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 SEPTEMBER 26, 1997
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)
No Change
(Former name, former address and former fiscal year,
if changed from last report.)
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 October 31, 1997, there were 4,708,851 shares of common stock, $.01 par
value, outstanding.
<PAGE>
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 26, 1997
(unaudited) and March 28, 1997 3
Unaudited Consolidated Statements of Operations for the
Three Months and Six Months Ended September 26, 1997
and September 27, 1996 4
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended September 26, 1997 and September 27, 1996 5
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended September 26, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TECHNOLOGY SERVICE GROUP, INC.
BALANCE SHEETS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
September 26, March 28,
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 205 $ 68
Accounts receivable, less allowance for doubtful
accounts of $109 and $147 4,090 3,235
Inventories 11,010 10,879
Refundable income taxes 267 --
Deferred tax asset 399 543
Prepaid expenses and other current assets 39 141
------------- -------------
Total current assets 16,010 14,866
Property and equipment, net 620 847
Goodwill 3,148 3,252
Other assets 968 807
------------- -------------
$ 20,746 $ 19,772
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 768 $ 243
Borrowings under revolving credit agreement 2,617 3,811
Accounts payable 3,455 1,047
Income taxes payable -- 126
Deferred revenue -- 375
Accrued liabilities 691 1,015
Accrued restructuring charges -- 28
------------- -------------
Total current liabilities 7,531 6,645
Long-term liabilities -- --
------------- -------------
7,531 6,645
------------- -------------
Commitments and contingencies (Note 7) -- --
Stockholders' equity:
Preferred stock, $100 par value, 100,000 shares authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
4,708,851 and 4,701,760 shares issued and outstanding 47 47
Capital in excess of par value 11,990 11,963
Retained earnings 1,186 1,122
Cumulative translation adjustment (8) (5)
------------- -------------
Total stockholders' equity 13,215 13,127
------------- -------------
$ 20,746 $ 19,772
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 7,084 $ 10,062 $ 13,301 $ 22,140
------------- ------------- ------------- -------------
Costs and expenses:
Cost of goods sold 5,906 7,770 11,029 17,610
General and administrative expenses 491 718 1,045 1,363
Marketing and selling expenses 185 194 350 555
Engineering, research and
development expenses 445 655 737 1,064
Litigation settlement -- -- -- (105)
Interest expense 53 63 125 205
Restructuring charges -- 63 -- 63
Other (income) (14) (13) (28) (30)
------------- ------------- ------------- -------------
7,066 9,450 13,258 20,725
------------- ------------- ------------- -------------
Income before income tax
(expense) benefit 18 612 43 1,415
Income tax (expense) benefit 9 (227) 21 (445)
------------- ------------- ------------- -------------
Net income $ 27 $ 385 $ 64 $ 970
============= ============= ============= =============
Income per common and common
equivalent share:
Primary $ 0.01 $ 0.08 $ 0.03 $ 0.21
============= ============= ============= =============
Assuming full dilution $ 0.01 $ 0.08 $ 0.03 $ 0.21
============= ============= ============= =============
Weighted average number of common and
common equivalent shares outstanding:
Primary 5,027 5,008 5,026 4,727
============= ============= ============= =============
Assuming full dilution 5,027 5,008 5,026 4,727
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
September 26, September 27,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 64 $ 970
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Depreciation and amortization 415 579
Provisions for inventory losses and
warranty expense 103 341
Provision for uncollectible accounts receivable (37) 56
Loss on disposition of assets 1 --
Restructuring charges -- 63
Deferred tax expense (benefit) 232 (134)
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (818) 856
(Increase) in inventories (154) (5,190)
(Increase) in refundable income taxes (267) --
Decrease in prepaid expenses and
other current assets 102 18
(Increase) in other assets (239) (1)
Increase (decrease) in accounts payable 2,408 (612)
Increase (decrease) in income taxes payable (126) 284
(Decrease) in deferred revenue (375) (541)
(Decrease) in accrued liabilities (404) (492)
(Decrease) in accrued restructuring charges (28) --
Other (1) 1
------------- -------------
Net cash provided by (used for) operating
activities 876 (3,802)
------------- -------------
Cash flows from investing activities
Capital expenditures (98) (198)
Proceeds from disposition of assets 1 --
------------- -------------
Net cash used for investing activities (97) (198)
------------- -------------
Cash flows from financing activities
Net proceeds (payments) under revolving credit
agreement (1,194) 702
Proceeds from initial public offering, net of
issuance expenses -- 8,635
Proceeds from exercise of common stock
options and warrants 27 164
Repayment of notes payable to stockholders -- (2,800)
Principal payments on long-term debt and
capital lease obligations -- (2,595)
Increase in bank overdraft 525 31
------------- -------------
Net cash provided by (used for)
financing activities (642) 4,137
------------- -------------
Increase in cash 137 137
Cash, beginning of period 68 20
------------- -------------
Cash, end of period $ 205 $ 157
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 26, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Capital in Cumulative
Common Excess of Retained Translation
Stock Par Value Earnings Adjustment Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 28, 1997 $ 47 $ 11,963 $ 1,122 $ (5) $ 13,127
Issuance of 7,091 shares upon exercise of
common stock options and purchase rights -- 27 -- -- 27
Net income for the period -- -- 64 -- 64
Foreign currency translation adjustment -- -- -- (3) (3)
----------- ----------- ----------- ----------- -----------
Balance at September 26, 1997 $ 47 $ 11,990 $ 1,186 $ (8) $ 13,215
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. GENERAL
The accompanying consolidated balance sheet as of March 28, 1997 has been
derived from the audited financial statements of Technology Service Group, Inc.
("TSG") included in TSG's annual report on Form 10-K for the fiscal year ended
March 28, 1997. The accompanying unaudited consolidated balance sheet as of
September 26, 1997, unaudited consolidated statements of operations for the
three months and six months ended September 26, 1997 and September 27, 1996,
unaudited consolidated statements of cash flows for the six months ended
September 26, 1997 and September 27, 1996 and unaudited statement of changes in
stockholders' equity for the six months ended September 26, 1997 have been
derived from TSG's books and records without audit and prepared in accordance
with instructions to Form 10-Q. Accordingly, the financial information does not
include all 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 TSG
at September 26, 1997 and its operations and its cash flows for the three months
and six months ended September 26, 1997 and September 27, 1996 have been made.
For further information, refer to the audited financial statements and footnotes
included in TSG's annual report on Form 10-K for the fiscal year ended March 28,
1997.
The results of operations for the three months and six months ended
September 26, 1997 are not necessarily indicative of the results for the entire
fiscal year ending April 3, 1998.
2. INVENTORIES
Inventories at September 26, 1997 and March 28, 1997 consisted of the
following:
September 26, March 28,
1997 1997
------------- -------------
Raw materials $ 7,189 $ 6,154
Work-in-process 1,962 2,117
Finished goods 3,104 4,036
------------- -------------
12,255 12,307
Reserve for potential losses (1,245) (1,428)
------------- -------------
$ 11,010 $ 10,879
============= =============
3. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT
At September 26, 1997, TSG is able to borrow up to a maximum of $9,000
under the terms of a Loan and Security Agreement (the "Loan Agreement") between
TSG and its bank. The Loan Agreement provides for revolving credit indebtedness
up to the maximum amount based on specified percentages applied to the value of
collateral consisting of accounts receivable and inventories. At September 26,
1997 and March 28, 1997, TSG had outstanding indebtedness of $2,617 and $3,811,
respectively, under the revolving credit line. Indebtedness outstanding under
the Loan Agreement is collateralized by substantially all assets of TSG
including accounts receivable, inventories and property and equipment. Interest
is payable monthly at a variable rate per annum equal to 1.5% above a base rate
quoted by Citibank N.A. (8.5% at September 26, 1997 and March 28, 1997). The
Loan Agreement expires on November 30, 1997,
7
<PAGE>
and is renewable for one-year periods unless terminated by the bank upon the
occurrence of an event of default or by TSG upon at least 90 days' notice.
4. INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share for the three months and six
months ended September 26, 1997 and September 27, 1996 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 pursuant to
Accounting Principles Board Opinion No. 15, Earnings per Share, all outstanding
options and warrants have been included in the calculation in accordance with
the modified treasury stock method and except as required pursuant to 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 TSG's May 10, 1996 initial public offering at prices below the
public offering price have been included in the calculation of weighted average
of common and common equivalent shares outstanding as if they were outstanding
as of the beginning of the period.
5. INCOME TAXES
Income tax expense (benefit) charged (credited) to operations for the three
months and six months ended September 26, 1997 and September 27, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current tax expense (benefit):
Federal $ 28 $ 275 $ (229) $ 494
State 5 41 (24) 85
------------- ------------- ------------- -------------
33 316 (253) 579
------------- ------------- ------------- -------------
Deferred tax expense (benefit):
Federal (28) (78) 220 (113)
State (14) (11) 12 (21)
------------- ------------- ------------- -------------
(42) (89) 232 (134)
------------- ------------- ------------- -------------
$ (9) $ 227 $ (21) $ 445
============= ============= ============= =============
</TABLE>
A reconciliation of income tax expense (benefit) determined by applying the
U.S. statutory federal income tax rate to income before income taxes and income
tax expense (benefit) charged (credited) to operations for the three months and
six months ended September 26, 1997 and September 27, 1996 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income tax expense at U.S. statutory
rate $ 7 $ 208 $ 15 $ 481
State taxes, net of federal benefit 3 18 (16) 44
Non-deductible expenses -- 14 13 29
Utilization of loss carryforwards -- -- (72) (72)
Other (19) (13) 39 (37)
------------- ------------- ------------- -------------
Income tax expense (benefit)
charged (credited) to operations $ (9) $ 227 $ (21) $ 445
============= ============= ============= =============
</TABLE>
8
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended September 26,
1997 and September 27, 1996 consists of the following:
Six Months Ended
-----------------------------
September 26, September 27,
1997 1996
------------- -------------
Interest paid $ 137 $ 340
Income taxes paid 140 294
Deferred offering expenses charged
against proceeds of initial public
offering -- 338
Realization of deferred tax assets
applied to goodwill 88 235
7. COMMITMENTS AND CONTINGENT LIABILITIES
In June 1997, TSG entered into an agreement with Southwestern Bell
Telephone Company ("SWB") that supersedes and terminates a December 1994
agreement. Under the new agreement, TSG agreed to reduce SWB's remaining
purchase commitment to approximately $3,000 from approximately $8,000 under the
former agreement. In addition, TSG provided an upgraded electronic key product
and, among other things, agreed to provide equipment and software to upgrade
SWB's payphone management system. SWB made a $250 cash payment to TSG upon
execution of the agreement, terminated TSG's obligation to pay royalties on
sales of a certain product to other customers, terminated a contingent
obligation of TSG to repay revenue of $375 from the sale of product software
under the former agreement, and agreed to make additional cash payments to TSG
of $250 on July 2, 1997, $100 on September 1, 1997, $150 on December 31, 1997
and $250 on March 31, 1998 subject to TSG's compliance with its obligations,
including conditions with respect to performance, service and repair. SWB has
the right to cancel the agreement upon default by TSG. Therefore, there is no
assurance that TSG will receive all of the scheduled payments or ship the
products set forth in the agreement. However, as of September 26, 1997, TSG has
met its obligations and has received all scheduled payments set forth in the
agreement.
At September 26, 1997, the Company is committed to purchase approximately
$5.5 million of product assemblies under the terms of a manufacturing agreement
entered into in October 1994. Upon a termination of the agreement by the
Company, the Company is obligated to purchase inventories held by the
manufacturer and pay vendor cancellation and restocking charges, and a
reasonable profit thereon. In addition, the Company is obligated to pay a
cancellation penalty of up to $500 if it cancels its purchase obligation or a
substantial portion thereof. The amount of the cancellation penalty, if any,
will vary depending upon quantities purchased by the Company.
8. BUSINESS COMBINATION
On August 13, 1997, TSG entered into an Agreement and Plan of Merger with
Elcotel, Inc. ("Elcotel") and Elcotel Hospitality Service, Inc. ("EHS"), a
wholly-owned subsidiary of Elcotel (the "Merger Agreement"). The Merger
Agreement provides for the merger of EHS into TSG and for TSG to be the
surviving corporation (the "Merger"). At the effective time of the Merger, each
outstanding share of TSG's common stock will be converted into and represent the
right to receive 1.05 shares of Elcotel common stock, $.01 par value per share.
The closing of the Merger is subject to certain conditions and approvals,
including the approval of TSG's and Elcotel's stockholders.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts, except per share data, stated in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
stated in thousands.
Forward Looking Statements
This report contains certain forward looking statements concerning TSG'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 September 26, 1997 Compared to the
Three Months Ended September 27, 1996
The following table shows certain line items in TSG's consolidated
statements of operations for the three months ended September 26, 1997 and
September 27, 1996 that are discussed below together with amounts expressed as a
percentage of sales and with the change expressed as a percentage increase or
(decrease).
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Percent Ended Percent Percentage
September 26, of September 27, of Increase
1997 Sales 1996 Sales (Decrease)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 7,084 100% $ 10,062 100% (30%)
Cost of goods sold 5,906 83% 7,770 77% (24%)
General and administrative expenses 491 7% 718 7% (32%)
Engineering, research and
development expenses 445 6% 655 7% (32%)
Interest expense 53 1% 63 1% (16%)
Restructuring charges -- -- 63 1% (100%)
Income tax expense (benefit) (9) -- 227 2% (104%)
</TABLE>
Sales. The decrease in sales for the three months ended September 26, 1997
as compared to the three months ended September 27, 1996 is primarily
attributable to (i) a decrease in sales volume of smart payphone systems and
processors and (ii) a reduction in the sales price of GeminiTM processors of
approximately 25% under the terms of a sales agreement between TSG and
Telesector Resources Group, Inc. and its affiliates, including NYNEX Corp.
("NYNEX"), which has now merged into Bell Atlantic Corp., offset by (i) an
increase in volume of exported wireless payphone systems and (ii) sales revenue
of $350 under the terms of a new sales agreement between TSG and Southwestern
Bell Telephone Company ("SWB") entered into in June 1997. Sales of smart
payphone products consisted primarily of smart processors during the three
months ended September 26, 1997. During the three months ended September 27,
1996, higher priced smart payphone systems accounted for approximately $2,288 of
sales. Sales of smart payphone systems and processors decreased by approximately
60%, from $6,265 during the three months ended September 27, 1996 to $2,465
during the three months ended September 26, 1997. Export sales increased from
approximately $160 during the three months ended September 27, 1996 to $668
during the three months ended September 26, 1997 due primarily to an increase in
volume related to new customers.
10
<PAGE>
TSG believes that the uncertainty in the marketplace caused by a delay in
the implementation of the Telecommunications Reform Act of 1996 (the
"Telecommunications Act") has adversely affected its smart product sales volume.
In addition, following a high level of start-up demand at the beginning of
NYNEX's smart payphone conversion program last year, NYNEX has reduced its
deployment of TSG's smart payphone systems and processors during TSG's current
fiscal year. The Company is attempting to increase its sales volume of smart
payphone products through other customer relationships. See "Operating Trends
and Uncertainties," below for a discussion of TSG's dependence on significant
customers and contractual relationships.
