UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 28, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission file number 0-28352
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value, $.01 Per Share
(Title of Class)
Redeemable Warrants
(Title of Class)
Indicate by check mark whether (1) Registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant at May 30, 1997, based on the closing price on such date
($5 3/4), was approximately $6,891,157.
At May 30, 1997, there were 4,701,760 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TECHNOLOGY SERVICE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
Number
PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings and Disputes 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 39
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management 80
Item 13. Certain Relationships and Related Transactions 82
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 83
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PART I
Item 1. BUSINESS
General
The Company designs, develops, manufactures and markets public
communication products including wireline and wireless pay telephone
("payphone") systems, electronic wireline payphone products and payphone
components. The Company's payphone systems are based upon microprocessor
technology and perform a variety of functions, including calling card, debit
("prepay") card and credit card operations, data storage, call progress
detection, call rating and maintenance, diagnostic and coin administration
functions. The Company's payphone software management system, CoinNet(TM), is an
integral component of the Company's microprocessor-based payphone systems. The
Company also provides payphone and payphone component repair, refurbishment and
upgrade conversion services to the regulated telephone operating companies in
the United States, which consist of the seven Regional Bell Operating Companies
("RBOCs") and other local exchange carriers. See "Products and Services," below.
The Company operates in one business segment as a provider of public
communication systems, products and services to communications providers in the
United States and foreign markets. The Company presently markets its products
and services primarily to the seven RBOCs in the United States and to cellular
service providers in certain international markets. The Company has derived
substantially all of its revenues from sales to four RBOCs. See "Sales and
Markets," below. The Company is presently developing a new microprocessor-based
wireline payphone processor for international markets and for the RBOC and
independent markets in the United States.
Unless the context requires otherwise, Technology Service Group, Inc. and
its subsidiary, International Service Technologies, Inc., are referred to herein
collectively as the "Company" or "TSG". The term "Predecessor" refers to the
Company for all periods prior to October 31, 1994, the date TSG Acquisition
Corp., a wholly-owned subsidiary of Wexford Partners Fund, L.P., acquired all of
the outstanding capital stock of the Company (see "History -- Acquisition,"
below; Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations;" and Item 8 -- "Financial Statements and
Supplementary Data"). The Company's principal executive offices are located at
20 Mansell Court East, Suite 200, Roswell, Georgia 30076, and its telephone
number at that address is (770) 587-0208.
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 under this Item 1 -- "Business;" Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations;" and elsewhere herein.
Developments During Fiscal 1997
Initial Public Offering. In May 1996, the Company completed an initial
public offering (the "Offering") of 1,150,000 units (the "Units"), each Unit
consisting of one share of common stock, $.01 par value per share (the "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 underwriter of the offering to purchase 100,000
shares of Common Stock (the "Underwriter Warrants") for gross proceeds of $10.
Net proceeds from the offering, after underwriting discounts and expenses of
$1,231,897 and other expenses of $824,953, amounted to $8,293,169. The net
proceeds of the Offering were used to repay the Company's then outstanding
indebtedness of $2,509,524 under bank term and installment notes; to repay
$3,808,589 of indebtedness outstanding under a bank revolving credit agreement;
and to repay $2.8 million of
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outstanding indebtedness under 10% interest bearing subordinated promissory
notes payable to stockholders. See "History -- Acquisition," below; Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations;" and Item 8 -"Financial Statements and Supplementary Data."
Stock Purchase Agreement. The Company and Wexford Partners Fund, L.P.
("Wexford"), Acor S.A. ("Acor") and Firlane Business Corp. ("Firlane"), and
A.T.T. IV, N.V. ("ATTI") entered into a Stock Purchase and Option Agreement on
May 3, 1996 (the "Stock Purchase Agreement"). Wexford, Acor and Firlane,
concurrently with the Offering, sold to ATTI an aggregate of 366,300 shares of
Common Stock at a price of $8.14 per share and options to purchase an additional
183,150 shares of Common Stock at an exercise price of $11.00 per share (the
"Options") at a price of $.10 per Option. Wexford sold 285,714 shares and
Options to purchase 142,857 shares. Acor sold 53,114 shares and Options to
purchase 26,557 shares. Firlane sold 27,472 shares and Options to purchase
13,736 shares. The consideration received by Wexford, Acor and Firlane was
$2,339,998, $435,004 and $224,995, respectively. No consideration was received
by the Company.
Fiscal 1997 Facilities Consolidation. During the year ended March 28, 1997,
the Company closed its Kentucky facility and consolidated service operations
into its Virginia manufacturing facility. Also, during the year ended March
28,1997, the Company assigned the capital lease obligation related to the closed
facility to an unaffiliated third party, and recorded the retirement of the
outstanding capital lease obligation and the disposition of the property. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 -- "Financial Statements and Supplementary
Data."
In November 1996, the Company executed a lease agreement with respect to a
39,200 square foot facility located in Georgia that commenced on April 1, 1997.
The Company intends to close its present corporate office facility and to
consolidate its product assembly operations and corporate activities into this
new facility.
Sales Agreements. In November 1996, TSG entered into a new non-exclusive
supply agreement, effective July 1, 1996, to provide its Gemini(TM) smart
payphones and processors, CoinNet payphone management system and other payphone
components to Telesector Resources Group, Inc. ("NYNEX") for a period of five
years. See "Sales and Markets -- Domestic," below.
In June 1997, the Company entered into an agreement with Southwestern Bell
Telephone Company ("SWB") that supersedes and terminates a December 1994
agreement between the parties. Under the new agreement, the Company agreed (i)
to reduce SWB's remaining purchase commitment of GemStar(TM) processors and
electronic locks to approximately $3 million from approximately $8 million under
the former agreement and, (ii) among other things, to upgrade SWB's payphone
management system. In return, SWB made a $250,000 cash payment to the Company,
terminated the Company's obligation to pay royalties on sales of GemStar
processors to other customers and terminated the Company's obligation to repay
$375,000 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments to the Company
aggregating up to $750,000 between July 2, 1997 and March 31, 1998 subject to
the Company's compliance with the terms and conditions contained in the
agreement. See "Sales and Markets -- Domestic," below; Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations;" and
Item 8 -- "Financial Statements and Supplementary Data."
History
General. The Company was incorporated in the State of Delaware in 1975.
Between 1975 and 1986, the Company was engaged in the high-speed dot matrix
printer business. In 1986, the Company acquired International Teleservice
Corporation, Inc., a company engaged in the repair and refurbishment of
telecommunication products consisting of residential telephones and payphones.
During 1987 and 1988, the Company discontinued its high-speed dot-matrix printer
business, sold the assets of its residential telephone repair and refurbishment
business, and began to focus its business on the public communications industry.
The Company established International Service Technologies, Inc. ("IST"), which
established a foreign division in
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Taiwan, and Technology Service Enterprises, Inc., and expanded its public
communications business to include the manufacture and marketing of payphones
and payphone components and the provision of services to convert and upgrade
payphones with components designed and manufactured by the Company and its
subsidiaries. In 1991, Technology Service Enterprises, Inc. acquired the assets
of the Public Communication Systems Division of Executone Information Systems,
Inc. ("PCS"), including its microprocessor-based technology. In fiscal 1993, the
Company established Wireless Technologies, Inc. and began to develop
microprocessor-based wireless payphone products for international applications.
In April 1993, International Teleservice Corporation, Inc., Technology Service
Enterprises, Inc. and Wireless Technologies, Inc. were merged into the Company.
Acquisition. On October 31, 1994, TSG Acquisition Corp., a wholly-owned
subsidiary of Wexford, acquired all of the outstanding capital stock of the
Company. The consideration paid by TSG Acquisition Corp. aggregated $3.5
million. In connection with this transaction, the Company entered into an
Investment Agreement with Wexford, Acor and Firlane. The Company issued an
aggregate of 3.5 million shares of Common Stock at a price of $1.00 per share to
Wexford. Wexford, in turn, sold to Acor and Firlane 507,500 and 262,500 shares,
respectively, of Common Stock. The consideration paid by Wexford, Acor and
Firlane for their shares of Common Stock was $2,730,000, $507,500 and $262,500,
respectively. Also, the Company borrowed $2.8 million from Wexford and Acor and
issued subordinated promissory notes due November 1, 1999 that bear interest at
a rate of 10% per annum (the "Affiliate Notes"). The Affiliate Notes were repaid
during the year ended March 28, 1997 with a portion of the proceeds from
Company's initial public offering.
Fiscal 1994 Restructuring. During the three years ended April 1, 1994, the
Company generated net losses due to poor operating performance caused in large
part by the termination of a sales agreement with respect to a first generation
microprocessor-based payphone product between the Company and one of its then
significant RBOC customers as a result of technical and delivery problems (which
were subsequently remedied) and the non-renewal of a refurbishment sales
agreement with that RBOC. In the fourth quarter of fiscal 1994, the Company
initiated a plan (the "fiscal 1994 Restructuring") to change certain senior
management, restructure its operations, refocus its development activities,
increase sales and attain profitable operations. Although the Company reduced
its operating costs and expenses, the Company continued to operate at a loss
during the seven months ended October 31, 1994 and five months ended March 31,
1995. However, during fiscal 1996 and fiscal 1997, the Company's sales
performance improved and the Company returned to profitability.
The Public Payphone Industry
Domestic Market. Public telecommunication services, including "coin" or
"pay" telephone service, in the United States are provided by regulated
telephone operating companies, including those owned by the RBOCs, referred to
as local exchange carriers ("LECs"), AT&T and other long distance (or
"inter-exchange") carriers ("IXCs") and independent payphone providers. The
operations of long distance and local exchange carriers are subject to extensive
regulation by the Federal Communications Commission ("FCC") and state regulatory
agencies (see "Government Regulation," below). Virtually all services offered by
LECs and IXCs, including payphone services, are provided in accordance with
tariffs filed with appropriate regulatory agencies, including the FCC.
