FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1996
Commission file number 0-28352
TECHNOLOGY SERVICE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-1637426
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 Mansell Court East - Suite 200 30076
Roswell, Georgia (Zip Code)
(Address of principal executive offices)
(770) 587-0208
(Registrant's Telephone Number,
including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
At January 31, 1997, there were 4,701,010 shares of common stock, $.01 par
value, outstanding.
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 27, 1996
(unaudited) and March 29, 1996 3
Consolidated Statements of Operations for the
three months and nine months ended December 27, 1996
(unaudited) and December 29, 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended December 27, 1996 (unaudited) and
December 29, 1995 (unaudited) 5
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended December 27, 1996
(unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, March 29,
1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 45,108 $ 19,787
Accounts receivable, less allowance for doubtful
accounts of $227,000 and $216,000 2,071,105 3,866,372
Inventories 13,053,079 8,658,669
Deferred tax asset 616,539 50,544
Prepaid expenses and other current assets 166,652 146,117
------------ ------------
Total current assets 15,952,483 12,741,489
Property and equipment, net 831,496 2,198,625
Other assets 3,925,715 4,693,650
============ ============
$ 20,709,694 $ 19,633,764
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 277,303 $ 1,002,403
Borrowings under revolving credit agreement 3,949,303 --
Current maturities under long-term debt and
capital lease obligations -- 118,444
Accounts payable 1,842,157 5,030,945
Income taxes payable 164,019 165,666
Deferred revenue 375,000 541,245
Accrued liabilities 965,072 1,472,379
Accrued restructuring charges 29,044 16,427
------------ ------------
Total current liabilities 7,601,898 8,347,509
Borrowings under revolving credit agreement -- 1,093,735
Long-term debt and capital lease obligations -- 3,414,586
Notes payable to stockholders -- 2,800,000
Deferred revenue -- 375,000
Other liabilities 3,198 3,198
------------ ------------
7,605,096 16,034,028
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $100 par value, 100,000 authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
4,701,010 and 3,500,000 shares issued and outstanding 47,010 35,000
Capital in excess of par value 11,962,114 3,465,000
Retained earnings 1,109,404 111,790
Cumulative translation adjustment (13,930) (12,054)
------------ ------------
Total stockholders' equity 13,104,598 3,599,736
------------ ------------
$ 20,709,694 $ 19,633,764
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 5,651,655 $ 9,585,664 $ 27,791,869 $ 23,677,489
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 4,588,941 7,416,123 22,199,304 18,857,150
General and administrative expenses 503,331 634,295 1,866,187 1,712,910
Marketing and selling expenses 179,743 320,102 734,851 906,754
Engineering, research and
development expenses 331,865 296,994 1,396,486 849,034
Litigation settlement -- -- (105,146) --
Interest expense 99,780 267,991 304,367 705,880
Restructuring charges -- -- 62,500 --
Other income (73,464) (4,798) (103,064) (14,642)
------------ ------------ ------------ ------------
5,630,196 8,930,707 26,355,485 23,017,086
------------ ------------ ------------ ------------
Income before income tax
(expense) benefit 21,459 654,957 1,436,384 660,403
Income tax (expense) benefit 5,686 -- (438,770) --
------------ ------------ ------------ ------------
Net income $ 27,145 $ 654,957 $ 997,614 $ 660,403
============ ============ ============ ============
Income per common and common
equivalent share:
Primary $ 0.01 $ 0.17 $ 0.21 $ 0.17
============ ============ ============ ============
Assuming full dilution $ 0.01 $ 0.17 $ 0.21 $ 0.17
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding :
Primary 5,059,505 3,870,889 4,793,020 3,870,889
============ ============ ============ ============
Assuming full dilution 5,059,505 3,870,889 4,793,020 3,870,889
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
December 27, December 29,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 997,614 $ 660,403
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 837,099 777,574
Gain on disposition of assets (46,908) --
Provisions for inventory losses and
warranty expense 397,139 238,057
Provision for uncollectible accounts receivable 14,268 58,745
Restructuring charges 62,500 --
Net deferred tax benefit (63,152) --
Changes in certain assets and liabilities
(Increase) decrease in accounts receivable 1,780,999 (5,779,384)
(Increase) in inventories (4,630,141) (1,077,648)
(Increase) decrease in prepaid expenses
and other current assets (20,535) 22,380
(Increase) in other assets (282,282) (140,651)
Increase (decrease) in accounts payable (3,188,788) 1,454,523
(Decrease) in income taxes payable (1,647) --
(Decrease) in accrued liabilities (668,715) (223,872)
(Decrease) in accrued restructuring charges (8,750) (61,890)
Increase (decrease) in deferred revenue
and other liabilities (541,245) 3,199
Other (615) (4,411)
----------- -----------
Net cash used for operating activities (5,363,159) (4,072,975)
----------- -----------
Cash flows from investing activities
Proceeds from disposition of assets 57,800 --
Capital expenditures (247,764) (164,593)
----------- -----------
Net cash used for investing activities (189,964) (164,593)
----------- -----------
Cash flows from financing activities
Net proceeds under revolving credit
agreement 2,855,568 4,576,332
Proceeds from initial public offering, net of
issuance expenses 8,631,532 --
Proceeds from exercise of common stock
options and warrants 215,964 --
Repayment of notes payable to stockholders (2,800,000) --
Principal payments on long-term debt and
capital lease obligations (2,599,520) (778,243)
Increase (decrease) in bank overdraft (725,100) 222,022
----------- -----------
Net cash provided by financing
activities 5,578,444 4,020,111
----------- -----------
Increase (decrease) in cash 25,321 (217,457)
Cash, beginning of period 19,787 265,576
=========== ===========
Cash, end of period $ 45,108 $ 48,119
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 27, 1996
(Unaudited)
<TABLE>
Capital in Cummulative
Common Excess of Retained Translation
Stock Par Value Earnings Adjustment Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at March 29, 1996 $ 35,000 $ 3,465,000 $ 111,790 $ (12,054) $ 3,599,736
Issuance of 1,150,000 shares in
initial public offering, net of
issuance expenses 11,500 8,281,660 -- -- 8,293,160
Issuance of 40,000 shares upon
exercise of common stock
purchase warrants 400 159,600 -- -- 160,000
Issuance of 4,250 shares upon
exercise of common stock
options 42 4,208 -- -- 4,250
Issuance of 6,760 shares under
1995 Employee Stock Purchase
Plan 68 51,646 -- -- 51,714
Net income for the period -- -- 997,614 -- 997,614
Foreign currency translation
adjustment -- -- -- (1,876) (1,876)
------------ ------------ ------------ ------------ ------------
Balance at December 27, 1996 $ 47,010 $ 11,962,114 $ 1,109,404 $ (13,930) $ 13,104,598
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated balance sheet as of December 27,
1996, unaudited consolidated statements of operations for the three months and
nine months ended December 27, 1996 and December 29, 1995, unaudited
consolidated statements of cash flows for the nine months ended December 27,
1996 and December 29, 1995, and unaudited consolidated statement of changes in
stockholders' equity for the nine months ended December 27, 1996 have been
prepared in accordance with instructions to Form 10-Q. Accordingly, the
financial information does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring accruals and adjustments, necessary for a fair presentation of
the financial position of the Company at December 27, 1996 and its operations
and its cash flows for the three months and nine months ended December 27, 1996
and December 29, 1995 have been made. For further information, refer to the
audited financial statements and footnotes included in the Company's annual
report on Form 10-K for the fiscal year ended March 29, 1996.