In June 1997, TSG entered into an agreement with SWB that supersedes and
terminates a December 1994 agreement. Under the new agreement, TSG agreed to
reduce SWB's remaining purchase commitment of GemStarTM processor kits to
approximately $3,000 from approximately $8,000 under the former agreement. In
addition, TSG provided an upgraded electronic key product and, among other
things, agreed to provide equipment and software to upgrade SWB's payphone
management system. SWB made a $250 cash payment to TSG upon execution of the
agreement, terminated TSG's obligation to pay royalties on sales of GemStar
processors to other customers, terminated a contingent obligation of TSG to
repay revenue of $375 from the sale of product software under the former
agreement, and agreed to make additional cash payments to TSG of $250 on July 2,
1997, $100 on September 1, 1997, $150 on December 31, 1997 and $250 on March 31,
1998 subject to TSG's compliance with its obligations, including conditions with
respect to performance, service and repair. During the three months ended
September 26, 1997, TSG met its obligations, received and recorded sales of $350
under the terms of the agreement.
Cost of Goods Sold. Cost of goods sold represented 83% of sales for the
three months ended September 26, 1997 as compared to 77% of sales for the three
months ended September 27, 1996. This increase resulted principally from an
increase in manufacturing costs as a percentage of sales due to the decrease in
sales volume of smart payphone products and the decrease in sales prices
referred to above, offset by the impact of sales recognized under the terms of
the new agreement between TSG and SWB and the increase in the percentage of
higher margin export sales.
General and Administrative Expenses. The decline in general and
administrative expenses is primarily attributable to a reduction in expenses of
approximately $72 from the closure of one of TSG's manufacturing facilities
during the year ended March 28, 1997, a decrease in accrued performance based
compensation of $61 due to the decline in income, a decrease in insurance
expense of $25 due to favorable policy renewal terms, a decrease in shareholder
communication costs of $10, a decrease in amortization of intangible assets of
$43, a decrease in depreciation expense of $14 and a reduction in the provision
for doubtful accounts receivable of $62, offset by an increase in rent expense
of approximately $60. The additional rent expense related to a lease with
respect to a new facility in Georgia that commenced on April 1, 1997. TSG
originally planned to close its present corporate office facility and to
consolidate its product assembly operations and corporate activities into the
new facility. However, in view of the pending merger between TSG and Elcotel,
Inc., TSG delayed the start-up of the new facility, and on September 30, 1997,
assigned the lease to an unaffiliated third party.
Engineering, Research and Development Expenses. TSG expanded its
engineering resources during its 1997 fiscal year ended March 28, 1997 in order
to facilitate the development of a new smart payphone processor and the
implementation of lower-cost manufacturing methodologies. During the three
months ended September 26, 1997, the requirement for contract engineering
services diminished and the related expense, net of an increase in salaries and
wages related to personnel additions of $41, decreased by approximately $105.
Also, TSG capitalized approximately $102 of software development costs in
connection with the development of its new smart payphone processor during the
three months ended September 26, 1997. Software development costs capitalized
during the three months ended September 27, 1996 were not significant.
11
<PAGE>
Interest Expense. The decrease in interest expense during the three months
ended September 26, 1997 as compared to the same period last year is primarily
due to the assignment of a capital lease obligation related to one of TSG's
manufacturing facilities in November 1996. See "Restructuring Charges," below.
Restructuring Charges. During August 1996, TSG approved and initiated a
consolidation plan intended to augment its on-going productivity and quality
improvement programs. In connection with this plan, TSG initiated the closure of
one of its manufacturing facilities, and recorded a restructuring charge of $63,
consisting primarily of estimated severance obligations, during the three months
ended September 27, 1996.
Income Taxes. During the three months ended September 26, 1997, TSG
recorded an income tax benefit of $9 on pre-tax income of $18 as compared to
income tax expense of $227 on pre-tax income of $612 for the three months ended
September 27, 1996. Current tax expense for the three months ended September 26,
1997 amounted to $33 as compared to current tax expense of $316 for the three
months ended September 27, 1996. Deferred tax benefits for the three months
ended September 26, 1997 amounted to $42 as compared to deferred tax benefits of
$89 for the three months ended September 27, 1996. Benefits of acquired deferred
tax assets applied to goodwill during the three months ended September 26, 1997
approximated $6 versus $75 for the three months ended September 27, 1996.
For the Six Months Ended September 26, 1997 Compared to the
Six Months Ended September 27, 1996
The following table shows certain line items in TSG's consolidated
statements of operations for the six months ended September 26, 1997 and
September 27, 1996 that are discussed below together with amounts expressed as a
percentage of sales and with the change expressed as a percentage increase or
(decrease).
<TABLE>
<CAPTION>
Six Six
Months Months
Ended Percent Ended Percent Percentage
September 26, of September 27, of Increase
1997 Sales 1996 Sales (Decrease)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 13,301 100% $ 22,140 100% (40%)
Cost of goods sold 11,029 83% 17,610 80% (37%)
General and administrative expenses 1,045 8% 1,363 6% (23%)
Marketing and selling expenses 350 3% 555 3% (37%)
Engineering, research and
development expenses 737 5% 1,064 5% (31%)
Litigation settlement -- -- (105) -- (100%)
Interest expense 125 1% 205 1% (39%)
Restructuring charges -- -- 63 -- (100%)
Income tax expense (benefit) (21) -- 445 2% (105%)
</TABLE>
Sales. The decrease in sales for the six months ended September 26, 1997 as
compared to the six months ended September 27, 1996 is primarily attributable to
(i) a decrease in sales volume of smart payphone systems and processors and (ii)
a reduction in the sales price of GeminiTM processors of approximately 25% under
the terms of the sales agreement between TSG and NYNEX (which has merged into
Bell Atlantic Corp.), offset by (i) an increase in volume of exported wireless
payphone systems and (ii) sales revenue of $975 under the terms of the new sales
agreement between TSG and SWB. Sales of smart payphone products consisted
primarily of smart processors during the six months ended September 26, 1997.
During the six months ended September 27, 1996, higher priced smart payphone
systems accounted
12
<PAGE>
for approximately $7,015 of sales. Sales of smart payphone processors and
systems decreased to $4,033 during the six months ended September 26, 1997 as
compared to $14,491 during the six months ended September 27, 1996. Export sales
increased to $1,267 during the six months ended September 26, 1997 as compared
to $155 for the corresponding period last year due primarily to an increase in
volume related to new customers. Sales related to other products and components
and refurbishment and repair services for the six months ended September 26,
1997 decreased to $7,026 as compared to $7,494 for the corresponding period last
year.
Cost of Goods Sold. Cost of goods sold as a percentage of sales increased
to 83% for the six months ended September 26, 1997 as compared to 80% for the
six months ended September 27, 1996. This increase resulted principally from an
increase in manufacturing costs as a percentage of sales due to the decrease in
sales volume of smart payphone products and the decrease in sales prices
referred to above, offset by the impact of sales revenues recognized under the
terms of the new agreement between TSG and SWB and the increase in the
percentage of higher margin export sales.
General and Administrative Expenses. The decline in general and
administrative expenses is primarily attributable to a reduction in expenses of
approximately $123 from the closure of one of TSG's manufacturing facilities
during the year ended March 28, 1997, a decrease in accrued performance based
compensation of $79 due to the decline in income, a decrease in insurance
expense of $27 due to favorable policy renewal terms, a decrease in depreciation
expense of $32, a decrease in amortization of intangible assets of $46 and a
reduction in the provision for doubtful accounts receivable of $93, offset by an
increase in rent expense of approximately $100 under the facility lease assigned
to an unaffiliated party on September 30, 1997.
Marketing and Selling Expenses. The decrease in marketing and selling
expenses during the six months ended September 26, 1997 as compared to the
corresponding period last year is primarily attributable to the expiration of a
royalty agreement and the resulting decrease in royalty expense of $205.
Engineering, Research and Development Expenses. TSG expanded its
engineering resources during its 1997 fiscal year ended March 28, 1997 in order
to facilitate the development of a new smart payphone processor and the
implementation of lower-cost manufacturing methodologies. During the six months
ended September 26, 1997, the requirement for contract engineering services
diminished and the related expense, net of an increase in salaries and wages
related to personnel additions of $98, decreased by approximately $99. Also, TSG
capitalized approximately $223 of software development costs in connection with
the development of its new smart payphone processor during the six months ended
September 26, 1997. Software development costs capitalized during the six months
ended September 27, 1996 were not significant.