Independent payphone providers are subject to regulations of state regulatory
agencies.
The Company believes that the RBOCs control approximately 1.4 million of an
estimated 2 million payphones in service in the United States. The remaining
installed base of payphones are owned and operated by the large independent
telephone operating companies (such as GTE), other local exchange carriers and
independent payphone providers.
The majority of payphones deployed by the RBOCs are essentially mechanical
devices that perform the functions of normal residential telephones, with the
additional ability to hold and collect or refund coins. In these conventional
payphone systems, all of the intelligence required to provide service is located
at central offices or other network locations of long distance or local exchange
carriers and is supplied to the payphone via a "coin line." In June 1984, the
FCC approved the operation of independently owned payphones, which permitted
independent payphone providers to enter the industry. However, barriers to entry
into the industry by
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independent payphone providers were substantial. The RBOCs had in place and
available the services of the central offices to provide payphone service,
including call rating and routing information, the "bong" tone that signals
callers to input calling card numbers, and collection/return signaling for the
payphone to collect or return coins. These services were not required to be made
available to independent payphone providers and placed them at a disadvantage.
Regulatory actions, together with the development of technologically advanced
microprocessor-based payphones that perform the functions of the central office
within the telephone (referred to in the industry as "smart payphones"), have
enabled independent payphone operators to enter the industry and compete
effectively with the regulated telephone operating companies.
Microprocessor-based technology provided independent payphone providers with the
capability to route and determine the proper charges ("rate") for calls and to
deploy payphones containing maintenance diagnostics and reporting features, coin
administration and credit card features, and station message detail recording
and reporting features. These features enable independent payphone providers to
either route calls to Alternate Operator Services ("AOS") or to store and
retrieve call data and billing information, thereby allowing the owner to share
in the long-distance revenues generated by the phone, reduce the cost of
maintenance and collection, and to monitor coin pilferage, among other things.
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 LECs,
long distance carriers, and cable television companies and preempts conflicting
state laws in an effort to foster greater competition in all telecommunications
market sectors, improve the quality of services and lower prices.
The Telecommunications Act expressly supersedes the consent decree which
led to the break-up of AT&T, the formation of the RBOCs, and the
line-of-business restrictions that prohibited the RBOCs from providing long
distance services and from manufacturing telecommunications equipment. The RBOCs
are now permitted to provide long distance service outside their local service
areas and to seek approval from the FCC to provide long-distance service within
their local service areas based upon a showing that they have opened their local
exchange markets to competition. After the FCC has given its approval to a
request to provide in-region long distance service, an RBOC may also engage in
the manufacture and provision of telecommunications equipment and the
manufacture of customer premises equipment, including pay telephones. Such
manufacturing enterprises must be conducted through separate affiliates for at
least three years after the date of enactment of the Telecommunications Act. In
addition, an RBOC may not discriminate in favor of equipment produced or
supplied by an affiliate, but rather must make procurement decisions based on an
objective assessment of price, quality, delivery and other commercial factors.
The Company believes that as a result of the reform legislation, the public
communications industry will undergo fundamental changes, many of which may
affect the Company's business. The legislation is likely to increase the number
of providers of telecommunications services, including perhaps providers of
payphone services. This increase in the number of providers is likely to
stimulate demand for new payphone equipment. In that 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. There can be no assurance, however, that these trends will
develop, or that if they do develop, they will have a beneficial impact on the
payphone market generally or on the Company's business in particular. See
"Government Regulation," below.
Over the past couple of years, in response to the competitive pressures
from independent payphone providers and in anticipation of passage of the
Telecommunications Act, several of the RBOCs and other local exchange carriers
began to upgrade their payphone base with microprocessor-based "smart" payphone
technology. The Company believes that approximately 15% to 20% of the installed
based of payphones
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operated by the RBOCs have been upgraded with smart payphone systems, including
those provided by the Company. The Company's prospects for future and continued
profitability are largely dependent on such trend continuing. See "Sales and
Markets --Domestic," below.
International Market. Internationally, it is estimated that there are
several million payphones in the installed base. Public communication services
in foreign countries are provided by large government controlled postal,
telephone and telegraph companies ("PTTs"), former PTTs that have been
privatized for the purpose of investing in and expanding telecommunication
networks and services, and cellular carriers. The Company believes that a trend
toward privatization and liberalization of the international telecommunication
industry is opening the international markets, previously dominated by monopoly
and government infrastructure, to increased competition. In addition, many
countries are allowing private firms to construct cellular networks and compete
with national telecommunication authorities. It is believed that some of the
large United States based telecommunications companies, including certain RBOCs,
have invested in telecommunication opportunities abroad including the
acquisition of interests in the privatized PTTs and consortiums for the
acquisition of licenses and construction of cellular networks to provide
cellular communication services. On February 15, 1997, over 60 countries signed
a World Trade Organization pact aimed at opening the global telecommunication
industry to competition. This agreement provides for most of the countries to
end their telephone monopolies by the year 2000. However, the agreement, which
must be ratified by the individual countries, will likely encounter substantial
opposition. Accordingly, there is no assurance that the agreement will be
ratified or facilitate free market conditions within the global
telecommunications market.
Presently, the density of payphone installations in many foreign countries
on a per capita basis is far less than that in the United States. The Company
believes that many of these countries are seeking to expand and upgrade their
telecommunications systems and are funding programs to provide communication
services to the public. The expansion programs include the construction of
wireless networks, and the Company believes that wireless payphone service will
become one of the primary avenues of providing communication services to the
public in certain foreign markets. The Company believes that large scale
payphone deployment programs are underway in several foreign markets, and that
the international public communications industry will continue to evolve and be
a significant growth industry over the next several decades to the extent that
privatization and the investment in and expansion of both wireline and wireless
networks progresses.
Although foreign markets are believed to be a potential source of
significant demand for the Company's products, there are impediments to the
Company's ability to penetrate such markets, including resource limitations,
regulations and the normal difficulties attendant on conducting international
business.
Products and Services
The Company manufactures and markets "coin" and "coinless" pay telephone
("payphone") systems and products that connect to and operate as integral parts
of domestic and foreign telecommunication networks. The Company also markets
payphone and payphone component repair, refurbishment and conversion upgrade
services to local exchange carriers in the United States. The Company's products
include payphones equipped with non-smart payphone electronics (for coin line
installations) and payphones equipped with microprocessor-based smart payphone
processors (for coin line and/or non-coin line installations) that connect to
wireline telecommunication networks ("wireline payphones") and payphones
equipped with a specially designed smart cellular processor that connect to
cellular telecommunication networks ("wireless payphones"). Smart payphone
processors (and non-smart electronics) are the primary electronic assemblies or
"engines" of payphones. The Company also supplies smart payphone retrofit kits
and a wide-range of payphone components (including, among other things, dials,
handsets, chrome doors, credit card readers and volume amplification modules)
required to manufacture payphones and to repair and/or upgrade deployed
payphones with enhanced technology. The Company's smart payphone systems are
provided with CoinNet payphone management software. This management system is
used by customers to remotely manage networks of the Company's smart payphone
products interactively. A significant portion of the Company's revenues is
derived from the sale of smart
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payphone processors and payphone retrofit kits to certain RBOCs that are
upgrading their installed base of payphones with technologically advanced
processors.
The Company's wireline payphone products were developed specifically for
the regulated telephone operating companies in the United States. The design of
the Company's wireline coin payphones is based upon the Western Electric
configuration developed for use in the Bell system versus the GTE configuration
developed for the independent telephone companies and also used by most of the
independent payphone providers. The Company's coinless wireless ("cellular")
payphone products were developed for use in foreign markets, and are
manufactured in several different configurations, including the Western Electric
configuration, depending on the application.
The majority of foreign countries follow the network standards of the
Consultative Committee for International Telephone and Telegraph ("CCITT"). One
of the primary technical network differences in the payphone industry between
the countries following the CCITT network standards and those following the U.S.
network standards relates to call rating. The Company has not to date offered a
wireline product that operates with networks following the CCITT standards. The
Company is presently developing a new smart payphone processor that it believes
will be capable of operating with networks following either standard. The
Company believes that this technology will enable the Company to compete in the
independent market in the United States and in foreign countries that follow the
CCITT standard. The Company's new smart payphone processor is currently
undergoing limited field trial testing and evaluation in coin line and in
non-coin line installations domestically. The Company believes that its new
smart payphone processor will be available to market during the next year. See
"Design and Product Development," below.
The following table outlines products currently offered by the Company:
PRODUCT DESCRIPTION
GEMINI SYSTEM II(R) The Gemini System II(R)("Gemini") product is a
sophisticated microprocessor-based smart payphone
processor which is programmable to operate in either a
coin line mode or a non-coin line mode. The coin line mode
uses the rating and answer supervision services provided
by the central office ("CO") and associated network. In
contrast, rating and answer supervision services are
performed within the processor when programmed to operate
in the non-coin line mode. Programmable billing, reporting
and operating cost reduction features offered with the
Gemini product include: (i) station message detail
recording, which provides for the storage of all call data
within the phone; (ii) maintenance reporting and
diagnostics, which provides for remote diagnosis of
payphone and component operating status via telemetry;
(iii) coin administration, which provides coin accounting
capability and reporting of coin box status; (iv) call
routing, which provides for the routing of calls to the
programmed carrier; and (v) credit card billing and
auditing, which provides the ability to bill credit card
calls and to identify invalid cards or card numbers. The
Gemini product is also designed to interface with an
electronic lock to control and to permit remote monitoring
of collection activities. Programmable revenue enhancement
features offered with the Gemini product include: (i)
voice messaging, which enables the user to record a
message to the called party rather than allow the call to
go uncompleted; and (ii) usage based pricing, which
administrates local call costing on the basis of time. The
features available with the Gemini product are designed to
enable customers to enhance revenues and to reduce costs
of operation and maintenance through accurate scheduling
of maintenance and collection activities. All programming,
retrieval, reporting and telemetry features are performed
remotely using the Company's payphone software management
system.