The results of operations for the three months and nine months ended
December 27, 1996 are not necessarily indicative of the results for the entire
fiscal year ending March 28, 1997.
2. INVENTORIES
Inventories at December 27, 1996 and March 29, 1996 consisted of the
following:
December 27, March 29,
1996 1996
----------- -----------
Raw materials $ 7,377,762 $ 6,056,702
Work-in-process 4,672,562 1,207,080
Finished goods 1,002,755 1,394,887
=========== ===========
$13,053,079 $ 8,658,669
=========== ===========
Reserves for potential inventory losses due to obsolescence and excess
quantities recorded at December 27, 1996 and March 29, 1996 aggregated
$1,245,146 and $1,606,195, respectively.
3. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT, LONG-TERM DEBT,
CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE TO STOCKHOLDERS
At December 27, 1996, the Company is able to borrow up to a maximum of $9
million under a revolving credit agreement pursuant to the terms of a Loan and
Security Agreement (the "Loan Agreement") between the Company and its bank. At
December 27, 1996 and March 29, 1996, the Company had outstanding debt of
$3,949,303 and $1,093,735, respectively, under the revolving credit agreement.
At March 29, 1996, the Company also had outstanding debt of $2,525,000 under
term and installment notes issued pursuant to the terms of the Loan Agreement.
Indebtedness outstanding under the Loan Agreement is secured by substantially
all assets of the Company including accounts receivable, inventories and
property and equipment. At December 27, 1996, the borrowing limit under the
revolving credit agreement was based upon specified percentages applied to the
value of collateral, consisting of eligible accounts receivable and inventories.
At March 29, 1996, the borrowing limit under the revolving credit agreement was
based upon specified percentages applied to the value of eligible collateral
less indebtedness outstanding under a $2.2 million term note due November 30,
7
<PAGE>
1997. Interest is payable monthly at a variable rate per annum equal to 1.5%
above a base rate quoted by Citibank (8.25% at December 27, 1996 and March 29,
1996).
In May 1996, the Company completed an initial public offering of equity
securities (see Note 4). A portion of the proceeds from the initial public
offering was used to repay the Company's then outstanding indebtedness of
$2,509,524 pursuant to the term and installment notes. In addition, a portion of
the proceeds was used to repay $3,808,589 of indebtedness outstanding under the
revolving credit agreement. Accordingly, the Company classified $1,093,735 of
indebtedness outstanding under the revolving credit agreement and $2,509,524 of
indebtedness outstanding under term and installment notes as long-term
obligations at March 29, 1996.
Long-term debt and capital lease obligations payable at December 27, 1996
and March 29, 1996 consisted of the following:
December 27, March 29,
1996 1996
----------- -----------
Loan and Security Agreement
$2.2 million secured term note, principal
balance due November 30, 1997 $ -- $ 2,200,000
$650,000 secured term note, principal
payable in sixty equal monthly installments
of $7,738, with remaining principal balance
due November 30, 1997 -- 325,000
Unsecured non-interest bearing promissory
note, payable in nineteen equal monthly
installments of $10,873 -- 32,620
Obligations under capital leases -- 975,410
----------- -----------
-- 3,533,030
Less - current maturities -- (118,444)
----------- -----------
$ -- $ 3,414,586
=========== ===========
During the three months ended December 27, 1996, the Company closed a one
hundred thousand square foot manufacturing facility located in Paducah, Kentucky
(see Note 7) and assigned the related capital lease obligation to an
unaffiliated party. Accordingly, the Company recorded the retirement of the
outstanding capital lease obligation and the disposition of the property during
the three months ended December 27, 1996, and realized a gain of $44,169
representing the difference between the outstanding lease obligation ($933,510)
and proceeds received ($50,000) and the net book value of the property
($939,341).
On October 31, 1994, the Company entered into an Investment Agreement.
Pursuant to the terms of the Investment Agreement, the Company borrowed $2.8
million from stockholders and issued subordinated promissory notes due November
1, 1999 bearing interest at a rate of 10% per annum. In May 1996, the Company
repaid the outstanding indebtedness pursuant to the subordinated promissory
notes from the proceeds of its initial public offering.
8
<PAGE>
4. STOCKHOLDERS' EQUITY
Initial Public Offering
In May 1996, the Company completed an initial public offering of 1,150,000
units (the "Units"), each Unit consisting of one share of common stock and one
redeemable warrant ("Redeemable Warrant"), at a price of $9.00 per Unit for
gross proceeds of $10,350,000. In connection with the offering, the Company
issued warrants to the Underwriters to purchase 100,000 shares of Common Stock
(the "Underwriter Warrants") for gross proceeds of $10. Net proceeds received by
the Company, after underwriting discounts and expenses of $1,231,897 and other
expenses of $824,953, amounted to $8,293,160. As of March 29, 1996, the Company
had incurred, and deferred as other assets, offering expenses of $338,372.
Accordingly, net proceeds during the nine months ended December 27, 1996
amounted to $8,631,532.
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, the Redeemable Warrants may be exercised at any time
beginning on May 10, 1996 and ending May 9, 1999, at which time the Redeemable
Warrants will expire. Beginning on February 10, 1997, 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 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.
The Underwriter Warrants are initially exercisable at a price of $10.80 per
share of common stock. The Underwriter Warrants contain anti-dilution provisions
providing for adjustments of the number of warrants and exercise price under
certain circumstances. The Underwriter Warrants grant to the holders thereof
certain rights of registration of the securities issuable upon exercise of the
Underwriter Warrants. The Underwriter Warrants may be exercised at any time
beginning on May 10, 1997 and ending May 9, 2001, at which time the Underwriter
Warrants will expire.
Common Stock Purchase Warrants
On May 23, 1995, the Company issued a warrant to a contract manufacturer to
purchase 40,000 shares of common stock, $.01 par value, at a price of $4.00 per
share in return for the extension of credit under the terms of a manufacturing
agreement between the Company and the contract manufacturer. On June 17, 1996,
the warrant was exercised and the Company issued 40,000 shares of common stock
for aggregate proceeds of $160,000.
Income Per Common and Common Equivalent Share
Income per common and common equivalent share for the three months and nine
months ended December 27, 1996 and December 29, 1995 is computed on the basis of
the weighted average number of common shares outstanding and dilutive common
equivalent shares outstanding during the period, except as required by
Accounting Principles Board Opinion No. 15, Earnings per Share, all outstanding
options and warrants during the three months and nine months ended December 27,
1996 have been included in the calculation in accordance with the modified
treasury stock method and except as required by Securities and Exchange
Commission Staff Accounting Bulletin ("SECSAB") Topic 4:D, shares of common
stock underlying warrants issued and options granted during the 12 months prior
to the Company's May 10, 1996 initial public offering at prices below the public
offering price have been included in the calculation of weighted average of
9
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common and common equivalent shares outstanding as if they were outstanding as
of the beginning of the periods.