Litigation Settlement. Pursuant to the terms of a settlement agreement and
mutual release dated July 3, 1996, a suit filed against TSG by a former supplier
to collect approximately $400 of unpaid obligations was dismissed with
prejudice. As a result of the settlement agreement, TSG realized a gain of $105
during the six months ended September 27, 1996 representing the difference
between unpaid obligations recorded in TSG's accounts and aggregate settlement
payments set forth in the settlement agreement.
Interest Expense. The decrease in interest expense during the six months
ended September 26, 1997 as compared to the same period last year is primarily
due to the repayment of outstanding bank and stockholder debt obligations during
May 1996 from proceeds of TSG's initial public offering and the assignment of a
capital lease obligation related to one of TSG's manufacturing facilities in
November 1996. See "Restructuring Charges," below and "Liquidity and Capital
Resources."
13
<PAGE>
Restructuring Charges. Restructuring charges during the six months ended
September 27, 1996 relate to the closure of one of TSG's manufacturing
facilities as previously discussed.
Income Taxes. During the six months ended September 26, 1997, TSG recorded
an income tax benefit of $21 on pre-tax income of $43 as compared to income tax
expense of $445 on pre-tax income of $1,415 for the six months ended September
27, 1996. Current tax benefits for the six months ended September 26, 1997
amounted to $253 as compared to current tax expense of $579 for the six months
ended September 27, 1996. Deferred tax expense for the six months ended
September 26, 1997 amounted to $232 as compared to deferred tax benefits of $134
for the six months ended September 27, 1996. Benefits of net operating loss
carryforwards used to offset current taxable income amounted to $72 during the
six months ended September 26, 1997 and September 27, 1996. Benefits of acquired
deferred tax assets applied to goodwill during the six months ended September
26, 1997 approximated $88 versus $235 for the six months ended September 27,
1996.
Liquidity and Capital Resources
TSG is able to borrow up to a maximum of $9,000 under the terms of a Loan
Agreement between TSG and its bank. The Loan Agreement provides for revolving
credit indebtedness up to the maximum amount based on specified percentages
applied to the value of eligible collateral consisting of accounts receivable
and inventories. At September 26, 1997 and March 28, 1997, outstanding
indebtedness under the Loan Agreement amounted to $2,617 and $3,811,
respectively. At September 26, 1997 and March 28, 1997, outstanding indebtedness
under the Loan Agreement bore interest at a variable rate per annum equal to
1.5% above a base rate quoted by Citibank, N.A. The base rate at September 26,
1997 and March 28, 1997 was 8.50% per annum. Amounts borrowed under the Loan
Agreement are collateralized by substantially all assets of TSG, 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
TSG upon at least 90 days' notice.
The Loan Agreement contains conditions and covenants that prevent TSG 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 TSG 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 indebtedness outstanding under the Loan Agreement. Although
TSG is in compliance with the covenants set forth in the Loan Agreement as of
September 26, 1997, there is no assurance that TSG will be able to remain in
compliance with such covenants in the future.
TSG uses the financing available under the Loan Agreement to finance its
working capital requirements. If an event of default under the existing
revolving credit facility were to occur, however, TSG's ability in this regard
could be curtailed. In such event, TSG would seek alternative financing sources,
but there is no assurance that alternative financing sources would be available
on commercially reasonable terms, or at all.
TSG also uses the financing available under the revolving credit line to
fund investing activities and payments on long-term debt when necessary. TSG
repays borrowed funds with cash, if any, provided by operating activities and
equity transactions. TSG measures its liquidity based upon the amount of funds
that TSG is able to borrow under the Loan Agreement, which varies based upon
operating performance and the level of current assets and liabilities. At
September 26, 1997, TSG had unused borrowing availability of approximately
$3,633 under the revolving credit facility based on the value of eligible
collateral.
TSG has established a cash management program with its bank pursuant to
which TSG funds drafts as they clear the bank. Accordingly, TSG maintains bank
overdrafts representing outstanding drafts
14
<PAGE>
and utilizes the cash management account as a source of working capital funding.
Bank overdrafts vary according to many factors, including the volume of
business, and the timing of purchases and disbursements.
TSG's cash flows for the six months ended September 26, 1997 and September
27, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
September 26, September 27,
1997 1996
------------- -------------
<S> <C> <C>
Operations, net of non-cash charges and credits $ 778 $ 1,875
Changes in operating assets and liabilities 98 (5,677)
------------- -------------
Cash provided by (used for) operating activities 876 (3,802)
Investing activities (97) (198)
Net proceeds (payments) under revolving credit (1,194) 702
Increase in bank overdraft 525 31
------------- -------------
110 (3,267)
------------- -------------
Principle payments on long-term debt and capital
lease obligations -- (2,595)
Repayment of stockholder notes -- (2,800)
Proceeds from equity transactions 27 8,799
------------- -------------
27 3,404
------------- -------------
Increase in cash $ 137 $ 137
============= =============
</TABLE>
During the six months ended September 26, 1997, TSG generated $876 in cash
from operating activities and $525 in cash from an increase in bank overdrafts,
used $97 of cash to fund investing activities and repaid $1,194 of indebtedness
under its revolving credit line. Proceeds from equity transactions consisted of
proceeds from the exercise of options granted under TSG's stock option and stock
purchase plans. During the year ended March 28, 1997, TSG retired all of its
outstanding long-term debt and capital lease obligations.
During the six months ended September 27, 1996, TSG used $3,802 of cash to
fund operating activities and $198 of cash to fund investing activities, and
generated $31 in cash from an increase in bank overdrafts. However, TSG
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 and net proceeds of $8,635 during the six months
ended September 27, 1996. TSG used a portion of the proceeds from the offering
to repay outstanding indebtedness under the revolving credit line, which reduced
net proceeds under the credit line to $702 during the six months ended September
27, 1996. In addition, TSG used $2,800 of the proceeds from the offering to
repay 10% interest bearing subordinated promissory notes payable to stockholders
due November 1, 1999, and used $2,510 of the net proceeds to repay bank
indebtedness consisting of a $2,200 term note due November 30, 1997 and $310
outstanding under a $650 term note due November 30, 1997. Other principal
payments on long-term debt and capital lease obligations during the six months
ended September 27, 1996 aggregated $85, including payments under a capital
lease obligation assigned to an unaffiliated party in November 1996 with a
then-outstanding balance of $933. Proceeds from equity transactions during the
six months ended September 27, 1996 include proceeds of $164 from the exercise
of outstanding common stock warrants and options granted under TSG's stock
option and stock purchase plans.
TSG has not entered into any significant commitments for the purchase of
capital assets. The Company has delayed its plan to purchase and install
information systems and capital equipment, including printed circuit board
assembly equipment and other manufacturing equipment, to advance its prototype
15
<PAGE>
manufacturing and product testing capabilities pending the merger with Elcotel.
TSG 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 twelve months. However, in the event that TSG'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 TSG's cash
requirements (due to unanticipated expenses, loss of sales revenues, a
significant increase in inventories, operating difficulties or otherwise), TSG
would be required to seek additional financing. In such an event, there can be
no assurance that additional financing will be available to TSG on commercially
reasonable terms, or at all.
Extension of credit to customers and inventory purchases represent the
principal working capital requirements of TSG. The Loan Agreement between TSG
and its bank limits outstanding revolving credit indebtedness collateralized by
eligible inventory to $3,100 and limits aggregate indebtedness collateralized by
inventory and accounts receivable to $9,000. Accordingly, significant increases
in accounts receivable and inventory balances could have an adverse effect on
TSG's liquidity. TSG's accounts receivable, less allowances for doubtful
accounts, at September 26, 1997 and March 28, 1997 amounted to $4,090 and
$3,235, respectively, and consists primarily of amounts due from its RBOC
customers. TSG's inventories, less allowances for potential losses due to
obsolescence and excess quantities, increased to $11,010 at September 26, 1997
from $10,879 at March 28, 1997. 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 TSG to
estimate and plan the volume of its business. TSG 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.
