
agreed not to sell, assign, or transfer any of the Company's securities for a
period of 12 months from the date of this Offering without the Representative's
prior written consent.
In connection with the Stock Purchase Agreement, the parties have entered
into an Amended and Restated Stockholders' Agreement pursuant to which Acor
S.A., Firlane Business Corp. and ATTI will grant Wexford a right of first
refusal with respect to any proposed sale by Acor S.A., Firlane Business Corp.
or ATTI of any Common Stock owned by them. In addition, Acor S.A., Firlane
Business Corp. and ATTI will agree that they would sell all or a proportionate
amount of their Common Stock to a third party in the event that Wexford requests
them to do so in connection with any such sale by Wexford. On its part, Wexford
will agree, in connection with any sale of its Common Stock to a third party, to
include a proportionate amount of Common Stock owned by Acor S.A., Firlane
Business Corp. and ATTI, if requested to do so. In addition, the agreement
provides that Wexford, Acor S.A., Firlane Business Corp. and ATTI will have
piggy-back registration rights with respect to their shares of Common Stock in
the event of any offering by the Company or Wexford of Common Stock (other than
in connection with exchange offers or stock option or similar plans). Wexford
also received demand registration rights with respect to their shares of Common
Stock which are exercisable at any time from time to time after 12 months
following consummation of this Offering until Wexford owns less than 5% of the
outstanding Common Stock. Acor S.A., Firlane Business Corp. and ATTI each
received demand registration rights with respect to their shares of Common Stock
which are exercisable on one occasion after 12 months following consummation of
this Offering until they own less than 5% of the outstanding Common Stock.
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000 shares of
Preferred Stock, par value $100 per share ("Preferred Stock"), none of which is
currently outstanding, and 10,000,000 shares of Common Stock, par value $.01 per
share, of which 3,500,000 shares are outstanding and are held by three
stockholders of record as of the date of this Prospectus.
Units
The Securities are being offered hereby as Units, each Unit consisting of
one share of Common Stock and one Redeemable Warrant. The Common Stock and the
Redeemable Warrants that constitute a Unit may be traded separately immediately
upon issuance. Prior to the Offering, no Units are outstanding. Common Stock
Each share of Common Stock has an equal and ratable right to receive
dividends, as and when declared by TSG's Board of Directors, out of any funds
legally available for the payment thereof. In the event of liquidation,
dissolution or winding up of the Company, subject to the rights of any
outstanding Preferred Stock, the holders of Common Stock are entitled to share
equally and ratably in the assets available for distribution after payment of
all liabilities.
Each share of Common Stock is entitled to one vote on all matters submitted
to a vote of the stockholders. Holders of Common Stock are not entitled to
cumulative voting, conversion or preemptive rights. All outstanding shares of
Common Stock are, and when issued, the shares of Common Stock to be issued in
connection with this offering will be, fully paid and nonassessable.
Redeemable Warrants
The Company is offering 1,000,000 Redeemable Warrants (as part of the
Units) for sale pursuant to this offering. As of the date of this Prospectus, no
Redeemable Warrants are outstanding.
The following is a brief summary of certain provisions of the Redeemable
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement by and
among the Company, and Liberty Bank and Trust Company of Okahoma City, N.A. (the
"Transfer and Warrant Agent"). A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
Two Redeemable Warrants entitle the holder thereof to purchase one share of
Common Stock at an exercise price of $11.00 per share. Unless the Redeemable
Warrants are redeemed as provided below, the Redeemable Warrants may be
exercised at any time beginning on the date of this Prospectus until May 9,
1999, at which time the Redeemable Warrants will expire.
Beginning nine months from the date of this Prospectus, the Redeemable
Warrants are redeemable by the Company at its option, as a whole and not in
part, at $.05 per Redeemable Warrant on 30 days' prior written notice, provided
that the average closing bid price of the Common Stock equals or exceeds $12.00
per share for 20 consecutive trading days ending within five days prior to the
date of the notice of redemption. The Redeemable Warrants may not be redeemed
unless they are then exercisable and a current prospectus covering the
Redeemable Warrants and the shares of Common Stock issuable thereunder is then
in effect. The Redeemable Warrants will remain exercisable until the close of
business on the business day prior to the date of redemption. Redemption of the
Redeemable Warrants may force the holders to exercise the Redeemable Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so or sell the Redeemable Warrants at the current market price when they
might otherwise desire to hold the Redeemable Warrants. See "Risk Factors."