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GEMSTAR(TM) The GemStar product is a microprocessor-based smart
payphone processor designed for coin line applications
which require the rating and answer supervision functions
performed by the CO network. The GemStar product offers
the primary cost reduction and reporting features of the
Gemini product, including maintenance reporting and
diagnostics and coin administration. With added memory,
the GemStar product also provides station message detail
recording. The GemStar product is also designed to
interface with an electronic lock to control and to permit
remote monitoring of collection activities.
INMATE(TM) The InMate product is a microprocessor-based smart
payphone processor designed for prisons where cost
reduction and revenue enhancement features as well as
other specialized features are required. The InMate
product offers station message detail recording,
maintenance reporting and diagnostics, voice messaging,
usage based pricing and call routing. In addition,
specialized features include: (i) outgoing call
restriction, which can restrict calls to specified
numbers; (ii) call duration, which limits the time
duration of calls; and (iii) personal identification
numbers, which permit valid user access only. Coin
administration features are not provided in this coinless
environment.
GEMCELL(TM) The GemCell product is a microprocessor-based cellular
payphone processor that interfaces to a cellular
transceiver for use in domestic and international wireless
networks. The GemCell product was designed to have the
primary features available with the Gemini product except
coin administration. Instead, the GemCell product was
designed to accept debit ("prepay") cards, smart ("chip")
cards or credit cards as the form of payment. The GemCell
product is not currently marketed in the U.S.
COINNET(TM) The CoinNet product is a remote payphone software
management system which operates on personal computers in
a multi-tasking environment. This proprietary software
product provides the Company's customers with the ability
to manage networks of installed payphones interactively.
Downloading software changes, retrieving station message
detail recording data, maintenance and diagnostics data
and coin box data are a few of the functions of this Unix
or MSDOS-based software system.
PAYPHONES The Company offers its payphones in a wide range of
electronic and smart configurations depending upon the
application requirements of its customers. The Company's
wireline payphones include coin (or token) payphones
and/or coinless payphones, including credit card
applications. The Company's wireless, coinless payphones
include debit ("prepay") and smart (chip") card payphones
which are offered in fixed configurations as well as
configurations for mobile deployment, such as taxis,
trains and buses. The Company's smart wireline payphone
technology derives power from the telephone line,
eliminating the need for external power sources. The
Company's wireless payphones are powered by commercial
electric line power or by a solar powered platform so that
they can be deployed without network wiring and cabling.
CELLULAR
ASSISTANCE PHONE The Company also offers a specialized Cellular Assistance
Phone designed to provide emergency phone service in
specific applications, such as along highways and in
remote areas. The Cellular Assistance Phone is provided
with a cellular transceiver and is powered by commercial
electric line power or by a solar powered platform so that
it can be deployed without network wiring and cabling. The
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features of the Cellular Assistance Phone are limited to
those required for emergency situations and permit the
user to automatically dial a preset emergency assistance
number. The Cellular Assistance Phone is not currently
marketed in the United States.
PAYPHONE
COMPONENTS Payphone components supplied by the Company include, among
others, non-smart payphone electronics, touchtone dials,
handsets, coin relays, and volume amplification
assemblies. These components are manufactured at the
Company's facilities to Bellcore specifications.
SERVICES The Company provides payphone and payphone component
repair, refurbishment and upgrade conversion services for
its customers. Refurbishment services involve the
rebuilding of payphone components and sets to "like new"
condition. Upgrade conversion services include the
modification of payphone components and sets to an updated
or enhanced technology.
Sales and Markets
Domestic. The Company markets its payphone products and services
predominately to the RBOCs. In fiscal years 1995, 1996 and 1997, sales to RBOCs
accounting for greater than 10% of the Company's sales aggregated 72%, 88% and
90%, respectively, of the Company's sales revenues. During fiscal 1995,
Ameritech Services, Inc. ("Ameritech"), Bell Atlantic Corp. ("Bell Atlantic"),
Southwestern Bell Telephone Company ("SWB") and NYNEX accounted for
approximately $2.8 million, $5.8 million, $3.8 million and $2.2 million,
respectively, of the Company's sales. During fiscal 1996, Bell Atlantic, NYNEX
and SWB accounted for approximately $5.6 million, $7.9 million and $15.5
million, respectively, of the Company's sales. During fiscal 1997, Ameritech,
Bell Atlantic and NYNEX accounted for approximately $4.6 million, $5.2 million
and $20.2 million, respectively, of the Company's sales. The Company anticipates
that it will continue to derive most of its revenues from these customers, and
other regional telephone companies, for the foreseeable future. During the last
year, 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 these 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 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 price increases and expire at various dates
from June 1997 to March 1999. These sales agreements are frameworks for dealing
on open account and do not specify or commit the Company's customers to purchase
a specific volume of products or services. If orders are made, however, the
Company has agreed to fill such orders in accordance with the contract
specifications. The agreements are generally subject to termination at the
option of the customer upon 30 days notice to the Company, or if the Company
defaults under any material provision of the agreement, including provisions
with respect to performance.
In November 1996, the Company entered into a non-exclusive sales agreement,
effective July 1, 1996, to provide its Gemini smart payphones and processors,
CoinNet payphone management system and other payphone components to NYNEX for a
period of five years. This agreement superseded a December 1995 smart product
sales agreement between the Company and NYNEX. The November 1996 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
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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 performance
specifications. The agreement may be terminated by either party upon default by
the other party upon 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.
In June 1997, the Company entered into an agreement with SWB that
supersedes and terminates a December 1994 agreement between the parties. Under
the new agreement, the Company agreed to reduce SWB's remaining purchase
commitment of GemStar processors and electronic locks to approximately $3
million from approximately $8 million under the former agreement and, among
other things, upgrade SWB's payphone management system. In return, SWB made a
cash payment of $250,000 to the Company, terminated the Company's obligation to
pay royalties on sales of GemStar processors to other customers and terminated
the Company's obligation to repay $375,000 received from the sale of product
software under the December 1994 agreement. SWB also agreed to make additional
cash payments of $250,000 on July 2, 1997, $100,000 on September 1, 1997,
$150,000 on December 31, 1997 and $250,000 on March 31, 1998 to the Company
subject to the Company's compliance with the terms and conditions of the
agreement, including conditions with respect to product quality and performance,
service and repair. SWB has the right to cancel the agreement without further
obligation to TSG, including any obligation to make additional payments or to
purchase additional products, upon a default by TSG of any of the terms and
conditions contained in the agreement. SWB also has the right to cancel the
agreement without notice and without further obligation to TSG, including any
obligation to make additional payments or to purchase additional products, in
the event TSG defaults on its obligation to upgrade SWB's payphone management
system by July 2, 1997. Further, SWB may terminate the agreement by giving the
Company thirty days prior written notice, in which case, SWB is obligated to
purchase the products and make the payments sets forth in the agreement. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 -- "Financial Statements and Supplementary
Data."
The Company sells its products and services directly to its customers. The
Company involves a wide-range of personnel in its sales and marketing activities
including its Vice President of Sales and Marketing, two experienced sales
directors, three service technicians, its engineering staff, its quality
managers and its President and CEO. The Company's engineering staff and service
technicians provide support and technical services via telephone without charge,
and the Company provides field engineering support services during the initial
deployment of products and when customers encounter unusual or technical
problems. The Company's commitment to service and support throughout its
organization is directed at maintaining strong relationships with customers'
operating, technical and administrative personnel. The Company also conducts
training seminars and provides assistance to customers in the installation and
set-up of the Company's payphone software management system.
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International. The Company markets its smart wireless payphones in Korea,
Mexico, Ecuador, Venezuela and other South American countries, primarily under
distributor and reseller relationships. The Company presently has distributor
relationships in Venezuela, for the South American markets, and in Korea. The
Company also markets its products in Central American markets directly and
through an independent sales representative.
The Company's export sales during fiscal 1995, 1996 and 1997 approximated
$1.4 million, $856,000 and $461,000, respectively. The Company believes that the
international public communications market represents a growth opportunity. The
Company, however, has limited experience exporting products and operating
outside the United States and there can be no assurance that the Company will be
able to generate significant revenues from international business. Conducting
business internationally is subject to a number of risks, including political
instability, foreign currency fluctuations, adverse movements in exchange rates,
economic instability, the imposition of tariffs and import and export controls,
changes in governmental policies (including U.S. policy toward foreign
countries), general credit and business risks and other factors, one or more of
which, if they occur, could have an adverse effect on the Company's ability to
generate international sales or operations. The Company's sales to date have
been denominated in U.S. dollars and as a result, no losses related to currency
fluctuations have been incurred. For the same reason, the Company has not
engaged in currency hedging activities. There is no assurance, however, that the
Company will be able to continue to export its products in U.S. dollar
denominations or that its business will not become subject to significant
exposure to foreign currency risks. In addition, the Company intends to complete
the development and begin marketing wireline payphone products for international
CCITT applications during fiscal 1998, and there is no assurance that the
Company will be able to successfully complete the development of such products
or that it will be able to successfully market such products. Finally, many of
the Company's known and potential international competitors have substantially
greater financial and other resources than the Company and, therefore, are
formidable competitors. See "Competition," below."
The Company believes that wireless payphone services will become one of the
primary avenues of providing communication services to the public in many of the
developing nations in South America and Central America and that these markets
represent a significant growth opportunity. Many of the cellular licenses
awarded to companies in foreign markets to provide services in competition with
national communication authorities have been awarded to consortiums and
companies in which the RBOCs have invested. The Company believes that an
opportunity exists to expand its market channel within the RBOC arena by
deployment of its wireless payphone technology to international wireless
concerns affiliated with the RBOCs. The Company intends to continue to invest in
the development of wireless products and hardware for non-coin technologies
including prepay and debit cards, including smart ("chip") cards.