At September 26, 1997, TSG is committed to purchase approximately $5.5
million of smart payphone assemblies under the terms of a manufacturing
agreement entered into in October 1994. Upon a termination of the agreement by
TSG, TSG is obligated to purchase inventories held by the manufacturer and pay
vendor cancellation and restocking charges, and a reasonable profit thereon. In
addition, TSG is obligated to pay a cancellation penalty of up to $500 if it
cancels its purchase obligation or a substantial portion thereof. The amount of
the cancellation penalty, if any, will vary depending upon quantities purchased
by TSG.
On September 26, 1997, in contemplation of the merger with Elcotel and the
assignment of the lease with respect to TSG's new Georgia facility, TSG entered
into an agreement with Elcotel that provides for the assembly of certain of
TSG's products by Elcotel at prices equal to TSG's cost. In the event the merger
is not consummated, Elcotel has agreed, subject to certain exceptions, to
continue to assemble such products at prices equal to TSG's cost until the first
anniversary of the date Elcotel becomes obligated to provide manufacturing
services under the agreement, and has agreed to reimburse TSG for certain costs
in establishing a new manufacturing facility to replace the Georgia facility not
to exceed $100.
Operating Trends and Uncertainties
Dependence on Customers and Contractual Relationships. During the past
three years, four of the RBOCs have accounted for the majority of TSG's sales.
TSG anticipates that it will continue to derive most of its revenues from such
customers, and other regional telephone companies, for the foreseeable future.
Significant reductions and/or fluctuations in sales volume from these customers,
such as TSG experienced during the three months and six months ended September
26, 1997 as compared to the three months and six months ended September 27,
1996, can have material adverse effects on TSG's business. In addition, the loss
of a significant customer could have a material adverse effect on TSG's
business.
16
<PAGE>
TSG's prospects for continued profitability are largely dependent upon the
RBOCs upgrading the technological capabilities of their installed base of
payphones, and utilizing TSG's products and services for such upgrade conversion
programs. Also, TSG's prospects and the ability of TSG to maintain a profitable
level of operations are dependent upon its ability to continue to secure
contract awards from the RBOCs. In addition, TSG's prospects for growth are
dependent upon the market acceptance and success of its smart payphone products,
as well as development of smart products containing additional advanced
features. If TSG is unable to attract the interest of the RBOCs to deploy its
smart payphone products, TSG's sales revenues, business and prospects for growth
would be adversely affected. Further, TSG's ability to maintain and/or increase
its sales is dependent upon its ability to compete for and maintain satisfactory
relationships with its customers.
Sales Prices. TSG's agreements with its contract manufacturers generally
provide that TSG will bear certain cost increases incurred by the manufacturer.
Accordingly, TSG'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. TSG's sales agreements with customers generally have
fixed prices with limited price escalation provisions. Consequently, there is a
risk that TSG may not be able to increase sales prices when product costs
increase. In the event TSG's costs increase without a corresponding price
increase or orders are lost due to price increases, TSG's profitability would be
adversely affected. TSG encounters substantial competition with respect to smart
payphone contract awards from the RBOCs. Pending the release of TSG's new smart
payphone processor later this year, market pressures have eroded margins on the
product version currently being shipped. Until TSG releases its new smart
payphone processor, TSG will realize little to no gross profit with respect to
smart product sales to NYNEX as was the case during the three months and six
months ended September 26, 1997.
Seasonality. TSG's sales are generally stronger during periods when weather
does not interfere with the maintenance and installation of payphone equipment
by TSG's customers, and may be adversely impacted near the end of the calendar
year by the budget shortfalls of customers. However, TSG may also receive large
year-end orders from its customers for shipment in December depending upon their
budget positions. In the event TSG does not receive any significant end of year
orders for its smart payphone products, its third quarter sales may decline
significantly in relation to other quarters.
Sources of Supply and Dependence on Contract Manufacturers. TSG 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 TSG or that affect the quality of items supplied to TSG, TSG'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 TSG, and such
delays or defects are material, TSG's customer relations could deteriorate and
its sales and operating results could be materially and adversely affected.
As a percentage of revenues, the majority of TSG's products contain
components or assemblies that are purchased from single sources. TSG believes
that there are alternative sources of supply for most of the components and
assemblies currently purchased from those sources. Most of the components and
assemblies used by TSG for which there are not immediately available alternative
sources of supply are provided to TSG under standard purchase arrangements. In
addition, suppliers of certain electronic parts and components to TSG and its
contract manufacturers occasionally place their customers on allocation for
those parts. If a shortage or termination of the supply of any one or more of
such components or assemblies were to occur, TSG's business could be materially
and adversely affected. In such event, TSG would have to incur the costs
associated with redesigning its products to include available components or
assemblies or otherwise obtain adequate substitutes, and those costs could be
material. Also, any delays in redesigning products or obtaining substitute
components could adversely affect TSG's business.
17
<PAGE>
Telecommunications Act. 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. Although TSG believes that the uncertainty in the
industry caused by a delay in the implementation of certain payphone provisions,
including the "dial around" compensation order, of the Telecommunications Act
has had an adverse impact on its smart product sales volume, the Company
believes that passage of the Telecommunications Act will have a favorable impact
on the profitability of the payphone industry in the long run and generally
benefit TSG. For example, the deregulation of local coin rates in October 1997
will improve revenues of TSG's domestic customers. However, there can be no
assurance that implementation of the Telecommunications Act will have a
favorable impact on TSG's operations in the future. In addition, as a result of
the Telecommunications Act, the RBOCs will be permitted to manufacture and
provide telecommunications equipment and to manufacture customer premise
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 TSG and could decrease demand for TSG's
products by such RBOCs.
Net Operating Loss Carryforwards
As of September 26, 1997, TSG had net operating loss carryforwards for
income tax purposes of approximately $11 million to offset future taxable
income. As a result of an ownership change on October 31, 1994, TSG is subject
to an annual limitation on the use of its net operating losses of approximately
$210. Such limitation has the effect of increasing TSG's tax liability and
reducing net income and available cash resources of TSG when the taxable income
during a year exceeds the allowable loss carried forward to that year. In
addition, because of such limitations, TSG will be unable to use a significant
portion of its net operating loss carryforwards.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires disclosure of basic earnings per share based on income available to
common stockholders and the weighted average number of common shares outstanding
during the period, and diluted earnings per share based on income available to
common stockholders and the weighted average number of common and dilutive
potential common shares outstanding during the period. Had the Company adopted
SFAS 128 during the years ended March 29, 1996 and March 28, 1997, basic
earnings per share on a pro forma basis would have been $.34 and $.22 per share,
respectively, and diluted earnings per share on a pro forma basis would have
been $.30 and $.21 per share, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, Disclosure of Information about
Capital Structure ("SFAS 129"). SFAS 129 requires a Company to explain the
privileges and rights of its various outstanding securities, the number of
shares issued upon conversion, exercise or satisfaction of required conditions
during the most recent annual fiscal period, liquidation preferences of
preferred stock and other matters with respect to preferred stock. Although the
statement is effective for periods ending after December 15, 1997, the Company's
financial statement disclosures are in compliance with SFAS 129.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business during a
period from transactions and events and circumstances from non-owner sources,
and includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS 130 is not
expected
18
<PAGE>
to have a material effect on the Company's results of operations or financial
position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 requires public
entities to report certain information about operating segments, their products
and services, the geographic areas in which they operate, and their major
customers, in complete financial statements and in condensed interim financial
statements issued to stockholders. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 is not expected to
have a material effect on the Company's results of operations or financial
position.