The holders of the Redeemable Warrants will not have any of the rights or
privileges of stockholders of the Company (except to the extent they otherwise
own Common Stock) prior to the exercise of the Redeemable Warrants. The
Redeemable Warrants will be entitled to the benefit of adjustments in the
exercise price and in the number of shares of Common Stock deliverable upon the
exercise thereof upon the occurrence of certain events, including a stock
dividend, stock split or similar reorganization.
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Preferred Stock
The Company's Certificate of Incorporation authorize the Board of
Directors, without the necessity of further action or authorization by the
stockholders (unless required in a specific case by applicable law or
regulations or stock exchange rules), to authorize the issuance of the Preferred
Stock from time to time in one or more series and to determine all pertinent
features of each such series of Preferred Stock, including but not limited to
variations in the designations, preferences and relative, participating, option
or other special rights (including, without limitation, rights of conversion
into Common Stock or other securities, redemption provisions or sinking fund
provisions) as between series and as between the Preferred Stock or any series
thereof and the Common Stock, and the qualifications, limitations or
restrictions of such rights, and any voting powers of such Preferred Stock.
Holders of Common Stock have no preemptive rights to purchase or otherwise
acquire any Preferred Stock that may be issued in the future. Each series of
Preferred Stock could, as determined by the Board of Directors at the time of
issuance, rank with respect to dividends, redemption and liquidation rights,
senior to the Common Stock.
It is not possible to state the actual effect of the authorization of the
Preferred Stock upon the rights of holders of the Common Stock until the Board
of Directors determines the respective rights of the holders of one or more
series of the Preferred Stock. Such effects, however, might include: (a)
restrictions on dividends on Common Stock if dividends on the Preferred Stock
are in arrears; (b) dilution of the voting power of the Common Stock to the
extent that a series of the Preferred Stock would have voting rights; (c) the
holders of Common Stock not being entitled to share in the Company's assets upon
dissolution until satisfaction of any liquidation preference granted to the
Preferred Stock; and (d) potential dilution of the equity of holders of Common
Stock to the extent that a series of the Preferred Stock might be convertible
into Common Stock. In addition, the issuance of Preferred Stock may serve to
discourage or make more difficult an attempt to obtain control of the Company by
way of a merger, tender offer, proxy contest or other means. Further, the
shareholders could be prevented from receiving a premium for their shares. See
"Risk Factors."
Delaware Law and Certain Certificate and Bylaw Provisions
Certain provisions of the Delaware General Corporation Law and the
Company's Certificate of Incorporation summarized in the following paragraphs,
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
hostile tender offer or takeover attempt that a stockholder might consider in
his or her best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
Delaware Anti-Takeover Law
Section 203 of the Delaware General Corporation Law ("Section 203") applies
to a Delaware corporation with a class of voting stock listed on a national
securities exchange, authorized for quotation on an interdealer quotation system
or held of record by 2,000 or more persons. In general, Section 203 prevents an
"interested stockholder" (defined generally as any person owning, or who is an
affiliate or associate of the corporation and has owned in the preceding three
years, fifteen percent (15%) or more of a corporation's outstanding voting stock
and affiliates and associates of such person) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (1) before such
person became an interested stockholder, the Board of Directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (2) the
interested stockholder owned at least eighty-five percent (85%) of the voting
stock of the corporation outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the corporation and
by employee stock plans that do not provide employees with the rights to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (3) on or subsequent to the date
such person became an interested stockholder, the business combination is
approved by the Board of Directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
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stockholder. Under Section 203, the restrictions described above do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
Board of Directors
The Company's bylaws, as amended, provide that directors may be removed
with or without cause by a vote of a majority of the holders of shares then
entitled to vote at an election of directors.