Competition
The Company believes that it is a significant provider of payphone products
and payphone repair services to the RBOCs. The Company operates in a highly
competitive environment and competes against numerous domestic and foreign
providers of payphones and payphone repair services that have financial,
management and technical resources substantially greater than those of the
Company. In addition, there are many other firms which have the resources and
ability to develop and market products which could compete with the Company's
products. The Company believes its ability to compete depends upon many factors
within and outside its control, including the timing and market acceptance of
new products developed by the Company and its competitors, performance, price,
reliability and customer service and support.
The Telecommunications Act lifts the restriction on the manufacturing of
telecommunications equipment by the RBOCs. After the FCC finds that an RBOC has
opened its local exchange market to competition, the RBOC, through a separate
affiliate, may manufacture and provide telecommunications equipment and may
manufacture customer premises equipment, such as payphones. As a result of the
legislation, the Company could face new competitors in the manufacture of
payphones and payphone components from one or more of the
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RBOCs or their affiliates. The RBOCs have financial, management and technical
resources substantially greater than the Company. However, the legislation does
not permit RBOCs to create joint manufacturing operations with each other. In
addition, the legislation provides that as long as Bellcore is an affiliate of
more than one RBOC, Bellcore may not engage in manufacturing telecommunications
equipment or customer premises equipment. The Telecommunications Act also
incorporates numerous safeguards to ensure that standards setting organizations
conduct themselves fairly and requires the FCC to establish a dispute resolution
process for equipment manufacturers involved in conflicts over standards
setting.
The Company believes that the primary competitive factors affecting its
business with the RBOCs are quality, price, service and delivery performance.
The Company competes aggressively with respect to the pricing of its products
and services, and since the Company's contractual agreements with the RBOCs
generally provide the Company with limited ability to increase prices if
manufacturing costs increase, the Company attempts to reduce its manufacturing
costs rather than increase its prices. The Company also attempts to maintain
inventory at levels which enable the Company to provide immediate service and to
fulfill the delivery requirements of its customers.
The Company believes that its principal competitors in the United States
include Protel Inc., Elcotel, Inc., Intellicall, Inc., Lucent Technologies and
International Totalizing Systems, Inc., and with respect to repair and
refurbishment services, Restor Industries, Inc. The Company also competes with
numerous foreign companies marketing products in the United States, including
Northern Telecom, Inc. However, the Company does not believe that foreign
competitors have yet been able to successfully penetrate the payphone industry
in the United States. Some of the Company's competitors, including Protel Inc.,
Intellicall, Inc. and Elcotel, Inc. supply payphone products to independent
payphone providers which compete with the RBOCs. During fiscal 1997, the Company
did not actively market its products to independent payphone providers.
Many of the Company's competitors are substantially larger than the Company
and have significantly greater financial, technical and marketing resources. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. It is also possible that new competitors may emerge and acquire
significant market share. Possible new competitors include large foreign
corporations, the Company's RBOC customers and other entities with substantial
resources. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which would have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, it is unlikely that
the Company will become a significant supplier of smart payphone products to all
of the RBOCs since competition for business with the RBOCs is intense.
Internationally, the Company competes with numerous foreign competitors,
all of which have financial, management and technical resources substantially
greater than the Company. These foreign competitors market payphone products
predominately to the PTT's and thereby dominate the international payphone
market. The Company believes that the primary competitive factors affecting its
international business are the ability to provide products that meet the
specific application requirements of the customers, quality and price.
The Company expects that a number of personal communications technologies
will become increasingly competitive with payphone services provided by the
telephone companies and independent payphone providers. Such technologies
include radio-based paging services, cellular mobile telephone services and
personal communication services. However, the Company believes that the payphone
industry will continue to be a major provider of telecommunications access.
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Prior to 1984, the regulated telephone companies held a monopoly in the
United States payphone market, and they continue to have a dominant share of the
payphone market. The regulated telephone companies have financial, marketing,
management and technical resources substantially greater than those of private
payphone providers. The Company believes that the regulated telephone companies
will continue to experience increasing competition from independent payphone
providers. Accordingly, the Company believes, but cannot ensure, that the
telephone operating companies can be expected to upgrade their technology base
and protect their market share.
Manufacturing, Assembly and Sources of Supply
The Company performs repair, refurbishment and conversion services and most
of its product assembly operations at its facilities. In addition, certain
components including low-density electronic circuit board assemblies, dials and
handsets, are assembled at the Company's facilities. Other components are
purchased from various distributors and manufacturers, including contract
manufacturers engaged by the Company. The Company generally assembles its smart
payphone products from assemblies produced by manufacturers under contractual
arrangements.
On October 21, 1994, the Company entered into a manufacturing agreement
with Avex Electronics, Inc. ("Avex"), a large contract manufacturer, that
provided for the production of the Company's GemStar circuit board assemblies
and payphone processor. The Company committed to purchase $12.2 million of
GemStar assemblies. At March 28, 1997, the Company had purchased the majority of
its initial commitment. The Company has also engaged Avex to manufacture the
printed circuit board assemblies for its Gemini processors, its new smart
payphone processor presently under development and other products, and has
committed to purchase approximately $5.5 million of assemblies for its new smart
payphone processor during the first year of production. The manufacturing
agreement may be terminated by either party for default upon a material breach
of the terms of the agreement by the other party, provided such breach is not
cured within a 30-day notice period. Further, the Company may terminate the
agreement at any time. However, upon a termination of the agreement by the
Company, the Company is obligated to purchase inventories held by the
manufacturer and pay vendor cancellation and restocking charges, and a
reasonable profit thereon. In addition, upon a cancellation by the Company of
its purchase obligation, or a substantial portion thereof, related to its new
smart payphone processor, the Company is obligated to pay a cancellation penalty
of up to $500,000. This cancellation obligation varies depending upon quantities
purchased by the Company and expires when the Company has substantially met its
purchase commitment. The Company is dependent upon Avex to manufacture and
supply products required to meet sales commitments under the terms of its smart
product sales agreements.
On November 18, 1994, the Company entered into an exclusive dealer
agreement with Control Module, Inc. that provided the Company with the rights to
purchase and supply electronic lock devices to SWB in accordance with the terms
of a December 1994 sales agreement between the Company and SWB. The Company
committed to purchase approximately $3.5 million of the electronic lock devices
at specified prices over a two-year period. At March 28, 1997, the Company had
satisfied its purchase commitment, and has an adequate inventory of electronic
lock devices to meet its remaining sales commitment to SWB. The dealer agreement
expired upon the Company's purchase of the committed volume.
On September 16, 1991, the Company entered into a Manufacturing Rights
Agreement (the "Manufacturing Agreement") with Commtek Industries, Inc., an
unaffiliated Taiwan corporation. The Company granted Commtek the exclusive right
to utilize the assets owned by the Company's foreign division for a period of
five years to manufacture many of the non-electronic components and assemblies
for the Company's products. The Company agreed to purchase a minimum aggregate
annual volume of $2.5 million during the first year of the agreement and $3
million for each year thereafter. The Manufacturing Agreement expired on
September 15, 1996. However, the parties have continued the supply relationship
under standard purchase arrangements. The Company believes that there are
alternative sources of supply for the components and assemblies currently
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purchased from Commtek. However, if a shortage or termination of the supply of
any one or more of such components or assemblies were to occur, the Company's
business could be materially and adversely affected.
Warranty and Service
The Company provides warranties of 90 days with respect to repair,
refurbishment and conversion services and from one to three years on its
products. Under the Company's warranty program, the Company repairs or replaces
defective parts and components at no charge to its customers. The Company's
contract manufacturers provide warranties on the electronic circuit board
assemblies ranging from 90 days to 120 days. Under warranties provided by
contract manufacturers, defective electronic circuit board assemblies are
replaced or repaired at no charge to the Company.
The Company generally enters into repair agreements with respect to its
smart products under which the Company agrees to perform non-warranty repair
services at specified prices. The Company also provides repair, refurbishment
and conversion services under agreements with its customers. See "Sales and
Markets," above.
Licenses, Patents and Trademarks
The engineering designs on which the Company's electronic products and
components are based were internally developed by the Company's engineering
staff. The Company owns eight United States patents relating to payphone
components, its smart payphone platform and other technology which expire
between April 2010 and May 2014. The Company has one patent application
outstanding. Although the Company believes that its patents and trademarks are
important to its business, it does not believe that patent protection or
trademarks are critical to the operation or success of its business. The Company
does not believe that it is infringing on the patents of others and would defend
itself against any allegations to that effect. There can be no assurance,
however, that infringement claims will not be asserted in the future or that the
results of any patent related litigation would not have a material adverse
affect on the Company's business.
The Company regards its manufacturing processes and circuit designs as
proprietary trade secrets and confidential information. To protect this
information, the Company relies largely upon a combination of agreements with
its contract manufacturers, confidentiality procedures, and employee agreements.
However, there can be no assurance that the Company's trade secrets will not be
disclosed or misappropriated.
The Company licenses certain technologies from third parties under
agreements providing for the payment of royalties. Royalty expense during the
year ended March 28, 1997 approximated $196,100. See Item 8 -- "Financial
Statements and Supplementary Data".
Design and Product Development
The Company's engineering department is staffed with software, electrical
and mechanical engineering professionals. Their activities are dedicated to the
development of new products, enhancements of the Company's deployed product
line, including the CoinNet management system, and enhancements to improve
product reliability. Their efforts are also directed to reducing product costs
through new manufacturing methods. During fiscal 1995 and 1996, the Company
expended approximately $938,000 and $1.2 million, respectively, on engineering,
research and development activities consisting primarily of the design and
development of GemStar, Gemini and GemCell products. During fiscal 1997, the
Company expanded its research and development activities for the purpose of
designing and developing a new smart payphone processor capable of operating in
domestic coin line installations, domestic non-coin line installations and in
foreign CCITT network installations. During the year ended March 28, 1997, the
Company expended approximately $1.8 million on engineering, research and
development activities, and in addition thereto, capitalized software
development expenses of $421,693.