19
<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
------- ----------------------
10.1 Assignment, Assumption and Consent Agreement
between Technology Service Group, Inc., World
Access, Inc. and McDonald Windward Partners II,
L.L.C. dated September 30, 1997
10.2 Manufacturing Services Agreement between Elcotel,
Inc. and Technology Service Group, Inc. dated
September 26, 1997
11. Statement re computation of per share earnings
27. Financial Data Schedule (EDGAR Filing only)
(b) Reports of Form 8-K
On August 21, 1997, TSG filed a report on Form 8-K, reporting in Item 5.
that on August 13, 1997, TSG entered into an Agreement and Plan of Merger with
Elcotel, Inc. and its wholly-owned subsidiary, Elcotel Hospitality Service, Inc.
20
<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: November 6, 1997 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
21
<PAGE>
EXHIBIT INDEX
Exhibit At
No. Description of Exhibit Page
- ------- ---------------------- ----
10.1 Assignment, Assumption and Consent Agreement between
Technology Service Group, Inc., World Access, Inc. and
McDonald Windward Partners II, L.L.C. dated September
30, 1997 23
10.2 Manufacturing Services Agreement between Elcotel, Inc.
and Technology Service Group, Inc. dated September 26,
1997 26
11. Statement re computation of per share earnings 34
27. Financial Data Schedule (EDGAR filing only) 35
22
EXHIBIT 10.1
ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT
THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT (this "Agreement") is made as
of the 30th day of September 1997 (the "Effective Date") by and among Technology
Service Group, Inc., a Delaware corporation (hereinafter referred to as "TSG");
World Access, Inc. a Delaware corporation (hereinafter referred to as
"Assignee"); and McDonald Windward Partners II, L.L.C., a Georgia Limited
Partnership (hereinafter referred to as "Landlord").
1. Consideration. The parties are entering into this Agreement for and in
consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged.
2. Background. Effective November 12, 1996, TSG and Landlord entered into that
certain lease relating to the premises at 1075 Windward Ridge Parkway (the
"Premises") (known as Building 200 at Windward Ridge) (the "Lease"). By
reason of certain events, TSG no longer has a need for the Premises and
wishes to assign the Lease to Assignee, and Assignee wishes to assume all
of TSG's obligations under the Lease. Having satisfied itself that the
credit-worthiness of Assignee is at least as good as that of TSG, Landlord
is willing to consent to the assignment of the Lease.
3. Assignment.
(a) TSG hereby sells, assigns and transfers to Assignee all of TSG's
right, title and interest in and to the Lease.
(b) TSG represents and warrants that a true, correct and complete copy of
the Lease is attached hereto as Exhibit A.
(c) TSG certifies that it has removed all hazardous materials from the
Premises by the effective date of this Agreement.
(d) TSG makes no other or further representations or warranties of any
kind or nature with respect to the Lease or the Premises.
4. Assumption.
(a) Assignee hereby assumes the obligations of TSG under the Lease and
accepts the Lease and the Premises as is, where is and with all
faults. Assignee agrees to tender to Landlord the security deposit in
the amount of $17,803.33 as required by the Lease upon signing of this
Agreement.
(b) Assignee agrees to defend, indemnify and hold TSG harmless from and
against any loss, cost, damage or expense (including reasonable
attorney's fees and expenses)
23
<PAGE>
that TSG may suffer arising from and after the date hereof out of the
Lease and/or Assignee's occupancy of the Premises.
5. Consent.
(a) Landlord hereby consents to the assignment to Assignee by TSG of all
of TSG's interests and obligations under the Lease and to the
assumption thereof by Assignee.
(b) Section 14.A. of the Lease to the contrary notwithstanding, effective
with this assignment of the Lease, Landlord agrees that TSG shall have
no further interest in the Lease or the Premises and shall have no
further obligation under the Lease of any kind or nature to Landlord
or to any person or entity claiming by, through or under Landlord,
other than indemnity obligations to Landlord under the Lease relating
to claims that accrued prior to the date of this Agreement.
(c) Landlord represents and warrants to Assignees that (i) Exhibit A is a
true, correct and complete copy of the Lease; (ii) the Lease is in
full force and effect as of the date hereof; (iii) no events of
default by Tenant under the Lease have occurred, and no events have
occurred that with the giving of notice or the lapse of time, or both,
would constitute an event of default under the Lease; and (iv) that
Landlord holds $17,803.33 as a security deposit from the Tenant under
the Lease. Landlord agrees to tender to TSG its security deposit in
the amount of $17,803.33 upon signing of this Agreement.
(d) All base rent, additional rent and all other amounts payable to
Landlord by "Tenant" under the Lease have been paid through and
including September 30, 1997, with the exception of amounts that will
be due to or receivable from Landlord as a result of the year-end
reconciliation of common area maintenance expenses and taxes which
shall be allocated between TSG and Assignee according to the number of
days the Lease was held by each of them during the year in question.
6. Clarification; Miscellaneous.
(a) With reference to Paragraph 32 of the Lease, and in clarification of
said Paragraph, Landlord, TSG, and Assignee agree that the Base Rent
under the Lease at Renewal shall increase by 15% and not 115% as
stated. Therefore, the Base Rent at Renewal shall be 115% of the Base
Rent in effect at the expiration of the initial term of the Lease.
(b) The effective commencement date of the Lease Agreement is April 1,
1997.
(c) This Agreement together with Exhibit A contains the entire
understanding of the parties on the subject matter hereof; shall not
be amended except by written agreement of the parties signed by all of
them; shall be binding upon and inure to the benefit of the parties
and their successors and assigns; and may be executed in one or more
counterparts each of which shall be deemed an original hereof, but all
24
<PAGE>
of which shall constitute but one and the same agreement.
(d) Each provision of this Agreement shall be interpreted and enforced
without the aid of any canon, custom or rule of law requiring or
suggestion construction against the party drafting or causing the
drafting of such provision.
(e) No representation, affirmation of fact, course of prior dealings,
promise or condition in connection herewith or usage of the trade not
expressly incorporated herein shall be binding on the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first above
written.
Technology Service Group, Inc. World Access, Inc.
By: /s/ Vincent C. Bisceglia By: /s/ Stephen A. Odom
----------------------------------- -----------------------------------
Vincent C. Bisceglia Steven A. Odom
President Chairman and Chief Executive Officer
Technology Service Group, Inc. World Access, Inc.
Attest: /s/ William H. Thompson Attest:_______________________________
------------------------------- Secretary
Secretary
[corporate seal] [corporate seal]
McDonald Windward Partners II, L.L.C.
By: /s/ John R. McDonald Attest:_______________________________
----------------------------------- Secretary
Name: John R. McDonald
Title: Managing Member
[corporate seal]
25
EXHIBIT 10.2
MANUFACTURING SERVICES AGREEMENT
ELCOTEL, INC. & TECHNOLOGY SERVICE GROUP, INC.
THIS MANUFACTURING AGREEMENT (this "Agreement") is made as of the 26th day of
September, 1997 (the "Effective Date") by and between Elcotel, Inc. (hereinafter
referred to as "Elcotel") and Technology Service Group, Inc.
(hereinafter referred to as "TSG").
1 Consideration. The parties are entering into this Agreement for and in
consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged.
2 Background. Elcotel and TSG have entered into an Agreement and Plan of
Merger dated as of August 13, 1997 (the "Merger Agreement") providing for
the merger of a wholly-owned subsidiary of Elcotel into TSG (the "Merger").
As a result of the Merger Agreement, TSG has canceled plans to move into a
new facility in Alpharetta, GA that would provide additional manufacturing
capacity for TSG since Elcotel has adequate space to accommodate TSG's
manufacturing needs after the Merger. In entering into this Agreement, the
parties wish to provide for the possibility that the Merger may not be
consummated, with the result that TSG would be left with inadequate
manufacturing capacity until it could negotiate a lease on a new
manufacturing facility.