Amendments to the Bylaws
The Company's Certificate of Incorporation, as amended, provide that the
majority of all directors or the vote of holders of a majority of the
outstanding stock entitled to vote is required to alter, amend or repeal the
bylaws.
Transfer Agent
The Company has appointed Liberty Bank and Trust Company of Okahoma City,
N.A. as Transfer and Warrant Agent for its Common Stock and Redeemable Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of
the Company. Therefore, future sales of substantial amounts of Common Stock in
the public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering the Company will have outstanding
4,500,000 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these outstanding shares of Common Stock, the 1,000,000 shares to be sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
remaining 3,500,000 shares of Common Stock held by existing stockholders are
"restricted securities" as the term is defined in Rule 144 under the Securities
Act ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) promulgated under the Securities Act, which are summarized
below. Sales of the Restricted Shares in the.public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. The Company's principal stockholders holding 3,500,000 shares of Common
Stock and ATTI have agreed not to sell, assign, or transfer any of the Company's
securities held by them for a period of 12 months from the date of this Offering
without the Representative's prior written consent. See "Security Ownership of
Certain Beneficial Owners and Management" and "Underwriting". Upon the
expiration of the 12-month period, such shares may be sold in reliance upon and
in accordance with the provisions of Rule 144 as early as October 31, 1996. In
addition, officers, directors and employees holding options to purchase 434,250
shares of Common Stock have agreed not to sell, assign or transfer any such
shares acquired upon exercise of options for a period of 12 months following
this Offering without the Representative's prior written consent.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years (including the
holding period of any prior owner except an affiliate) would be entitled to sell
within any three month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 45,000 shares immediately after this
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Offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144: therefore,
unless otherwise restricted, 144(k) shares" many therefore be sold immediately
upon the completion of this Offering.
In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.
Prior to the Offering, there has been no public market for the Common
Stock. Following the Offering, the Company cannot predict the effect, if any,
that sales of Common Stock pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, will have on the market price prevailing
from time to time. Nevertheless, sales by the Company's stockholders as of the
date of this Prospectus of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices for the Common Stock. In
addition, the availability for sale of a substantial amount of Common Stock
acquired through the exercise of the Representative's Warrants could adversely
affect prevailing market prices for the Common Stock.
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UNDERWRITING
The Underwriters named below (the "Underwriters") for whom Brookehill
Equities, Inc. is acting as Representative, have severally agreed, subject to
the terms and conditions contained in the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the number of
Units as set forth opposite their names:
Underwriter Number of Units
---------- ---------------
Brookehill Equities, Inc .......................... 700,000
Joseph Stevens & Company, L.P. .................... 250,000
Hill Thompson Magid & Co., Inc. ................... 50,000
---------
Total .................................... 1,000,000
=========
The Underwriters are committed to purchase the Units offered hereby, if any
of the Units are purchased. The Underwriting Agreement provides that the
obligations of the several Underwriters are subject to the conditions precedent
specified therein.
The Company has been advised by the Representative that the Underwriters
initially propose to offer the Units to the public at the offering price set
forth on the cover page of this Prospectus and that the Underwriters may allow
to certain dealers who are members of the National Association of Securities
Dealers, Inc. (the "NASD") concessions not in excess of $0.40 per Unit, of
which amount a sum not in excess of $0.10 per Unit may in turn be reallowed by
such dealers to other dealers. After the commencement of this offering, the
public offering price, the concessions and the reallowances may be changed. The
Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
securities offered by the Company hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a nonaccountable expense allowance equal to
three percent of the gross proceeds derived from the sale of the Units
underwritten, $40,000 of which has been paid to date.
All officers and directors of the Company, and holders of Common Stock and
securities exercisable, convertible or exchangeable for shares of Common Stock,
have agreed not to, directly or indirectly, offer, sell, transfer, pledge,
assign, hypothecate or otherwise encumber any shares of Common Stock or
convertible securities, or otherwise dispose of any interest therein, for a
period of 12 months from the date of this Prospectus without the prior written
consent of the Representative. An appropriate legend shall be marked on the face
of certificates representing all such securities.