5. INCOME TAXES
There was no income tax expense for the three months and nine months ended
December 29, 1995. Income taxes charged (credited) to operations for the three
months and nine months ended December 27, 1996 consisted of the following:
Three Months Nine Months
Ended Ended
December 27, December 27,
1996 1996
--------- ---------
Current tax expense (benefit):
Federal $ (1,939) $ 491,632
State (74,500) 10,290
--------- ---------
(76,439) 501,922
--------- ---------
Deferred tax expense (benefit):
Federal (40,316) (496,620)
State (5,633) (69,375)
--------- ---------
(45,949) (565,995)
--------- ---------
(122,388) (64,073)
Tax benefits applied to goodwill 116,702 502,843
========= =========
$ (5,686) $ 438,770
========= =========
Income tax expense (benefit) differs from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate to
income before income taxes as a result of the following differences:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory U.S. tax rates $ 7,297 $ 222,685 $ 488,371 $ 224,537
State taxes, net of federal benefit 1,633 -- 45,805 --
Non-deductible expenses 14,004 25,708 42,939 77,150
Utilization of loss carryforwards -- (248,393) (71,995) (301,687)
Other (28,620) (66,350)
============ ============ ============ ============
Effective tax rates $ (5,686) $ -- $ 438,770 $ --
============ ============ ============ ============
</TABLE>
10
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended December 27,
1996 and December 29, 1995 consists of the following:
Nine Months Ended
---------------------------
December 27, December 29,
1996 1995
----------- ------------
Interest paid $421,716 $731,858
Income taxes paid 503,569 --
Deferred offering expenses charged
against proceeds of initial public
offering 338,372 --
Tax benefits applied to goodwill 502,843 --
Retirement of capital lease obligation
and write-off of related property 933,910
Write-off of property and equipment
against accrued restructuring charges 41,133
Other current assets acquired by
assumption of debt obligations -- 131,594
Increase in goodwill from
distribution of escrow
consideration -- 329,709
7. RESTRUCTURING
During the nine months ended December 27, 1996, the Company initiated a
consolidation plan intended to augment its on-going productivity and quality
improvement programs. The consolidation plan provides for the closure the
Company's Kentucky manufacturing facility, the closure of the Company's Georgia
corporate office facility, the consolidation of repair, refurbishment and
conversion service operations into the Company's Virginia facility and the
consolidation of corporate activities and product assembly operations into a new
Georgia facility. In connection with this plan, the Company recorded
restructuring charges of $62,500 during the nine months ended December 27, 1996.
These restructuring charges consist of estimated severance obligations and
estimated losses related to abandonment of assets.
During the three months ended December 27, 1996, the Company closed its
Kentucky facility and relocated service operations into its Virginia
manufacturing facility. Relocation expenses and other incremental costs incurred
in connection with the consolidation and charged to operations during the three
months ended December 27, 1996 approximated $304,000.
In November 1996, the Company executed a lease agreement with respect to a
39,200 square foot facility located in Georgia that is expected to commence in
April 1997. Upon commencement of the lease, the Company intends to close its
present corporate office facility and consolidate its product assembly
operations and corporate activities into the new facility. The lease, which
provides for a monthly payment of $17,803, has an initial term of five years and
is renewable for an additional five-year term.
11
<PAGE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
Pursuant to the terms of a settlement agreement and mutual release dated
July 3, 1996, a suit filed against the Company by a former supplier to collect
approximately $400,000 of unpaid obligations was dismissed with prejudice.
Pursuant to the terms of the settlement agreement, the Company paid $180,000 and
agreed to pay an additional $112,500 in six equal monthly installments of
$18,750 commencing on August 15, 1996. As a result of the settlement agreement,
the Company realized a gain of $105,146 representing the difference between
unpaid obligations recorded in the Company's accounts and aggregate settlement
payments set forth in the settlement agreement. The gain is reflected in the
Company's results of operations for the nine months ended December 27, 1996.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This report 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 herein.
Results of Operations
For the Three Months Ended December 27, 1996 Compared to the
Three Months Ended December 29, 1995
Overview. The Company's business during the three months ended December 27,
1996 was adversely affected by a significant decrease in sales volume of smart
payphone products, which the Company attributes to the budget cycles and related
changes in the deployment schedules of the two primary customers deploying the
Company's smart payphone products. During the three months ended December 29,
1995, the Company received significant year-end smart product orders from its
customers. The Company's net income for the three months ended December 27, 1996
decreased by $627,812 to $27,145 as compared to $654,957 for the three months
ended December 29, 1995. Primary earnings per share for the three months ended
December 27, 1996 decreased to $.01 per share based on 5,059,505 common and
common equivalent shares outstanding versus $.17 per share based on 3,870,889
common and common equivalent shares outstanding for the three months ended
December 29, 1995.
Sales. Sales decreased by $3,934,009, or 41%, to $5,651,655 for the three
months ended December 27, 1996 (third quarter of fiscal 1997) from $9,585,664
for the three months ended December 29, 1995 (third quarter of fiscal 1996). The
decrease in sales is primarily attributable to a decrease in sales volume
related to smart payphone products and exported wireless products of
approximately $4.7 million, which was offset by an increase in the volume of
repair and refurbishment services of approximately $.8 million. Sales of smart
payphone products and components decreased by approximately $4.6 million and
accounted for approximately 38% of sales during the third quarter of fiscal 1997
as compared to 70% of sales during the third quarter of fiscal 1996.
Refurbishment and repair services and related product sales for the third
quarter of fiscal 1997 increased by approximately 31% as compared to the same
period last year, and accounted for 59% of sales as compared to 27% last year.
Sales during the third quarter of fiscal 1997 include export sales of
approximately $167,000 as compared to export sales of approximately $304,000
during the third quarter of fiscal 1996.
During the third quarter of fiscal 1997, the Company entered into a
non-exclusive sales agreement, effective July 1, 1996, to provide its GeminiTM
smart payphones and processors, CoinNetTM payphone management system and other
smart payphone components to Telesector Resources Group, Inc. and its affiliates
("NYNEX") for a period of five years. The Company has been informed by NYNEX
that, as a result of budgetary issues and related changes in NYNEX's deployment
schedule, the Company did not receive any significant orders under this contract
during the third quarter of fiscal 1997.
Sales of smart payphone products during the third quarter of fiscal 1997
were primarily attributable to shipments under a former sales agreement between
the Company and NYNEX executed in December 1995. This sales agreement expired
during the third quarter of fiscal 1997, and although the Company has entered
into the new contract, no significant orders were received during the quarter.
During the third quarter of fiscal 1996, a significant portion of the Company's
sales were attributable to shipments under the former NYNEX agreement as well as
a sales agreement between the Company and Southwestern Bell Telephone Company
("SWB") executed in December 1994. SWB had purchased approximately 65% of the
13
<PAGE>
committed volume under the agreement by June 1996, and deferred the purchase of
the remaining committed volume to its 1997 budget (calendar) year. Accordingly,
sales to SWB under the 1994 contract have not been significant during the
Company's 1997 fiscal year. See "Operating Trends and Uncertainties," below for
a discussion of the Company's dependence on significant customers and
contractual relationships.
Cost of Goods Sold. Cost of goods sold decreased by $2,827,182, or 38%, to
$4,588,941 during the third quarter of fiscal 1997 as compared to $7,416,123
during the third quarter of fiscal 1996. The decrease in cost of products sold
is primarily attributable to the 41% decrease in sales during the third quarter
of fiscal 1997 as compared to the third quarter of fiscal 1996. During the third
quarter of fiscal 1997, the Company closed one of its manufacturing facilities
and consolidated its repair and refurbishment operations into its Virginia
facility. Incremental costs incurred in connection with the closure and
consolidation approximated $304,000 during the three months ended December 27,
1996. The incremental costs, certain sales price reductions, the decrease in
volume, and variations in product mix had an unfavorable impact on production
costs as a percentage of sales. Overall, cost of goods sold as a percentage of
sales increased to 81% during the third quarter of fiscal 1997 as compared to
77% of sales during third quarter of fiscal 1996.