3 Compensation. In the event that the Merger is not consummated (other than
by reason of a breach of the Merger Agreement by TSG, because of the
failure of TSG's stockholders to approve the Merger, or by mutual agreement
by the parties), Elcotel shall pay to TSG as reimbursement for expenses
that TSG will incur in establishing a manufacturing facility to replace the
Alpharetta facility, the lesser of one hundred thousand dollars ($100,000)
or the sum of (i) TSG's actual costs incurred in locating a new facility;
(ii) the difference in annual rent between the Alpharetta facility and a
replacement facility for a five-year term; (iii) the actual costs of
leasehold improvements paid for by TSG and not covered by the rental rate;
and (iv) any losses actually incurred by TSG relating to the subleasing of
the Alpharetta facility (such as unreimbursed leasehold expenses paid for
by TSG). All such costs and losses shall be documented by TSG.
4 Elcotel's Responsibilities.
4.1 Elcotel will assemble and manufacture those TSG products and
components listed on Exhibit A at Elcotel's facility in Sarasota,
Florida according to TSG's specifications furnished to Elcotel for
such purpose. A mutually agreed upon implementation schedule will be
developed. Additional components will be added to Exhibit A as
required.
4.2 Elcotel warrants that TSG products manufactured and/or assembled by it
will be free from
26
<PAGE>
defects in materials and workmanship (other than materials furnished
by TSG) for a period of ninety (90) days after delivery thereof to
TSG. Any products that do not conform to the foregoing warranty may be
returned to Elcotel by TSG for credit. Elcotel shall repair and return
to TSG, at Elcotel's expense, products that fail to meet the foregoing
warranty.
4.3 In the event of the termination of this Agreement Elcotel shall at
TSG's expense and direction return and/or dispose of all
specifications, drawings, manuals, and other tangible items furnished
by TSG to Elcotel to assist it in manufacturing and/or assembling TSG
products and all unused TSG inventory then remaining at Elcotel's
facility.
5 TSG's Responsibilities.
5.1 TSG shall furnish to Elcotel such specifications, drawings, manuals
and the like as are reasonably required by Elcotel to manufacture
and/or assemble the TSG products.
5.2 TSG shall provide Elcotel on a timely basis with the parts and
components required to assemble TSG's products.
5.3 Any inventory of parts or components furnished by TSG to Elcotel shall
be on a consignment basis and shall at all times remain the property
of TSG.
5.4 TSG will supply the manufacturing equipment to Elcotel as listed on
Exhibit B which shall also at all times remain the property of TSG.
5.5 TSG shall pay the freight on shipments of inventory and equipment to
Elcotel and on shipment to TSG of products manufactured and/or
assembled by Elcotel.
6 Acceptance Testing. TSG shall perform incoming inspection of all products
shipped to it by Elcotel and shall retain the right reject products for
return and repair. This inspection will be performed on a lot by lot basis.
7 Pricing and Payment.
7.1 Elcotel shall charge TSG for labor and overhead at current costs as
documented on TSG's bills of materials.
7.2 TSG shall pay Elcotel for products net thirty (30) days after receipt
of an invoice therefor.
8 Risk of Loss.
8.1 The risk of loss of inventory and equipment furnished by TSG to
Elcotel shall pass to Elcotel upon delivery to Elcotel's Sarasota
manufacturing facility.
8.2 Risk of loss of TSG products manufactured and/or assembled by Elcotel
shall pass to TSG upon delivery to TSG F.O.B. Elcotel's place of
manufacture in Sarasota, Florida.
27
<PAGE>
9 Term & Termination.
9.1 This Agreement shall commence on the date hereof and shall continue
until the earlier to occur of the consummation of the Merger or the
first anniversary of the date Elcotel first becomes obligated to
provide manufacturing services to TSG hereunder.
9.2 If either party shall breach any term, condition or provision of this
Agreement and if the breaching party shall fail to cure such breach
within thirty (30) days after receipt from the other party of a notice
of such breach, the non-breaching party may terminate this Agreement
by written notice to the other party and/or may pursue such other
remedies as are available to it under applicable law. However, if the
type of breach is one that cannot be cured within a thirty-day period,
then such breach shall be deemed to be cured if the breaching party
within the thirty-day period shall have in good faith commenced a cure
and shall continue thereafter with all due diligence to effect such
cure and in fact does so complete the cure with all due diligence.
10 Confidentiality. The confidentiality agreement between the parties dated as
of February 27, 1997 entered into in connection with negotiations for the
Merger shall continue in full force and effect for the duration of this
Agreement and for three (3) years thereafter.
11 Limitation of Liability
11.1 NEITHER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO ITS OBLIGATIONS
UNDER THIS AGREEMENT OR OTHERWISE FOR CONSEQUENTIAL, EXEMPLARY,
SPECIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES EVEN IF IT HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
11.2 EXCEPT AS EXPRESSLY STATED HEREIN, ELCOTEL DISCLAIMS ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, ARISING BY OPERATION OF LAW OR
OTHERWISE, WITH RESPECT TO TSG PRODUCTS MANUFACTURED AND/OR ASSEMBLED
BY ELCOTEL, INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
12 Arbitration.
12.1 Except as otherwise provided below, this Agreement and any
controversy, claim or dispute between the parties directly or
indirectly concerning this Agreement or the breach hereof or the
subject matter hereof, including questions concerning the scope and
applicability of this Section 12 shall be finally settled by
arbitration held in Atlanta, Georgia in accordance with the provisions
of this Section and the rules of commercial arbitration then followed
by the American Arbitration Association or any successor to the
functions thereof.
12.2 The arbitrators shall be chosen in accordance with such rules. A
majority of the arbitrators shall have the right and authority to
determine how their decision or determination as to each issue or
matter in dispute may be implemented or enforced. Any decision or
award of a majority of the arbitrators shall be final and conclusive
on the parties to this Agreement, and there shall be no appeal
therefrom other than for fraud or willful misconduct. Notwithstanding
anything herein to the contrary, no arbitrator in any such proceeding
shall
28
<PAGE>
have authority or power to (a) modify or alter any express condition
or provision hereof by an award or otherwise; (b) award punitive or
exemplary damages for or against any party to any such proceeding; or
(c) award any damages expressly excluded under this Agreement.
12.3 The parties hereto agree that an action to compel arbitration pursuant
to this Agreement may be brought in the appropriate court of the State
of Georgia. Application may also be made to such court for
confirmation of any decision or award of a majority of the
arbitrators, for an order of enforcement and for any other remedies
that may be necessary to effectuate such decision or award. Each of
the parties hereto hereby consents to the jurisdiction of the
arbitrators and of such court and waives any objection to the
jurisdiction of such arbitrators and court.
12.4 Notwithstanding anything contained herein to the contrary, the parties
hereby agree that this Section 12 shall not apply to any action
brought by a party seeking an injunction or other equitable relief.
12.5 In any controversy, claim or dispute subject to arbitration under the
terms of this Section 12, the parties shall pay the fees and expenses
of the arbitrators in accordance with any decision or award of a
majority of the arbitrators.
13 Force Majeure. Neither party shall be liable to the other party hereunder
for non-performance or delay in the performance of any of the terms and
conditions of this Agreement if such non-performance or delay is caused by
circumstances beyond its control, which circumstances, however, shall not
include lack of funds.
14 Notices. All notices required or permitted under this Agreement shall be in
writing and shall be deemed given to a party either (a) when hand delivered
to such party; (b) when deposited with a nationally-recognized delivery
service with instructions to provide next-business-day delivery and proof
of delivery to such party; or (c) when sent to such party by facsimile
transmission as follows:
If to Elcotel at: If to TSG at:
6428 Parkland Drive 20 Mansell Court East Suite 200
Sarasota, Florida 34243 Roswell, Georgia 30076
Attention: President Attention: President
Fax #: (941) 751-4716 Fax #: (770) 641-7528
or to such other address of a party as such party may by notice hereunder
designate to the other party.