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The Company believes that new products and product enhancements have the
potential to increase its market opportunities and are essential to its
long-term growth, particularly in international wireline markets, and the
Company's ability to fund future research and development activities, in turn,
will be dependent upon its ability to generate cash in excess of its operating
needs. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Employees
At March 28, 1997, the Company had 149 full-time employees, 3 part-time
employees and 22 temporary contract employees consisting of 112 persons engaged
in direct labor activities, 22 persons engaged in manufacturing support
activities, 20 persons engaged in administrative, sales and finance activities
and 20 persons engaged in engineering and engineering support activities. In
addition, the Company has three independent contractors engaged in product
development activities. The Company considers its relations with its employees
to be satisfactory.
At March 28, 1997, none of the Company's employees were represented by a
collective bargaining unit.
Backlog
The amount of the Company's backlog is subject to large fluctuations
because the Company's business depends upon a small number of customers and
large orders. The Company calculates its backlog by including only items for
which there are purchase orders with firm delivery schedules. Contractual
commitments are not included in backlog until purchase orders are received by
the Company. At March 28, 1997, the backlog of all products and services was
approximately $2.6 million as compared to approximately $3.8 million at March
29, 1996. The Company's objective is to ship orders within 30 days of receipt
and, therefore, the Company does not expect its backlog, other than orders with
scheduled deliveries under contractual commitments, to exceed monthly sales
levels. Accordingly, the Company's backlog at any given date is not indicative
of future revenues. 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. Accordingly, the Company's sales could be adversely
affected during certain periods of the year. The Company's sales may also be
adversely impacted near the end of the calendar year by the budget short falls
of customers. As a result, the Company's sales during its third quarter may
decline significantly in relation to other quarters. Potential Environmental
Liabilities
During the year ended March 28, 1997, the Company completed the evaluation,
assessment and monitoring of soil and groundwater contamination at one of the
Company's former facilities in Florida in accordance with requirements
stipulated by the Florida Department of Environmental Protection (the "FDEP"),
and in April 1997 received a formal "no further action status" notification for
the site from the FDEP. Accordingly, the Company has not accrued any additional
costs with respect to this site. It is possible, however, that the FDEP could
reopen the investigation in the future and require the Company to take further
actions at the site. The Company cannot estimate a range of costs, if any, that
it could incur in the future since such costs would be dependent upon the scope
of additional actions, if any, that may be required by the State of Florida.
During the year ended March 28, 1997, the Company was a Potentially
Responsible Party ("PRP") for undertaking response actions at a facility for the
treatment, storage, and disposal of hazardous substances operated by Seaboard
Chemical Corporation from 1975 to 1989 at Jamestown, North Carolina. However,
the Company, as a small generator "De Minimis" party, executed a buy-out
agreement with respect to the remediation activities at a cost of approximately
$8,200 during the year ended March 28, 1997. The Company believes, based on
information presently available to the Company, that it has no further
obligations with respect to the site. However, if additional waste is attributed
to the Company, it is possible that the Company could be liable for additional
costs. The Company cannot estimate a range of costs, if any, that it could incur
in the future
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since such costs would be dependent upon the amount of additional waste, if any,
that could be attributed to the Company.
The Company has also been notified that it is a PRP with respect to
response actions at the Galaxy/Spectron Superfund Site in Elkton, Maryland. The
Company, however, is also a De Minimis party with respect to this site, and its
proportionate share of costs to undertake response actions, the Company
believes, will likely be insignificant. The Company has received notification
that the De Minimis parties will be able to buy out and obtain a release from
any further clean-up liability at the site at a cost presently estimated at
$3.70 per gallon of contributed waste, which would amount to $2,849 with respect
to the Company's contribution. The Company has not incurred any costs with
respect to this site and believes that its ultimate costs will not be material.
Government Regulation
The Company's operations are subject to certain Federal, state and local
regulatory requirements relating to environmental, health and safety matters.
Management believes that the Company's business is operated in compliance with
applicable regulations promulgated by the Occupational Safety and Health
Administration and the Environmental Protection Agency and corresponding state
agencies which pertain to health and safety in the work place and the use,
discharge and storage of chemicals employed in its operations, respectively.
Current costs of compliance with such regulations are not material to the
Company. However, the adoption of new or modified requirements not presently
anticipated could create additional expense for the Company.
The Federal Communications Commission ("FCC") regulates under Part 15 of
its rules the operation and marketing of devices which emit radio-frequency
energy, whether intentionally or unintentionally, and which do not require an
individual license. The marketing of such devices is also regulated under Part 2
of the FCC's rules. The FCC regulates the direct connection of terminal
equipment to the public switched telephone network and the marketing of such
equipment under Part 68 of its rules. Parts 15 and 68 establish technical
standards and procedural and labeling requirements for equipment subject to
these rules. Certain modifications to equipment subject to these rules must also
comply with these technical standards and procedural and labeling requirements.
Manufacturers of products subject to Part 68 also must implement a continuing
compliance program under which products currently in production must be tested
every six months to ensure continued compliance with the applicable technical
standards. Certain types of devices sold as components or subassemblies are
exempt from the technical standards and procedural and labeling requirements of
Parts 15 and 68. If such components or subassemblies are incorporated into and
marketed as part of systems or sets subject to Part 15 or Part 68, however, such
systems or sets must comply with the applicable rules. The Company believes that
it is in compliance with Parts 15 and 68 of the FCC's rules and regulations at
March 28, 1997.
The Company believes that the regulatory climate in the United States over
recent years has begun to influence the RBOCs deployment of public communication
products. The Company also believes that the RBOCs have begun to upgrade their
payphone base with smart products that reduce their cost of management,
maintenance and coin administration and that include revenue enhancement
features. The deployment and business strategies of the public communication
divisions of the RBOCs have affected and will continue to affect the Company's
business. To the extent that these business strategies were to change, for
regulatory reasons or otherwise, the Company's prospects would be materially and
adversely affected.
On 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. Among other matters, 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 authorized RBOCs and other providers to select service
providers.
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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 expire on September
1, 1997, 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 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 was to be completed by April 15, 1997. By October 1, 1997, the
inter-exchange carriers ("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. The carrier which is the primary
beneficiary of the call will pay the per-call compensation. After one year of
deregulation of coin rates (October 1, 1998), the compensation rate would be
adjusted to equal the local coin rate charge in a particular payphone.
The order required 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. LECs were 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
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 as the RBOCs
demand.
Although dramatic regulatory changes, particularly those created by recent
legislative actions have occurred and may continue to occur, the Company
believes that the telecommunications industry will continue to be regulated in
some form by Federal and/or state authorities. There can be no assurance that
changes in regulations affecting the telecommunications industry would not have
an adverse impact on the operations of the Company's customers and, therefore,
on the operations of the Company.
Item 2. PROPERTIES
The Company's administration, sales, marketing and engineering activities
are located at its headquarters in approximately 11,800 square feet of leased
office space. The lease expires on December 31, 1997.
In November 1996, the Company executed a lease agreement with respect to a
39,200 square foot facility located in Georgia that commenced on April 1, 1997.
The Company intends to close its present corporate office facility and to
consolidate its product assembly operations and corporate activities into the
new facility. The lease has an initial term of five years and is renewable for
an additional five-year term.
The Company performs payphone assembly operations and repair, refurbishment
and conversion service operations in a 53,400 square-foot leased facility
located in Orange, Virginia. The Orange, Virginia facility is leased pursuant to
the terms of an operating lease agreement dated August 1, 1986. The lease had an
initial term of five years and was renewed for an additional five-year term on
August 1, 1991. During fiscal 1997, the Company and the lessor entered into a
lease extension agreement that extended the term of the lease to July 31, 1997
and provided the Company with the right to renew the lease for five additional
terms of one year each.
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During the third quarter of fiscal 1997, the Company closed a one hundred
thousand square-foot facility located in Paducah, Kentucky and consolidated
service operations into its Orange, Virginia facility.
The Company believes its facilities are adequate for its business.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of fiscal 1997.
--------------------
19
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was listed on the Nasdaq Small Cap Market tier
of The Nasdaq Market under the symbol "TSGI" from May 10, 1996 to October 7,
1996. On October 7, 1996, the Company's Common Stock was listed on the Nasdaq
National Market tier of The Nasdaq Market under the symbol "TSGI". Prior to May
10, 1996, there was no public trading market for the Company's Common Stock.
The high and low sales prices of the Company's Common Stock for the
quarterly periods during the period May 10, 1996 to March 28, 1997 were as
follows:
High Low
------ -----
Fiscal 1997
First Quarter (May 10, 1996 through June 28, 1996) 12 3/4 9 3/8
Second Quarter (ended September 27, 1996) 11 1/2 8 1/4
Third Quarter (ended December 27, 1996) 11 6 7/8
Fourth Quarter (ended March 28, 1997) 7 7/8 4 1/4
At March 28, 1997, the Company had 15 common stockholders of record.
However, the Company believes that there were over 400 beneficial owners of its
Common Stock at March 28, 1997.
The Company has never paid any cash dividends on its Common Stock and does
not currently intend to pay cash dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the continued
growth of its business. Under the terms of a Loan and Security Agreement between
the Company and its bank, the Company is prohibited from paying cash dividends
or other distributions on capital stock, except stock distributions.