General and Administrative Expenses. General and administrative expenses
decreased by $130,964, or 21%, to $503,331 (9% of sales) during the third
quarter of fiscal 1997 from $634,295 (7% of sales) during the third quarter of
fiscal 1996. The decrease in general and administrative expenses is primarily
related to the closure of one of the Company's manufacturing facilities, a
decrease in accrued performance based compensation and a reduction in the
estimate of doubtful accounts receivable, which resulted in a credit of
approximately $56,000 during the quarter.
Marketing and Selling Expenses. Marketing and selling expenses decreased by
$140,359, or 44%, to $179,743 (3% of sales) during the third quarter of fiscal
1997 as compared to $320,102 (3% of sales) during the third quarter of fiscal
1996. The decrease is primarily attributable to the expiration of a royalty
agreement and the resulting decrease in royalty expense associated with sales of
smart payphone products.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased by $34,871, or 12%, to $331,865 (6% of sales)
during the third quarter of fiscal 1997 as compared to $296,994 (3% of sales)
during the third quarter of fiscal 1996 due to an expansion of engineering
resources and product development activities. The Company began to expand its
engineering resources during the first quarter of fiscal 1997 in order to
facilitate smart product development activities and the implementation of
lower-cost manufacturing methodologies. During the third quarter of fiscal 1997,
the Company capitalized approximately $272,000 of software development costs
with respect to its next generation smart payphone processor.
Interest Expense. Interest expense decreased to $99,780 during the third
quarter of fiscal 1997 as compared to $267,991 during the third quarter of
fiscal 1996 primarily due to the repayment of outstanding bank and stockholder
debt obligations during May 1996 from proceeds of the Company's initial public
offering. See "Liquidity and Capital Resources - Cash Flows From Financing
Activities," below.
Other Income. During the three months ended December 27, 1996, the Company
closed a one hundred thousand square foot manufacturing facility located in
Paducah, Kentucky and assigned the related capital lease obligation to an
unaffiliated party. Accordingly, the Company recorded the retirement of the
outstanding capital lease obligation and the disposition of the property during
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the three months ended December 27, 1996, and realized a gain of $44,169
representing the difference between the outstanding lease obligation ($933,510)
plus the proceeds received ($50,000) and the net book value of the property
($939,341). The increase in other income during the third quarter of fiscal 1997
as compared to the third quarter of fiscal 1996 is primarily attributable to
this gain and to an increase in income from a sublease of a portion of property
leased by the Company.
Income Taxes. During the third quarter of fiscal 1997, the Company recorded
an income tax benefit of $5,686. Benefits of acquired deferred tax assets
aggregating $116,702 were applied to goodwill during the three months ended
December 27, 1996. There was no income tax provision during third quarter of
fiscal 1996. Benefits of net operating loss carryforwards used to offset current
tax expense during the three months ended December 29, 1995 approximated
$248,000.
For the Nine Months Ended December 27, 1996 Compared to the
Nine Months Ended December 29, 1995
Overview. The Company's income before taxes for the nine months ended
December 27, 1996 increased by $775,981, to $1,436,384 as compared to $660,403
for the nine months ended December 29, 1995. During the nine months ended
December 27, 1996, the Company recorded an income tax provision of $438,770. No
income tax provision was recorded during the nine months ended December 29,
1995. Net income for the nine months ended December 27, 1996 increased 51% to
$997,614 versus $660,403 for the same period last year. Primary earnings per
share for the nine months ended December 27, 1996 increased to $.21 per share
based on 4,793,020 common and common equivalent shares outstanding versus $.17
per share based on 3,870,889 common and common equivalent shares outstanding for
the nine months ended December 29, 1995.
Sales. Sales increased by $4,114,380, or 17%, to $27,791,869 for the nine
months ended December 27, 1996 (first nine months of fiscal 1997) from
$23,677,489 for the nine months ended December 29, 1995 (first nine months of
fiscal 1996). The increase in sales is primarily attributable to an increase in
sales volume, particularly sales related to smart payphone products and
components. Sales of smart payphone products and components increased by
approximately $2 million (14%), and accounted for approximately 60% of sales
during the first nine months of fiscal 1997 as compared to 62% of sales during
the first nine months of fiscal 1996. Refurbishment and repair services and
related product sales for the first nine months of fiscal 1997 increased by
approximately $2.3 million (28%) as compared to the same period last year, and
accounted for 39% of sales as compared to 36% last year. Sales during the first
nine months of fiscal 1997 include export sales of approximately $322,000 as
compared to export sales of approximately $561,000 during the first nine months
of fiscal 1996.
During the third quarter of fiscal 1997, the Company entered into a
non-exclusive sales agreement, effective July 1, 1996, to provide its GeminiTM
smart payphones and processors, CoinNetTM payphone management system and other
smart payphone components to Telesector Resources Group, Inc. and its affiliates
("NYNEX") for a period of five years. Sales of smart payphone products during
the nine months ended December 27, 1996 were primarily attributable to shipments
under a former sales agreement between the Company and NYNEX executed in
December 1995. This sales agreement expired during the third quarter of fiscal
1997, and although the Company has entered into the new contract, no significant
orders were received during the quarter, which according to NYNEX, is due to its
budget cycle and related changes in the deployment schedule. During the nine
months ended December 29, 1995, a significant portion of the Company's sales
were attributable to shipments under the former NYNEX agreement as well as a
sales agreement between the Company and Southwestern Bell Telephone Company
("SWB") executed in December 1994. SWB had purchased approximately 65% of the
committed volume under the agreement as of March 1996, and deferred the purchase
of the remaining committed volume to its 1997 budget (calendar) year.
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Accordingly, sales to SWB under the 1994 contract have not been significant
during the Company's 1997 fiscal year. See "Operating Trends and Uncertainties,"
below for a discussion of the Company's dependence on significant customers and
contractual relationships.
Cost of Goods Sold. Cost of goods sold increased by $3,342,154, or 18%, to
$22,199,304 during the first nine months of fiscal 1997 as compared to
$18,857,150 during the first nine months of fiscal 1996. The increase in cost of
products sold is primarily attributable to the 17% increase in sales during the
first nine months of fiscal 1997 as compared to the first nine months of fiscal
1996. The increase in volume offset the adverse impact of incremental costs
incurred in connection with the plant closure and consolidation and certain
sales price reductions, and production costs as a percentage of sales remained
stable at approximately 80% during the nine months ended December 27, 1996 as
compared to the nine months ended December 29, 1995.
General and Administrative Expenses. General and administrative expenses
increased by $153,277, or 9%, to $1,866,187 (7% of sales) during the first nine
months of fiscal 1997 from $1,712,910 (7% of sales) during the first nine months
of fiscal 1996. The increase in general and administrative expenses is primarily
related to the increase in the volume of business, amortization of deferred
patent license fees with respect to a patent license acquired in September 1995
and an increase in accrued performance based compensation.