The Company has granted to the Underwriters an option, exercisable within
45 days of the date of this Prospectus to purchase from the Company at the
offering price less underwriting discounts, up to an aggregate of 150,000
additional Units for the sole purpose of covering over-allotments, if any.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, Representative's Warrants to purchase
from the Company 100,000 shares of Common Stock. The Representative's Warrants
are initially excercisable at a price of $10.80 per share of Common Stock. The
Representative's Warrants contain anti-dilution provisions providing for
adjustments of the number of warrants and exercise price under certain
circumstances. The Representative's Warrants grant to the Holders thereof
certain rights of registration of the securities issuable upon exercise of the
Representative's Warrants.
Prior to this offering there has been no public market for the Units, the
Common Stock or the Redeemable Warrants. Accordingly, the initial public
offering price of the Units and the terms of the Redeemable Warrants were
determined in negotiations between the Company and the Representative. Other
factors considered in determining such price and terms, in addition to
prevailing market conditions, included the history of and the prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors that were deemed relevant.
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Although the Representative commenced operations in 1979 and Joseph Stevens
& Company, L.P. commenced operations in May 1994, neither has extensive
experience as an underwriter of public offerings of securities. Joseph Stevens &
Company, L.P. does not intend to participate as a market maker in the Units, the
Common Stock or the Redeemable Warrants. In addition, the Representative is a
relatively small firm and no assurance can be given that it will be able to
participate as a market maker in the Units, the Common Stock or the Redeemable
Warrants and no assurance can be given that another broker-dealer will make a
market in the Units, the Common Stock or the Redeemable Warrants. See "Risk
Factors--Lack of Experience of Representative and Underwriter."
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Berlack, Israels & Liberman LLP, 120 West 45th Street, New York, New
York 10036. Martin S. Siegel, a partner of Berlack, Israels & Liberman LLP, has
a nominal limited partnership interest in Wexford Partners Fund LP, which is a
principal stockholder of the Company. Orrick, Herrington & Sutcliffe, New York,
New York has acted as counsel for the Underwriters in connection with the
Offering.
EXPERTS
The financial statements as of April 1, 1994 and for each of the two years
in the period ended April 1, 1994 included in this Prospectus have been so
included in reliance on the report (which included an explanatory paragraph
relating to the Company's ability to continue as a going concern as described in
Note 1 to the Consolidated Financial Statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements as of March 31, 1995 and for
the seven months ended October 30, 1994 and five months ended March 31, 1995
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in this Registration Statement and have been so included in reliance on the
report of such firm given upon their authority as experts in accounting and
auditing.
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No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with this offering other than those contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell or solicitation of an offer to buy the
securities by anyone in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information herein is correct as of any time subsequent to its date.
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TABLE OF CONTENTS
Page
------
Additional Information .......................................... 2
Prospectus Summary .............................................. 3
Risk Factors .................................................... 8
The Company ..................................................... 17
Use of Proceeds ................................................. 21
Dividend Policy ................................................. 23
Capitalization .................................................. 24
Dilution ........................................................ 25
Selected Financial Data ......................................... 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 29
Business ........................................................ 40
Management ...................................................... 56
Security Ownership of Certain Beneficial
Owners and Management ........................................ 66
Certain Relationships and Transactions .......................... 68
Description of Securities ....................................... 71
Shares Eligible for Future Sale ................................. 73
Underwriting .................................................... 75
Legal Matters ................................................... 76
Experts ......................................................... 76
Index to Consolidated Financial Statements ...................... F-1
--------------
Until June 4, 1996 (25 calendar days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as Underwriter and with respect to their unsold
allotments or subscriptions.
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TECHNOLOGY
SERVICE
GROUP, INC.
[LOGO]
T S G
1,000,000 Units
--------------
PROSPECTUS
--------------
BROOKEHILL EQUITIES, INC.
JOSEPH STEVENS & COMPANY, L.P.
May 10, 1996
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