--------------------
20
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------------- --------------------------------------------
Seven Months Five Months
Year Ended Year Ended Ended Ended Year Ended Year Ended
April 2, April 1, October 30, March 31, March 29, March 28,
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Net sales $ 30,535,968 $ 31,048,706 $ 11,108,653 $ 9,161,359 $ 33,201,686 $ 33,471,918
Cost of goods sold 24,083,319 25,761,831 9,176,134 8,226,245 26,082,055 26,638,622
General and administrative 3,333,996 3,476,932 1,742,324 850,069 2,204,915 2,391,164
expenses
Marketing and selling expenses 1,865,134 1,748,814 366,464 371,757 1,290,349 881,324
Engineering, research and
development expenses 2,241,552 2,009,524 457,553 480,495 1,197,183 1,776,611
Restructuring charges (credits) -- 2,570,652 (534,092) -- -- 62,500
Litigation settlement -- -- (261,022) -- -- (105,146)
Interest expense 809,589 911,821 599,276 356,624 941,261 399,469
Other (income) expense 200,875 54,557 (14,618) (58,250) (17,763) (116,664)
Income (loss) before taxes (1,998,497) (5,485,425) (423,366) (1,065,581) 1,503,686 1,544,038
Income tax provision -- -- -- -- (326,315) (533,379)
Net income (loss) $ (1,998,497) $ (5,485,425) $ (423,366) $ (1,065,581) $ 1,177,371 $ 1,010,659
Income (loss) per common and
common equivalent share (1)(2)
Primary $ (0.30) $ 0.30 $ 0.22
Assuming full dilution $ (0.30) $ 0.30 $ 0.22
Weighted average number of
common and common equivalent
shares outstanding
Primary 3,541,778 3,870,889 4,780,263
Assuming full dilution 3,541,778 3,870,889 4,780,263
Financial Position
Current assets $ 14,213,270 $ 9,742,477 $ 7,579,857 $ 8,551,369 $ 12,741,489 $ 14,865,472
Total assets 18,868,906 13,421,291 10,397,376 15,669,648 19,633,764 19,772,382
Borrowings under revolving
credit agreement 6,727,726 5,352,040 1,660,965 970,197 -- 3,810,961
Current maturities under
long-term debt and capital
lease obligations (3) 827,198 1,283,792 877,557 813,917 118,444 --
Current liabilities 12,942,935 13,006,714 8,190,910 6,856,802 8,347,509 6,644,652
Working capital (deficit) 1,270,335 (3,264,237) (611,053) 1,694,567 4,393,980 8,220,820
Long-term debt and capital
lease obligations (4) 2,068,287 957,104 3,627,596 3,532,867 3,414,586 --
Long-term borrowings under
revolving credit agreement (5) -- -- -- -- 1,093,735 --
Notes payable to stockholders (3)(4) -- -- 400,000 2,800,000 2,800,000 --
Other liabilities -- 862,517 -- 375,000 378,198 --
Total liabilities 15,011,222 14,826,335 12,218,506 13,564,669 16,034,028 6,644,652
Retained earnings (deficit) (18,964,484) (24,449,909) (24,873,275) (1,065,581) 111,790 1,122,449
Stockholders' equity (deficit) $ 3,857,684 $ (1,405,044) $ (1,821,130) $ 2,104,979 $ 3,599,736 $ 13,127,730
</TABLE>
(1) Assuming the Acquisition had occurred on April 2, 1994, the Company's and
the Predecessor's net loss for the year ended March 31, 1995 would have
approximated $1,599,000 and the net loss per common and common equivalent
share outstanding (primary and assuming full dilution) would have been
($.45).
(2) Income (loss) per common and common equivalent share and the weighted
average number of common and common equivalent shares outstanding are not
presented for periods prior to the five months ended March 31, 1995 since
such data is not meaningful for periods prior to the Acquisition on October
31, 1994.
(3) Subordinated notes payable to stockholders of $400,000 were retired in
connection with the Acquisition. These notes were classified as current
maturities under long-term debt and capital lease obligations at April 1,
1994.
(4) Indebtedness under a bank term note in the amount of $2,200,000, a bank
term note in the amount of $309,524 and notes payable to stockholders of
$2,800,000 were repaid from the proceeds from the Company's initial public
offering of securities in May 1996.
(5) Indebtedness under the revolving credit agreement was repaid from the
proceeds from the Company's initial public offering of securities in May
1996. Accordingly, such indebtedness is classified as a long-term
obligation at March 29, 1996.
The selected financial data and related footnotes set forth above should be
read in connection with Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8 -- "Financial
Statements and Supplementary Data."
21
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Fiscal 1997 and fiscal 1996 operating performance reflects the successful
outcome of initiatives and plans set in motion during the later part of fiscal
1994 and throughout fiscal 1995 to turn around the business, to return to
profitability, and to improve the Company's financial condition and liquidity.
These initiatives included a change in senior management, a restructuring of the
organization, and raising additional capital and financing. The restructuring
was also directed at reducing operating costs and expenses and increasing sales
and gross profit margins. In addition, the Company refocused its engineering and
product development activities to resolve certain technical product problems
experienced prior to the restructuring and to develop new smart payphone
products that would position the Company to capture a significant share of the
market for the technological upgrade of the installed base of payphones owned by
the RBOCs.
This discussion 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.
Background - The Acquisition
On October 31, 1994, TSG Acquisition Corp., a wholly-owned subsidiary of
Wexford Partners Fund, L.P. ("Wexford"), acquired all of the outstanding capital
stock of the Company pursuant to an Agreement and Plan of Merger dated October
11, 1994 between Wexford, TSG Acquisition Corp., the Company and the majority
holders of the Company's capital stock (the "Acquisition"). The consideration
paid by TSG Acquisition Corp. aggregated $3,500,000 including contingent
consideration of $329,709, consisting of cash of $230,117 and a subordinated
note of the Company in the principal amount of $99,592, placed in escrow and
distributed to former stockholders in September 1995. The aggregate
consideration consisted of $3,004,000 to acquire the outstanding capital stock
of the Company and $496,000 to retire a $400,000 subordinated master promissory
note payable to former stockholders and related accrued interest and preference
fees of $96,000. Aggregate cash payments to former stockholders, including the
contingent consideration and the retirement of the subordinated master
promissory note, accrued interest and preference fees of $496,000, amounted to
$3,222,090. Consideration of $277,910 was withheld from amounts paid to former
stockholders to pay certain liabilities of the Company.
The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase price of $3,170,291, exclusive of contingent
consideration, was pushed down and allocated to the net assets acquired based
upon their fair values. The excess of the purchase price over the estimated fair
value of the net assets acquired of $3,853,877 was recorded as goodwill. Upon
distribution of the escrow consideration in September 1995, the aggregate
purchase price was increased to $3,500,000, which increased the excess purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $329,709. Prior to the Acquisition, the Company is sometimes
referred to as the "Predecessor."
In conjunction with the Acquisition, TSG Acquisition Corp. was merged into
the Company. The outstanding shares of the Company's capital stock were
cancelled and the outstanding shares of capital stock of TSG Acquisition Corp.
were exchanged for one share of the Company's common stock, $.05 par value (the
"merger share"). In addition, on October 31, 1994, the Company amended its
Certificate of Incorporation to reflect authorized capital consisting of 10
million shares of common stock, $.01 par value (the `Common Stock), and 100,000
shares of preferred stock, $100 par value. Further, the Company entered into an
investment agreement with Wexford, Acor S.A. ("Acor") and Firlane Business Corp.
("Firlane"), referred to herein collectively as the "investors." Pursuant to
that investment agreement, the Company issued 3.5 million shares of Common Stock
in exchange for the merger share. Also, the Company borrowed $2.8 million from
Wexford and
22
<PAGE>
Acor and issued 10% interest bearing subordinated promissory notes in respect
thereof due November 1, 1999 (the "Affiliate Notes") to such persons.
The accompanying analysis compares the combined results of operations of
the Company and the Predecessor for the fiscal year ended March 31, 1995 and the
Predecessor for the fiscal year ended April 1, 1994, the results of operations
of the Company for the fiscal year ended March 29, 1996 and the combined results
of operations of the Predecessor and the Company for the fiscal year ended March
31, 1995 and the results of the Company for the fiscal years ended March 28,
1997 and March 29, 1996.
Because of the Acquisition, certain financial information described below
is not comparable in all respects. In addition, comparability is affected
because of the following purchase accounting adjustments made by the Company on
October 31, 1994: (i) a net decrease in inventories of $44,734 consisting of a
reduction of $491,397 attributable to a change in the method used to estimate
the amount of manufacturing overhead included in inventories to a method based
on labor factors, not on a combination of labor and material factors, offset by
an increase in the basis of inventories of $446,664 to reflect their estimated
net realizable value; (ii) an increase in the basis of property and equipment of
$382,733 to reflect their estimated fair value; (iii) an increase in debt
obligations of $106,275 to reflect present values of amounts to be paid
determined at current interest rates; (iv) a net increase in accrued liabilities
of $124,859 to reflect the acquisition expenses of TSG Acquisition Corp. to be
paid by the Company, offset by a reduction of accrued interest and preference
fees of $96,000 retired in connection with the Acquisition; (v) a reduction in
accrued restructuring charges of $202,910 retired in connection with the
Acquisition; (vi) a reduction of notes payable to stockholders of $400,000
retired in connection with the Acquisition; (vii) a net increase in other assets
of $429,728 consisting of an increase in identifiable intangible assets
(consisting of product software, patents, customer contracts, and unpatented
technology) of $584,095 to reflect their estimated fair values, offset by a
reduction in goodwill and deferred debt issuance expenses of $154,367 recorded
by the Predecessor; and (viii) an increase in goodwill related to the
Acquisition of $3,853,877. The principal impacts of the purchase accounting
adjustments on the Company's results of operations for the five months ended
March 31, 1995 consisted of a slight increase in depreciation due to the
increase in the basis of property and equipment and their estimated useful
lives, an increase in amortization expense of approximately $100,000 due to the
net increase in the basis of intangible assets, including goodwill, and their
estimated useful lives, and an increase in cost of goods sold of approximately
$235,000 due to the revaluation of inventories. The change in the method used to
estimate the amount of manufacturing overhead included in inventories did not
have a significant effect on the Company's results of operations for the five
months ended March 31, 1995.
During the fiscal years ended March 29, 1996 and March 28, 1997, the
Company has reduced goodwill by approximately $653,000 in the aggregate with
respect to the realization of acquired deferred tax assets.