Marketing and Selling Expenses. Marketing and selling expenses decreased by
$171,903, or 19%, to $734,851 (3% of sales) during the first nine months of
fiscal 1997 as compared to $906,754 (4% of sales) during the first nine months
of fiscal 1996. The decrease is primarily attributable to the expiration of a
royalty agreement and the related decrease in royalty expense offset by
commission compensation accrued pursuant to a sales commission plan adopted
during fiscal 1997.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased by $547,452, or 65%, to $1,396,486 (5% of sales)
during the first nine months of fiscal 1997 as compared to $849,034 (4% of
sales) during the first nine months of fiscal 1996 primarily due to an expansion
of engineering resources and product development activities. The Company began
to expand its engineering resources during the first quarter of fiscal 1997 in
order to facilitate smart product development activities and the implementation
of lower-cost manufacturing methodologies. During the nine months ended December
27, 1996, the Company capitalized approximately $272,000 of software development
costs with respect to its next generation smart payphone processor.
Litigation Settlement. Pursuant to the terms of a settlement agreement
dated July 3, 1996, a suit filed against the Company by a former supplier to
collect approximately $400,000 of unpaid obligations was dismissed with
prejudice. As a result of the settlement agreement, the Company realized a gain
of $105,146 representing the difference between the unpaid obligations recorded
in the Company's accounts and the aggregate settlement payments.
Interest Expense. Interest expense decreased to $304,367 during the first
nine months of fiscal 1997 as compared to $705,880 during the first nine months
of fiscal 1996 primarily due to the repayment of outstanding bank and
stockholder debt obligations during May 1996 from proceeds of the Company's
initial public offering. See "Liquidity and Capital Resources - Cash Flows From
Financing Activities," below.
Restructuring Charges. During August 1996, the Company initiated a
consolidation plan intended to augment its on-going productivity and quality
improvement programs. The consolidation plan provides for the closure of the
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Company's Kentucky manufacturing facility, the closure of the Company's Georgia
corporate office facility, the consolidation of repair, refurbishment and
conversion service operations into the Company's Virginia facility and the
consolidation of corporate activities and product assembly operations into a new
Georgia facility. In connection with this plan, the Company recorded
restructuring charges of $62,500 during the nine months ended December 27, 1996.
These restructuring charges consist of estimated severance obligations and
estimated losses related to abandonment of assets.
Other Income. The increase in other income during the nine months ended
December 27, 1996 as compared to the nine months ended December 29, 1995 is
primarily attributable to the gain on the disposition of the facility closed
during the quarter ended December 27, 1996 and an increase in income related to
the sublease of property leased by the Company.
Income Taxes. During the first nine months of fiscal 1997, the Company
recorded an income tax provision of $438,770 on pre-tax income of $1,436,384.
Benefits of net operating loss carryforwards used to offset current tax expense
amounted to $71,995. Deferred tax benefits of $565,995 were recognized during
the nine months ended December 27, 1996. However, benefits of acquired deferred
tax assets aggregating $502,843 were applied to goodwill. There was no income
tax provision during the nine months ended December 29, 1995. Benefits of net
operating loss carryforwards used to offset current tax expense during the first
nine months of fiscal 1996 amounted to $301,687.
Liquidity and Capital Resources
Initial Public Offering
During May 1996, the Company completed an initial public offering of
1,150,000 Units, each Unit consisting of one share of common stock and a
redeemable warrant, at a price of $9.00 per Unit for gross proceeds of
$10,350,000. In connection with the offering, the Company issued warrants to the
underwriter to purchase 100,000 shares of common stock (the "Underwriter
Warrants") for gross proceeds of $10. Net proceeds received by the Company as of
December 27, 1996, after underwriting discounts and expenses of $1,231,897 and
other expenses of $824,953, aggregated $8,293,160. At March 29, 1996, the
Company had incurred and deferred offering expenses of $338,372. Accordingly,
net proceeds from the Company's initial public offering during the nine months
ended December 27, 1996 aggregated $8,631,532.
The proceeds of the offering, net of underwriting discounts and expenses,
were initially used to repay then outstanding indebtedness consisting of
subordinated notes payable to stockholders of $2.8 million and bank indebtedness
aggregating $6,318,113 (see "Cash Flows From Financing Activities," below).
Indebtedness pursuant to the Loan Agreement between the Company and its bank
repaid with the net proceeds consisted of a $2.2 million term note due November
30, 1997, $309,524 outstanding under a $650,000 term note due November 30, 1997
and borrowings under a revolving credit agreement of $3,808,589.
The Loan Agreement
The Loan Agreement between the Company and its bank provides financing to
the Company under a revolving credit agreement and term and installment notes of
up to $9 million. Pursuant to an October 31, 1994 amendment to the Loan
Agreement, $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 0.75%
and the term of the Loan Agreement was extended from May 31, 1995 to November
30, 1997. At March 29, 1996, the Company had outstanding indebtedness of
$1,093,735 under the revolving credit agreement and $2,525,000 under term and
installment notes, including the $2.2 million term note due November 30, 1997.
At March 29, 1996, the term and installment notes consisted of a term note with
an outstanding balance of $2.2 million and a term note with an outstanding
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balance of $325,000. At December 27, 1996, the Company had outstanding
indebtedness of $3,949,303 under the revolving credit agreement. At December 27,
1996, outstanding indebtedness under the Loan Agreement bears interest at a
variable rate per annum equal to 1.5% 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 27, 1996 and March 29, 1996 was
8.25% per annum. Amounts borrowed under the Loan Agreement 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.
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. Although the Company was in compliance
with the covenants set forth in the Loan Agreement at December 27, 1996, there
is no assurance that the Company will be able to remain in compliance with such
covenants in the future.
The Company used the net proceeds of its initial public offering to repay
outstanding indebtedness under the Loan Agreement in order to reduce its
interest expense. The Company intends to use the financing available under the
Loan Agreement 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, but there is no assurance that such
financing sources would be available on commercially reasonable terms, or at
all.
Cash Flows From Financing Activities
Cash provided by financing activities during the nine months ended December
27, 1996 aggregated $5,578,444, including the net proceeds from the initial
public offering of $8,631,532, as compared to $4,020,111 during the nine months
ended December 29, 1995.
Net proceeds under the Company's revolving credit agreement during the nine
months ended December 27, 1996 amounted to $2,855,568 as compared to net
proceeds of $4,576,332 during the nine months ended December 29, 1995. Net
proceeds under the revolving credit agreement during the nine months ended
December 27, 1996 reflect the repayment of $3,808,589 of indebtedness from the
proceeds of the Company's initial pubic offering. Exclusive of such repayment,
the net proceeds under the revolving credit agreement during the nine months
ended December 27, 1996 would have aggregated $6,664,157. The net proceeds under
the revolving credit agreement were used to fund the Company's net cash
requirements during the nine months ended December 27, 1996 and December 29,
1995.
Principal payments on long-term debt and capital lease obligations during
the nine months ended December 27, 1996 aggregated $2,599,520, including
repayment of the $2.2 million term note due November 30, 1997 and the repayment
of $309,524 outstanding under the $650,000 term note due November 30, 1997 from
the proceeds of the Company's initial public offering. Principal payments on
long-term debt and capital lease obligations during the nine months ended
December 27, 1996, excluding the repayments of term and installment note
indebtedness from the proceeds of the offering, amounted to $89,996, as compared
to $778,243 during the nine months ended December 29, 1995. The decrease in
principal payments (exclusive of repayments made from proceeds of the offering)
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for the nine months ended December 27, 1996 as compared to the corresponding
period last year is attributable to debt maturing during fiscal 1997, the
repayments made from the proceeds of the offering and the assignment of the
capital lease obligation related to the Company's Kentucky facility to an
unrelated third party in November 1996.