15 Instruments. All instruments such as purchase orders, order acceptances,
confirmations, invoices and the like used in connection with this Agreement
shall be for the sole purpose of describing, defining or identifying
Products, quantities, prices, amounts due, delivery dates and destinations,
and to this extent only are incorporated into this Agreement. All of the
printed or other terms on the front and reverse side of any such instrument
shall be void and of no force or effect.
29
<PAGE>
16 Severability. If any provision or part of a provision of this Agreement is
finally declared to be invalid by any tribunal of competent jurisdiction,
such part shall be deemed automatically adjusted, if possible, to conform
to the requirements for validity, but, if such adjustment is not possible,
it shall be deemed deleted from this Agreement as though it had never been
included herein. In either case, the balance of any such provision and of
this Agreement shall remain in full force and effect. Notwithstanding the
foregoing, however, no provision shall be severed if it is clearly apparent
under the circumstances that either or both of the parties would not have
entered into this Agreement without such provision.
17 Survival.
The expiration or earlier termination of this Agreement shall not relieve
(i) Elcotel of its warranty hereunder, (ii) TSG of the obligation to pay
for conforming products shipped prior to termination or (iii) either party
of its obligations of confidentiality as provided herein.
18 Relationship. The relationship between the parties shall be that of
independent contractors, and nothing contained in this Agreement shall be
construed to constitute either party as a partner, employee, joint venturer
or agent of the other. Neither party shall have the authority to bind the
other in any manner without the other's prior written consent and
authorization.
19 Miscellaneous.
19.1 This Agreement together with Exhibits A and B contains the entire
understanding of the parties on the subject matter hereof except as
otherwise expressly contemplated herein; shall not be amended except
by written agreement of the parties signed by each of them; shall be
binding upon and inure to the benefit of the parties and their
successors and permitted assigns; may be executed in one or more
counterparts each of which shall be deemed an original hereof, but all
of which shall constitute but one and the same agreement; and shall
not be assignable by a party without the prior written consent of the
other party.
19.2 The words "herein," "hereof," "hereunder," "hereby," "herewith" and
words of similar import when used in this Agreement shall be construed
to refer to this Agreement as a whole. The word "including" shall mean
including, but not limited to any one or more enumerated items.
19.3 "Best Efforts means that the obligated party is required to make a
diligent, reasonable good faith effort to accomplish the stated
objective. The obligated party is not, however, required to expend
funds or incur liabilities and is not required to act in a manner that
would be contrary to normal commercial practices in order to
accomplish the objective. The fact that the objective is not
accomplished is not by itself an indication that the obligated party
did not in fact use its Best Efforts.
19.4 "Business Day" means a day that is not a Saturday, Sunday or a
statutory or civic holiday in the state of Florida, or any other day
on which the principal office of either party is closed or becomes
closed prior to 2:00 p.m. local time, whether in accordance with
established company policy or as a result of unanticipated events,
including adverse weather conditions.
30
<PAGE>
19.5 Each provision of this Agreement shall be interpreted and enforced
without the aid of any canon, custom or rule of law requiring or
suggestion construction against the party drafting or causing the
drafting of such provision.
19.6 No representation, affirmation of fact, course of prior dealings,
promise or condition in connection herewith or usage of the trade not
expressly incorporated herein shall be binding on the parties.
19.7 The failure by a party to insist upon strict compliance with any term,
covenant or condition, or to exercise any right, contained herein
shall not be deemed a waiver of such term, covenant, condition or
right; and no waiver or relinquishment of any term, covenant,
condition or right at any one or more times shall be deemed a waiver
or relinquishment thereof at any other time or times.
19.8 The captions of the paragraphs herein are for convenience only and
shall not be used to construe or interpret this Agreement.
19.9 This Agreement shall not confer any rights or remedies upon any person
other than the parties and their respective successors and permitted
assigns.
20 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Georgia without giving
effect to any choice of law or conflict of law provision or rule (whether
of the State of Georgia or of any other jurisdiction) that would cause the
application hereto of the laws of any jurisdiction other than the State of
Georgia.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first above
written.
Elcotel, Inc. Technology Service Group, Inc.
By: /s/ Tracey L. Gray By: /s/ Vincent C. Bisceglia
------------------------------------ ---------------------------------
Tracey L. Gray Vincent C. Bisceglia
President & Chief Operating Officer President & Chief Executive Officer
31
<PAGE>
EXHIBIT A
LISTING OF TSG PRODUCTS AND COMPONENTS
TO BE MANUFACTURED AT
ELCOTEL
Item
UBX C Cash Box Switch
Hookswitch Assembly
GC Dial UCD Assembly
DC Dial UCD Assembly
Note: This listing may be increased to include additional products and
components
32
<PAGE>
EXHIBIT B
LISTING OF TSG MANUFACTURING EQUIPMENT
TO BE LOANED TO
ELCOTEL
Item
1. Reed Switch Forming Fixture Consisting of:
a. Sony Monitor
b. Camera
c. Lights
d. Pneumatic Switch Forming Fixture
e. Lead Straightener
2. Microscope and Base with Light Adapter - Bausch & Lomb
3. Two Reed Switch Assembly Stations with Vacuum Pumps
4. Gauss Meter and Fixture with Holding Tool
5. Manual Sleeve Press for Mounting Screws
6. UBX Final Test Station:
* a. Holding Block for UBX with Test Strip
b. Lower Phone Housing with Cash Box Test Fixture
* Have two more in Orange, will ship when we complete assembly.
Note: This list may be increased to include additional equipment
33
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
September 26, September 27, September 26, September 27,
1997 (1) 1996 (1) 1997 (1) 1996 (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 4,707 4,690 4,705 4,399
Incremental shares assumed to be outstanding
related to common stock options granted and
outstanding 587 582 588 517
Incremental shares assumed to be outstanding
related to common stock warrants issued and
outstanding 675 675 675 533
Shares of common stock assumed to be
purchased upon exercise of outstanding
options and warrants (2) (942) (939) (942) (722)
------------- ------------- ------------- -------------
Weighted average number of common and
common equivalent shares outstanding -
Primary earnings per share 5,027 5,008 5,026 4,727
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 5,027 5,008 5,026 4,727
============= ============= ============= =============
Net income (loss) $ 27 $ 385 $ 64 $ 970
Adjustment of interest expense, net of tax
effect, due to 20% limitation on purchase
of outstanding options and warrants at
average market price 46 4 107 --
------------- ------------- ------------- -------------
Net income (loss) as adjusted - Primary
earnings per share 73 389 171 970
Adjustment of interest expense, net of tax
effect, due to 20% limitation on purchase of
outstanding options and warrants at closing
market price versus average market price (14) -- (30) --
------------- ------------- ------------- -------------
Net income (loss) as adjusted - Earnings per
share assuming full dilution $ 59 $ 389 $ 141 $ 970
============= ============= ============= =============
Net income (loss) per share:
Primary $ 0.01 $ 0.08 $ 0.03 $ 0.21
============= ============= ============= =============
Assuming full dilution $ 0.01 $ 0.08 $ 0.03 $ 0.21
============= ============= ============= =============
</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 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.
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS
ENDED SEPTEMBER 26, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-03-1998
<PERIOD-END> SEP-26-1997
<CASH> 205
<SECURITIES> 0
<RECEIVABLES> 4,199
<ALLOWANCES> (109)
<INVENTORY> 11,010
<CURRENT-ASSETS> 16,010
<PP&E> 2,645
<DEPRECIATION> (2,025)
<TOTAL-ASSETS> 20,746
<CURRENT-LIABILITIES> 7,531
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 13,168
<TOTAL-LIABILITY-AND-EQUITY> 20,746
<SALES> 13,301
<TOTAL-REVENUES> 13,301
<CGS> 11,029
<TOTAL-COSTS> 11,029
<OTHER-EXPENSES> 737
<LOSS-PROVISION> (37)
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 43
<INCOME-TAX> (21)
<INCOME-CONTINUING> 64
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