--------------------
23
<PAGE>
Results of Operations
Year Ended March 28, 1997 Compared to the Year Ended March 29, 1996
The following table shows certain line items in the Company's consolidated
statements of operations for the years ended March 28, 1997 and March 29, 1996
that are discussed below together with the change expressed as a percentage.
Year Ended Year Ended Percentage
March 28, March 29, Increase
1997 1996 (Decrease)
------------ ------------ -----------
Sales $ 33,471,918 $ 33,201,686 1%
Cost of goods sold 26,638,622 26,082,055 2%
General and
administrative expenses 2,391,164 2,204,915 8%
Marketing and selling expenses 881,324 1,290,349 -32%
Engineering, research and
development expenses 1,776,611 1,197,183 48%
Restructuring charges 62,500 -- --
Litigation settlement (105,146) -- --
Interest expense 399,469 941,261 -58%
Other income 116,664 17,763 557%
Income tax expense 553,379 326,315 70%
Overview. The Company's operations for the year ended March 28, 1997
reflect a slow down in sales during the last six months of the year which the
Company attributes to several factors as explained below, an increase in
engineering, research and development spending of $579,428 directed at the
development of a new wireline smart payphone product for the RBOC, independent
and international markets, a gain on the settlement of litigation of $105,146,
restructuring charges of $62,500, lower interest expense as a result of debt
repayments from proceeds of an initial public offering and higher income taxes
due to limitations on utilization of net operating loss carryforwards.
Sales. The increase in sales during fiscal 1997 as compared to fiscal 1996
is primarily related to volume fluctuations. Sales of smart payphone products
and components decreased by approximately $.6 million (3%) to $21.2 million in
fiscal 1997 as compared to $21.8 million in fiscal 1996, and accounted for
approximately 63% of sales during fiscal 1997 as compared to 66% of sales during
fiscal 1996. Sales related to refurbishment, repair and conversion services and
related products during fiscal 1997 increased by approximately $1.2 million
(11%) to $11.8 million as compared to $10.6 million in fiscal 1996, and
accounted for 35% of sales as compared to 32% in fiscal 1996. Export sales
consisting primarily of wireless products during fiscal 1997 approximated
$461,000 as compared to approximately $856,000 during fiscal 1996.
The Company believes that the reduction in smart product sales volume was
attributable to several key factors, including the uncertainties created by
merger activities among the Company's RBOC customers, the efforts of the RBOCs
to comply with the requirements of the Telecommunications Act of 1996 during the
last six months of the Company's fiscal year, and related budget implications.
Notwithstanding, sales from refurbishment, repair and conversion services and
related products increased as a result of additional volume from one of the
Company's customers that has not begun a smart product upgrade conversion
program. Export sales activities during fiscal 1997 did not generate volume
comparable to fiscal 1996, a trend the Company expects to reverse during the
coming year.
The Company believes, but cannot assure, that the decline in smart product
sales volume during the last six months of fiscal 1997, which is believed to be
attributable to efforts of the RBOCs to comply with the
24
<PAGE>
Telecommunications Act of 1996, represents a short term trend, and that its
sales will be favorably affected by the implications of the new law during
fiscal 1998 and beyond.
During fiscal 1997, the Company entered into a non-exclusive sales
agreement, effective July 1, 1996, to provide its Gemini smart payphones and
processors, CoinNet payphone management system and other payphone components to
NYNEX for a period of five years. Sales of smart payphone products during the
year ended March 28, 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 entered into the new contract, no significant orders were
received until February 1997, which the Company believes was due to the factors
enumerated above. During the year ended March 29, 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 committed volume under the agreement as of March 29,
1996. However, sales to SWB under the 1994 contract were not significant during
the Company's 1997 fiscal year, a condition the Company believes is attributable
to a change in deployment strategies of SWB. In June 1997, the Company entered
into an agreement with SWB that supersedes and terminates the December 1994
agreement. Under the new agreement, the Company agreed to reduce SWB's remaining
purchase commitment to approximately $3 million from approximately $8 million
under the former agreement and, among other things, upgrade SWB's payphone
management system. In return, SWB made a $250,000 cash payment to the Company,
terminated the Company's obligation to pay royalties on sales of GemStar
processors to other customers and terminated the Company's obligation to repay
$375,000 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments of $250,000 on July
2, 1997, $100,000 on September 1, 1997, $150,000 on December 31, 1997 and
$250,000 on March 31, 1998 to the Company subject to the Company's compliance
with the terms and conditions of the agreement, including conditions with
respect to performance, service and repair. See Item 1 -- "Business -- Sales and
Markets" for a discussion of the Company's dependence on significant customers
and contractual relationships. Also, see "Liquidity and Capital Resources --
Operating Trends and Uncertainties," below.
Cost of Goods Sold. The increase in cost of products sold is primarily
attributable to the increase in sales, the increase in the percentage of sales
related to refurbishment, repair and conversion services and related products
and certain sales price reductions. Incremental costs of approximately $350,000
incurred in connection with the closure of one of the Company's manufacturing
facilities and the consolidation of service operations were offset substantially
by gains of approximately $273,000 from changes in estimates of contingent
liability obligations recorded in connection with the Acquisition. Production
costs as a percentage of sales increased to approximately 80% during the year
ended March 28, 1997 as compared to 79% during the year ended March 29, 1996 due
to these factors.
General and Administrative Expenses. The increase in general and
administrative expenses is primarily related to incremental costs and expenses
incurred as a public reporting entity after the consummation of the Company's
initial public offering in May 1996.
Marketing and Selling Expenses. The decrease in marketing and selling is
primarily attributable to the expiration of a smart product royalty agreement on
June 30, 1996 and the related decrease in royalty expense.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased 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 year ended March 28, 1997,
the Company capitalized approximately $422,000 of software development costs in
connection with the development of its new smart payphone processor.
25
<PAGE>
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. The decrease in interest expense is 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
facilities consolidation plan intended to augment its on-going productivity and
quality improvement programs. The consolidation plan provided for the closure of
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 year ended March 28, 1997. These
restructuring charges consisted of severance obligations and estimated losses
related to the abandonment of assets in connection with the closure of
facilities.
Other Income. The Company assigned the capital lease obligation related to
its former Kentucky facility to an unaffiliated third party, and recorded the
retirement of the outstanding capital lease obligation and the disposition of
the property during the fiscal year ended March 28, 1997. In connection with
this transaction, the Company 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 year ended March 28, 1997 as compared to the
year ended March 29, 1996 is primarily attributable to the gain from the
disposition of the facility and an increase in income related to the sublease of
a portion of property leased by the Company.
Income Tax Expense. The increase in income tax expense is primarily due to
a reduction in tax benefits from utilization of net operating loss
carryforwards. Benefits of net operating loss carryforwards used to offset
current tax expense amounted to $71,995 during fiscal 1997 as compared to
$334,985 during fiscal 1996. Deferred tax benefits of $492,110 were recognized
during the year ended March 28, 1997 as compared to $50,544 during the year
ended March 29, 1996. However, deferred tax benefits related to acquired
deferred tax assets aggregating $442,070 were applied to goodwill during fiscal
1997 as compared to $211,193 during fiscal 1996.
--------------------
26
<PAGE>
Year Ended March 29, 1996 Compared to the Year Ended March 31, 1995
The following table shows certain line items in the Company's consolidated
statement of operations for the year ended March 29, 1996 and in the Company's
and Predecessor's consolidated statement of operations for the year ended March
31, 1995 that are discussed below and that changed significantly between the two
periods indicated together with the change expressed as a percentage.
Year Ended Year Ended Percentage
March 29, March 31, Increase
1996 1995 (Decrease)
------------ ------------ ----------
Sales $ 33,201,686 $ 20,270,012 64%
Cost of goods sold 26,082,055 17,402,379 50%
General and administrative expenses 2,204,915 2,592,393 -15%
Marketing and selling expenses 1,290,349 738,221 75%
Engineering, research and development
expenses 1,197,183 938,048 28%
Restructuring credits -- 534,092 -100%
Litigation settlement -- 261,022 -100%
Income tax expense 326,315 -- --
Overview. The Company's results for the year ended March 29, 1996 reflect a
significant increase in sales volume, an increase in operating expenses and an
income tax provision of $326,315 on pre-tax profits of $1.5 million as compared
to the previous year during which the Company reported a loss of $1.5 million.
The results of the Predecessor during the seven months ended October 30, 1994
includes a gain from the recognition of a litigation settlement of $261,022,
restructuring credits of $534,092 and acquisition expenses of $166,000. The
results of operations of the Company for the five months ended March 31, 1995
include the effects of the Acquisition consisting primarily of amortization of
intangible assets of approximately $100,000 and an increase in cost of goods
sold of approximately $226,000. The results of the Company during fiscal 1996
include the effects of the Acquisition consisting primarily of amortization of
intangible assets, including goodwill, of $253,000 and an increase in cost of
goods sold of approximately $221,000.
Sales. Sales of smart payphone products and components during fiscal 1996
approximated $21.8 million as compared to approximately $6.6 million during
fiscal 1995. Sales attributable to refurbishment and conversion services and
related payphone components approximated $10.6 million during fiscal 1996 as
compared to approximately $12.3 million during fiscal 1995. Sales of wireless
payphone products and components consisting primarily of export sales
approximated $856,000 during fiscal 1996 as compared to approximately $1.4
million during fiscal 1995. The $15.2 million increase in sales of smart
payphone products and components during fiscal 1996 as compared to fiscal 1995
was primarily attributable to an increase in sales volume of GemStar products,
Gemini products and electronic locks under sales agreements entered into in
December 1994 and December 1995. Sales increases attributable to GemStar, Gemini
and electronic lock products were offset by a reduction in sales volume of
Inmate products, which the Company believes is primarily attributable to the
saturation of the inmate institution market. The 14% decline in sales from
repair, refurbishment and conversion services and related payphone components
during fiscal 1996 as compared to fiscal 1995 was primarily due to a reduction
in volume that the Company believes was attributable to implementation of smart
product conversion programs by certain customers, as well as competition. The
decline in the Company's wireless product sales during fiscal 1996 as compared
to fiscal 1995 was primarily due to a decrease in export volume to Mexico, which
the Company believes was attributable to the devaluation of the Mexican peso
during fiscal 1995.