Pursuant to an October 31, 1994 Investment Agreement, the Company borrowed
$2.8 million from its stockholders, and issued 10% interest bearing subordinated
promissory notes due November 1, 1999. These subordinated promissory notes were
repaid during the nine months ended December 27, 1996 from the proceeds of the
Company's initial public offering.
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. Bank overdrafts
vary according to many factors, including the volume of business, and the timing
of purchases and disbursements. During the nine months ended December 27, 1996,
the Company's bank overdrafts decreased by $725,100 as compared to an increase
of $222,022 during the nine months ended December 29, 1995.
In June 1996, the Company issued 40,000 shares of common stock for
aggregate proceeds of $160,000 upon the exercise of outstanding common stock
purchase warrants issued in May 1995. See "Capital Commitments and Liquidity,"
below. During the nine months ended December 27, 1996, the Company issued 4,250
shares of common stock upon the exercise of incentive stock options at an
aggregate exercise price of $4,250, and issued 6,760 shares of common stock upon
the exercise of rights granted under the 1995 Employee Stock Purchase Plan for
an aggregate purchase price of $51,714.
Cash Flows From Operating Activities
Nine Months Ended December 27, 1996. Cash used to fund operating activities
during the nine months ended December 27, 1996 amounted to $5,363,159. During
the nine months ended December 27, 1996, the Company's operations generated
$2,198,560 in cash, after adjustments related to non-cash charges and credits of
$1,200,946. In addition, a decrease in accounts receivable provided cash of
$1,780,999 during the nine months ended December 27, 1996. However, net cash
used to fund increases in inventories of $4,630,141, prepaid expenses and other
assets of $302,817, including capitalized software development costs, and
decreases in accounts payable of $3,188,788, deferred revenue of $541,245 and
accrued liabilities of $668,715 aggregated $9,331,706 during the nine months
ended December 27, 1996. The decline in accounts receivable was primarily
attributable to the decline in sales during the three months ended December 27,
1996 as compared to the three months ended December 29, 1995. The increase in
inventories was primarily attributable to changes in the deployment schedules of
customers, the resulting slow-down in customer smart payphone product orders and
the final production run of printed circuit board assemblies for one of the
Company's smart products to meet anticipated sales requirements until the
planned release of the Company's next generation smart product series. The
decrease in accounts payable is related to the decline in manufacturing volume
during the three months ended December 27, 1996 and the Company's efforts to
reduce inventory levels. The Company satisfied its delivery requirements with
respect to revenues deferred at the end of fiscal 1996 and deferred revenue
decreased accordingly. The decrease in accrued expenses is primarily related to
the expiration of a royalty agreement and the payment of remaining royalty
obligations during the nine months ended December 27, 1996.
Nine Months Ended December 29, 1995. Cash used to fund operating activities
during the nine months ended December 29, 1995 amounted to $4,072,975. During
the nine months ended December 29, 1995, the Company's operations generated
$1,734,779 in cash, after adjustments related to non-cash charges of $1,074,376.
In addition, cash provided by an increase in accounts payable of $1,454,523 and
a decrease in prepaid expenses of $22,380 aggregated $1,476,903 during the
period. However, cash used to fund increases in accounts receivable and
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inventories amounted to $5,779,385 and $1,077,648, respectively, and cash used
to fund an increase in other assets and decreases in accrued liabilities and
restructuring charges aggregated $426,413. The increases in accounts payable,
accounts receivable and inventories during the nine months ended December 29,
1995 were primarily related to the increase in the volume of business. The
decrease in accrued liabilities and accrued restructuring charges was primarily
related to the payment of accrued interest on shareholder notes and the
settlement of a lease obligation included in formerly established restructuring
reserves, respectively.
Cash Flows From Investing Activities
Cash used to fund investing activities during the nine months ended
December 27, 1996 amounted to $189,964 as compared to $164,593 during nine
months ended December 29, 1995. During the nine months ended December 27, 1996,
the Company expanded its investment in manufacturing and automated test
equipment located at its contract manufacturer, began to invest in equipment and
hardware required to manufacture its next generation of smart payphone products,
and began a program to upgrade its in-house testing capability. During the
corresponding period last year, the Company's investing activities were
primarily related to the introduction of a new smart payphone product. The
Company expects that its capital expenditures over the next several quarters
will continue to grow as the Company invests in manufacturing and test equipment
required to improve its in-house prototype and manufacturing capabilities and
moves forward to select and begin the implementation of new management
information systems (see "Capital Commitments and Liquidity," below). Proceeds
from the assignment of the capital lease obligation with respect to the
Company's Kentucky manufacturing facility and the disposition of equipment
aggregated $57,800 during the nine months ended December 27, 1996.
Capital Commitments and Liquidity
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 Company's initial public offering. 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 expend approximately $800,000 to fund anticipated capital
expenditures during the eighteen month period following the initial public
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 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 and cash flow from operations will be adequate to satisfy
its anticipated cash needs, including anticipated capital expenditures, for at
least the next year. 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, a
significant increase in inventories, 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 would be available
to the Company on commercially reasonable terms, or at all.
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 27, 1996 and March 29, 1996 amounted to
$2,071,105 and $3,866,372, respectively. Accounts receivable at December 27,
1996 and March 29, 1996 consists primarily of amounts due from the Regional Bell
Operating Companies. The Company's inventories, less allowances for potential
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losses due to obsolescence and excess quantities amounted to $13,053,079 and
$8,658,669 at December 27, 1996 and March 29, 1996, respectively. 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. 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. At
December 27, 1996, the Company had acquired the majority of committed purchase
volume pursuant to these purchase agreements. However, as a result of changes in
the deployment schedule of SWB, the Company's inventories related to such
agreements increased by approximately $2 million during the nine months ended
December 27, 1996. Also, the Company's inventories of printed circuit board
assemblies related to another smart payphone product increased by approximately
$3 million during the nine months ended December 27, 1996. This increase, which
was attributable to the release of the final production run to meet anticipated
sales requirements until the planned release of TSG's next generation smart
payphone products, was compounded by changes in the deployment schedule of
NYNEX.
The revolving credit agreement between the Company and its bank limits the
outstanding indebtedness secured by eligible inventory to $3.1 million.
Accordingly, the increase in inventory together with the decrease in sales
during the third quarter of fiscal 1997 has adversely affected the Company's
liquidity under the revolving credit agreement. The ability of the Company to
improve its liquidity and/or avoid a short-term cash flow deficit during the
next quarter is dependent on the level of smart payphone product orders during
the quarter and the extent of the related inventory reduction, if any. Also, the
Company is presently attempting to secure a new lender and financing agreement
to obtain a higher level of inventory financing. The Company believes, but
cannot ensure, that its sources of cash during the next quarter will be
sufficient to overcome its present concerns with respect to the funding
available under its current credit line.
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 sub-license 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 are
payable if, and only if, laws, regulations or judicial actions occur which
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 at December
27, 1996 and March 29, 1996. The actual amount of any repayment is dependent
upon the amount of aggregate royalties paid pursuant to the license agreement
during such three-year period. 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
agreement exceed $375,000, the Company is not required to repay any portion of
the purchase price. At December 27, 1996, the Company was not obligated to pay
and has not paid any royalties under the agreement.
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Operating Trends and Uncertainties
Dependence on Large Customers and Contractual Relationships
The Company markets its payphone products and services predominately to the
Regional Bell Operating Companies ("RBOCs"). In fiscal years 1994, 1995 and
1996, sales to RBOCs accounting for greater than 10% of the Company's sales
aggregated 73%, 72% and 88%, respectively, of the Company's sales revenues. The
Company's significant customers during the past three years have included
Ameritech Services, Inc., Bell Atlantic Corp. ("Bell Atlantic"), BellSouth
Telecommunications, Inc., Southwestern Bell Telephone Company ("SWB") and NYNEX
Corp. ("NYNEX"). During the three months ended December 27, 1996, Ameritech
Services, Inc., Bell Atlantic, NYNEX and SWB accounted for approximately $1.6
million, $1.0 million, $2.4 million and $.3 million, respectively, of the
Company's sales. During the three months ended December 29, 1995, Bell Atlantic,
NYNEX and SWB accounted for approximately $1.6 million, $2.4 million and $4.8
million, respectively, of the Company's sales. During the nine months ended
December 27, 1996, Ameritech Services, Inc., Bell Atlantic, NYNEX and SWB
accounted for approximately $3.8 million, $3.7 million, $17.4 million and $1.9
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 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 RBOC customer or a significant reduction
in sales volume, such as the reduction in the third quarter of fiscal 1997, or a
reduction in sales prices to such RBOCs would have a material adverse effect on
the Company's business. Recently, two mergers between Pacific Telesis Inc. and
SBC Communications, Inc. (the parent of SWB), and between Bell Atlantic and
NYNEX were announced. The Company cannot predict the impact that such mergers or
other future mergers will or may have on the Company's business.
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 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 through 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 agreements, including provisions with respect to
performance. In addition, as further described below, the Company has entered
into sales agreements to provide smart products to NYNEX and SWB. The terms of
the sales agreement between the Company and SWB includes a provision for SWB to
purchase specific quantities of smart products and other components from the
Company at specified prices, subject to the cancellation provisions thereof.
The Company's prospects for continued profitability are largely dependent
upon the RBOCs 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 one of the RBOCs has
completed a technological upgrade program for its installed base of payphones
and that two of the RBOCs have commenced such a program. The two RBOCs that have
22
<PAGE>
commenced upgrade programs, and which are significant customers of the Company,
have entered into sales agreements with the Company as described 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 price and other terms at least as favorable as those extended by the
Company to other customers for the products covered by the agreement. 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. 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. As of December 27,
1996, the Company estimates that SWB has acquired in excess of 65% of committed
volume under such sales agreement. However, as a result of changes in SWB's
deployment schedule, the Company does not anticipate shipping the remaining
volume pursuant to the terms of the agreement during fiscal 1997.
In November 1996, TSG entered into a non-exclusive sales agreement,
effective July 1, 1996, to provide its GeminiTM smart payphones and processors,
CoinNetTM payphone management system and other smart payphone components to
NYNEX for a period of five years. The agreement sets forth the terms and
conditions relating to the sale of products to NYNEX, and does not specify or
commit NYNEX to purchase a specific volume of products from the Company. If
orders are made, however, the Company has agreed to fill such orders in
accordance with NYNEX's specifications and at fixed prices set forth in the
agreement. The Company has agreed not to increase its prices during the term of
the agreement and has agreed to implement a continuous improvement program to
improve productivity and quality and to reduce product costs during the term of
the agreement. The agreement includes provisions for reductions in sales prices
to NYNEX based on product cost reductions achieved from the continuous
improvement program and based on NYNEX's purchase volume. The agreement contains
a "most favored customer" clause pursuant to which the Company has agreed to
provide price and other terms at least as favorable as those extended by the
Company to other customers for similar purchase volumes of products covered by
the agreement. The Company has agreed to indemnify NYNEX against expenses,
liabilities, claims and demands resulting from products covered by the
agreement, including those related to patent infringement and those related to
performance specifications. The agreement may be terminated by either party upon
default of any provision of the agreement by the other party upon at least
thirty days' written notice, provided the default is not cured within thirty
days from the receipt of notice of default. Further, NYNEX may terminate the
agreement upon 120 days' written notice to the Company. However, upon such a
termination, NYNEX has agreed to purchase the Company's inventories related to
the products covered by agreement, provided that such obligation shall not
exceed the value of NYNEX's purchases for a 120-day period, determined based
upon the average monthly volume for the previous six-month period, less the
value of outstanding orders to be shipped, the value of products which may be
sold to other customers and the value of inventory that may be returned to the
Company's suppliers. The agreement expires on July 1, 2001.
The termination of these or any of the Company's sales agreements would
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
23
<PAGE>
material adverse effect on the Company's operating results and liquidity. In
April 1995, the Company initiated a recall of products as a result of potential
product failures 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.
The Company's prospects and the ability of the Company to maintain a
profitable level of operations are dependent upon its ability to secure contract
awards from the RBOCs. In addition, the Company's prospects for growth are
dependent upon market acceptance and success of its smart payphone products, as
well as development of other smart products containing additional advanced
features. If the Company is unable to attract the interest of the RBOCs to
deploy the Company's smart payphone products, the Company's sales revenues,
business and prospects for growth would be adversely affected. 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 RBOCs presently representing significant customers of the
Company. 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. There can be no assurances that similar difficulties
will not occur in the future.
Product Sales Prices
The Company's agreements with its contract 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. 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. The Company encounters substantial competition with
respect to smart payphone contract awards by the RBOCs. Competition is beginning
to result in price reductions. The Company reduced its prices to NYNEX upon the
execution of the November 1996 sales agreement based on the planned release of
its lower cost next generation smart product series during the fourth quarter of
fiscal 1997. Until the Company releases its next generation smart product
series, the Company will experience a reduction in gross profit margins with
respect to smart product sales to NYNEX, and such reduction will be material.
Also, any other price reductions in response to competition will result in
reduced gross profit margins unless the Company is able to achieve reductions in
product costs.
Seasonality
The Company's sales are generally stronger during periods when weather does
not interfere with the maintenance and installation of payphone equipment by the
Company's customers, and may be adversely impacted near the end of the calendar
year by the budget short falls of customers. However, the Company may also
receive large year-end orders from its customers for shipment in December
depending upon their budget positions. In the event the Company does not receive
24
<PAGE>
any significant end of year orders for its smart payphone products, its third
quarter sales may decline significantly in relation to other quarters.
Telecommunications Act of 1996
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 long-standing legal barriers separating local
exchange carriers, 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 Federal Communications Commission (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. 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.
On September 20, 1996, the FCC released its order adopting regulations to
implement the section of the Telecommunications Act which mandated fair
compensation for all payphone providers. The order addressed compensation for
non-coin calls, local coin calling rates, removal of subsidies and
discrimination favoring payphones operated by local exchange carriers (LECs) and
authorization of RBOCs and other providers to select service providers, among
other matters.
The order prescribed interim dial-around compensation for independent
payphone providers for both access code and subscriber 800 dial-around calls on
a flat-rate basis of $45.85 per phone per month, as compared to the previous
compensation of $6.00 per month. This new interim rate will be effective for a
year, and replaces all other dial around compensation prescribed at the state or
federal level. This compensation will be paid by the major inter-exchange
carriers ("IXCs") based on their share of toll revenues in the long distance
market. Payphones owned by the RBOCs and other LECs will be eligible for interim
compensation when they have removed their payphones from their regulated
accounts, which must be completed by April 15, 1997. By October 1, 1997, the
IXCs are required to have per-call tracking instituted. At that point, all
payphones will switch to a per-call compensation rate set at $.35 per call.
Under this system, compensation will be paid on every completed 800-subscriber
and access code call. Under the per-call compensation, compensation will be paid
by the carrier who is the primary beneficiary of the call. After one year of
deregulation of coin rates (October 1, 1998), the order indicates that the
compensation rate would be adjusted to equal the local coin rate charge in a
particular payphone.
The order requires LEC payphones to be removed from regulation, separating
payphone costs from regulated accounts by April 15, 1997. This requirement is
intended to eliminate all subsidies that favor LEC payphones. The FCC ruled that
the transfer of payphones from regulated accounts should be at net book value,
which could allow RBOCs to begin unregulated operations with artificially low
asset values, which may represent a competitive advantage. LECs are also
required to reduce interstate access charges to reflect separation of payphones
from regulated accounts. In order to eliminate discrimination, LECs are also
required to offer coin line services to independent providers if LECs continue
to connect their payphones to central office driven coin line services. The FCC
did not mandate unbundling of specific coin line related services, but did make
25
<PAGE>
provisions to allow states to impose further payphone services requirements that
are consistent with the order.
The order authorizes RBOCs to select the operator service provider serving
their payphones and for independent payphone providers to select the operator
service provider serving theirs. This provision preempts state regulations that
require independent providers to route intralata calls to the LECs. The FCC,
however, did not establish conditions that require operator service providers to
pay independent payphone providers the same commission levels the RBOCs demand.
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.
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. Notwithstanding,
the Company believes that deregulation generally will benefit the Company.
However, there can be no assurance that the Company will benefit from
deregulation or that it will not be adversely affected by deregulation.
Sources of Supply and Dependence on Contract Manufacturers
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 the event that contract manufacturers delay shipments or supply defective
materials to the Company, 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.
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.
26
<PAGE>
Disputes
In October 1994, a contract manufacturer that delivered allegedly defective
first generation smart products to the Company 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 has not acquired products or inventory from
the manufacturer since October 1994. The contract manufacturer has claimed that
TSG is obligated to (i) purchase inventories of approximating $l million, (ii)
pay purchase obligations of approximately $265,000, and (iii) pay lost profits
of the contract manufacturer of approximately $916,000 related to the Company's
minimum contract purchase commitment. The Company has claimed that the contract
manufacturer supplied defective product, breached the agreement by discontinuing
operations prior to the scheduled termination date of the contract and that the
delivery of defective product resulted in the termination of a significant smart
product sales agreement and the loss of significant business and profits by the
Company. The Company does not believe, but cannot ensure, that the contract
manufacturer will pursue its claims against the Company, nor does the Company
intend to pursue its claims against the contract manufacturer unless the
manufacturer commences an action against the Company. Should the contract
manufacturer pursue its claims against the Company, the Company intends to
defend and pursue its positions vigorously. However, there is no assurance that
the outcome of any action will not have a material adverse effect on the
Company's financial position or results of operations.
Net Operating Loss Carryforwards
As of December 27, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $15 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 $210,000. 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.
27
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith as a part of this Report.
Exhibit
No. Description of Exhibit
------- ----------------------
11. Statement re computation of per share earnings
27. Financial Data Schedule (EDGAR Filing only)
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNOLOGY SERVICE GROUP, INC.
(Registrant)
Date: February 5 , 1996 By: /s/ Vincent C. Bisceglia
------------------------------
Vincent C. Bisceglia
President & Chief Executive Officer
By: /s/ William H. Thompson
------------------------------
William H. Thompson
Vice President of Finance
& Chief Financial Officer
29
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit At Page
- ----------- ---------------------- -------
11. Statement re computation of per share earnings 31
27. Financial Data Schedule (EDGAR filing only) 32
30
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
December 27, December 29, December 27, December 29,
1996 (1) 1995 (1) 1996 (1) 1995 (1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common and
common equivalent shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 4,697,428 3,500,000 4,498,314 3,500,000
Incremental shares assumed to be
outstanding related to common stock
options granted and outstanding,
excluding options granted within twelve
months of initial public offering 538,279 345,250 470,492 345,250
Incremental shares assumed to be
outstanding related to common
stock options granted within
twelve months of initial public
offering 89,000 89,000 89,000 89,000
Incremental shares assumed to be
outstanding related to common stock
warrants issued and outstanding 675,000 40,000 580,256 40,000
Shares of common stock assumed to be
purchased upon exercise of outstanding
options and warrants (2) (940,202) (103,361) (845,042) (103,361)
----------- ----------- ----------- -----------
Weighted average number of common
and common equivalent shares
outstanding - Primary earnings per share 5,059,505 3,870,889 4,793,020 3,870,889
Adjustment of number of shares assumed to
be purchased upon exercise of options and
warrants based on the closing market price -- -- -- --
----------- ----------- ----------- -----------
Weighted average number of common
and common equivalent shares outstanding -
Earnings per share assuming full dilution 5,059,505 3,870,889 4,793,020 3,870,889
=========== =========== =========== ===========
Net income (loss) $ 27,145 $ 654,957 $ 997,614 $ 660,403
Adjustment of interest expense, net of tax
effect, related to assumed repayment of
debt obligations due to 20% limitation on
purchase of shares upon exercise of
outstanding options and warrants 21,263 -- -- --
----------- ----------- ----------- -----------
Net income (loss) as adjusted $ 48,408 $ 654,957 $ 997,614 $ 660,403
=========== =========== =========== ===========
Net income (loss) per share:
Primary $ 0.01 $ 0.17 $ 0.21 $ 0.17
=========== =========== =========== ===========
Assuming full dilution $ 0.01 $ 0.17 $ 0.21 $ 0.17
=========== =========== =========== ===========
</TABLE>
(1) Computations do not reflect exercise of outstanding options and warrants if
the effect thereof is anti-dilutive except as required by Accounting
Principles Board Opinion No. 15 (APB #15) under the modified treasury stock
method, and except as required by Securities and Exchange Commission
Accounting Bulletin Topic 4D, stock options granted during the twelve
months prior to the Company's initial public offering at prices below the
public offering price have been included in the calculation of weighted
average shares of common stock as if they were outstanding as of the
beginning of the periods presented.
(2) Shares of common stock assumed to be purchased with proceeds upon exercise
of outstanding options and warrants is based on the average market price of
the Company's common stock during the period and is limited to 20% of the
number of common shares outstanding at the end of the period, if applicable
in accordance with APB #15.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 27, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> SEP-28-1996
<PERIOD-END> DEC-27-1996
<CASH> 45,108
<SECURITIES> 0
<RECEIVABLES> 2,298,448
<ALLOWANCES> (227,343)
<INVENTORY> 13,053,079
<CURRENT-ASSETS> 15,952,483
<PP&E> 2,396,015
<DEPRECIATION> (1,564,519)
<TOTAL-ASSETS> 20,709,694
<CURRENT-LIABILITIES> 7,601,898
<BONDS> 0
0
0
<COMMON> 47,010
<OTHER-SE> 13,057,588
<TOTAL-LIABILITY-AND-EQUITY> 20,709,694
<SALES> 27,791,869
<TOTAL-REVENUES> 27,791,869
<CGS> 22,199,304
<TOTAL-COSTS> 22,199,304
<OTHER-EXPENSES> 1,396,486
<LOSS-PROVISION> 14,268
<INTEREST-EXPENSE> 304,367
<INCOME-PRETAX> 1,436,384
<INCOME-TAX> 438,770
<INCOME-CONTINUING> 997,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 997,614
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