Cost of Products Sold. The increase in cost of products sold is primarily
attributable to the 64% increase in sales during fiscal 1996 as compared to
fiscal 1995. Production costs as a percentage of sales
27
<PAGE>
declined to 79% during fiscal 1996 as compared to 86% during fiscal 1995 as a
result of the increase in volume. In addition, during the five months ended
March 31, 1995, the Company accrued damages of $200,000 attributable to a
product recall initiated in April 1995 (see "Operating Trends and
Uncertainties," below). Purchase adjustments from the revaluation of inventories
in connection with the Acquisition had the impact of increasing cost of goods
sold by $226,000 and $221,000 during the five months ended March 31, 1995 and
year ended March 29, 1996, respectively.
General and Administrative Expenses. The decline in general and
administrative expenses is primarily related to cost reductions associated with
a restructuring initiated during the latter part of fiscal 1994 and expenses of
$166,000 incurred by the Predecessor during the seven months ended October 30,
1994 in connection with the Acquisition. Amortization of goodwill and other
intangible assets recorded in connection with the Acquisition approximated
$253,000 during fiscal 1996 as compared to approximately $100,000 during the
five months ended March 31, 1995.
Marketing and Selling Expenses. The increase in marketing and selling
expenses is primarily due to royalties on sales of GemStar and Gemini products
incurred under an asset purchase agreement dated January 11, 1991, and an
elimination of royalties during the first six months of fiscal 1995 pursuant to
a November 9, 1994 amendment to the royalty provisions of that agreement.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased primarily due to an expansion of engineering
resources and product development activities, which had been reduced during
fiscal 1995 as a result of the restructuring initiated during the later part of
fiscal 1994.
Restructuring Credits. During the five months ended March 31, 1995, the
Company settled severance obligations under employment contracts terminated in
fiscal 1994 and negotiated the termination of certain non-cancelable lease
obligations with respect to facilities closed in connection with the
restructuring initiated at the end of fiscal 1994. The severance and lease
obligations were settled on terms more favorable than estimated during the year
ended April 1, 1994, which resulted in the recognition of restructuring credits
of $248,684 and $274,659, respectively, during the seven months ended October
30, 1994. Restructuring credits recognized during the seven months ended October
30, 1994 aggregated $534,092.
Litigation Settlement. During the seven months ended October 30, 1994, the
Company settled litigation against a supplier to recover costs and damages
attributable to defective components supplied to the Company, and realized a
gain of approximately $261,000, net of legal fees of $56,000.
Income Tax Expense. During the year ended March 29, 1996, the Company
generated a taxable profit as compared to a net loss during the year ended March
31, 1995. Benefits of net operating loss carryforwards used to offset current
tax expense during fiscal 1996 aggregated $334,985. Deferred tax benefits
recognized during fiscal 1996 of $50,544 were offset by benefits of acquired
deferred tax assets aggregating $211,193 that were used to reduce goodwill.
There was no tax provision during fiscal 1995 as a result of the reported net
loss.
--------------------
28
<PAGE>
Year Ended March 31, 1995 Compared to the Year Ended April 1, 1994
The following table shows certain line items in the Company's and the
Predecessor's consolidated statement of operations for the year ended March 31,
1995 and in the Predecessor's consolidated statement of operations for the year
ended April 1, 1994 that are discussed below and that changed significantly
between the two periods indicated together with the change expressed as a
percentage.
Year Ended Year Ended Percentage
March 31, April 1, Increase
1995 1994 (Decrease)
------------ ------------ ----------
Sales $ 20,270,012 $ 31,048,706 -35%
Cost of goods sold 17,402,379 25,761,831 -32%
General and administrative expenses 2,592,393 3,476,932 -25%
Marketing and selling expenses 738,221 1,748,814 -58%
Engineering, research and development
expenses 938,048 2,009,524 -53%
Restructuring charges (credits) (534,092) 2,570,652 121%
Litigation settlement 261,022 -- --
Overview. The results of the Company and Predecessor for the year ended
March 31, 1995 reflect a significant decrease in sales and a significant
decrease in operating expenses from restructuring activities at the end of
fiscal 1994. The results of the Predecessor for the year ended April 1, 1994
reflect restructuring charges of $2,570,652. The results of the Predecessor
during the seven months ended October 30, 1994 include the recognition of
restructuring credits and the gain from recognition of a litigation settlement
of $534,092 and $261,022, respectively, and expenses of approximately $166,000
incurred in connection with the Acquisition. The results of the Company during
the five months ended March 31, 1995 included the recognition of product recall
damages of $200,000 and the effects of the Acquisition consisting primarily of
an increase in cost of goods sold of approximately $235,000 and amortization of
intangible assets, including goodwill, of approximately $100,000.
Sales. Sales of smart payphone products and components during fiscal 1995
approximated $6.6 million as compared to $9.0 million during fiscal 1994. Sales
from refurbishment and conversion services and related payphone components
approximated $12.3 million during fiscal 1995 versus $21.2 million during fiscal
1994. Sales of wireless payphone products and components consisting primarily of
export sales approximated $1.4 million in fiscal 1995 versus $833,000 in fiscal
1994. The 27% decline in sales of smart payphone products and components and the
42% decline in sales from refurbishment and conversion services and related
payphone components resulted primarily from a decrease in the volume of business
due to the termination of a sales agreement for a first generation smart product
and the non-renewal of a refurbishment sales agreement between the Company and
one of the RBOCs during the latter part of fiscal 1994. The volume reductions in
fiscal 1995 resulting from the termination and non-renewal of these agreements
were offset somewhat by sales under the terms of a sales agreement between the
Company and SWB executed in December 1994. Sales under this agreement during the
five months ended March 31, 1995 approximated $2.6 million. The increase in the
Company's wireless product sales in fiscal 1995 as compared to fiscal 1994 is
attributable to an increase in export volume. However, during the third quarter
of fiscal 1995, the devaluation of the Mexican peso had an adverse impact on
export sales to one of the Company's primary foreign customers.
Cost of Products Sold. The decrease in cost of products sold is primarily
attributable to a 35% decrease in sales, which was offset by a net increase in
production costs during fiscal 1995. Higher production costs as a percentage of
sales, damages of $200,000 attributable to a product recall initiated in April
1995 (see "Operating Trends and Uncertainties," below) and the effects of the
Acquisition consisting primarily of an increase in cost
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of goods sold of approximately $235,000 for the five months ended March 31, 1995
offset decreases in provisions for obsolete and excess inventory of
approximately $758,000 and warranty expense of approximately $347,000 related to
reserves established in fiscal 1994.
General and Administrative Expenses. In connection with a restructuring
initiated at the end of fiscal 1994, the Company closed one of its manufacturing
facilities and three satellite office locations and relocated its corporate
headquarters from Pennsylvania to Georgia. The decrease in general and
administrative expenses is primarily attributable the restructuring. Cost
reductions attributable to the fiscal 1994 restructuring were offset somewhat by
Acquisition expenses of approximately $166,000 during the seven months ended
October 30, 1994 and amortization expense of approximately $100,000 during the
five months ended March 31, 1995.
Marketing and Selling Expenses. The reduction in marketing and selling
expenses is attributable to personnel and other operating expense reductions
resulting from the fiscal 1994 restructuring and the curtailment of
participation at trade shows during fiscal 1995. In addition, royalty expense
during fiscal 1995 declined by approximately $188,000 as a result of an
amendment to the royalty provisions of an asset purchase agreement dated January
11, 1991 that eliminated royalty obligations for the six months ended September
30, 1994.
Engineering, Research and Development Expenses. The reduction in
engineering, research and development expenses is attributable to personnel and
other operating expense reductions resulting from the fiscal 1994 restructuring
and the refocus of research and development activities towards development of
smart payphone products.
Litigation Settlement. During the seven months ended October 30, 1994, the
Company settled litigation against a supplier to recover costs and damages
attributable to defective components supplied to the Company, and realized a
gain of approximately $261,000, net of legal fees of $56,000.
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
March 28, 1997, 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 year ended
March 28, 1997 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 under a 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
indebtedness under a revolving credit agreement of $3,808,589.
The Loan Agreement
At March 29, 1996, the Company was able to borrow up to a maximum of $9
million under term and installment notes and a revolving credit agreement under
the terms of a Loan and Security Agreement (the "Loan Agreement") between the
Company and its bank. Indebtedness under the Loan Agreement at March 29, 1996
included $2,525,000 outstanding under term and installment notes, including a
$2.2 million term note due November 30, 1997, and $1,093,735 outstanding under
the revolving credit agreement.
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At March 28, 1997, the Company was able to borrow up to a maximum of $9
million under the revolving credit agreement of which $3,810,961 had been drawn
down on that date.
At March 29, 1996 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 interest rate was reduced from 2% above a
base rate quoted by Citibank, N.A. on March 1, 1996. The base rate at March 28,
1997 and March 29, 1996 was 8.5% and 8.25% per annum, respectively. 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 prohibit 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 indebtedness
outstanding under the Loan Agreement. Although the Company was in compliance
with the covenants set forth in the Loan Agreement at March 28, 1997, 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
alternative financing sources would be available on commercially reasonable
terms, or at all. Further, the Loan Agreement expires on November 30, 1997
unless it is renewed in accordance with its terms. The Company is presently
discussing renewal options with its bank and is seeking other refinancing
sources. Although the Company believes that it will either negotiate an
acceptable renewal or refinancing agreement, there is no assurance that its
efforts will be successful. The Company's liquidity would be materially and
adversely affected if it is unable to renew or refinance is present credit
facility.
The Company borrows funds to finance increases in accounts receivable and
inventories and decreases in bank overdrafts, accounts payable and accrued
liability obligations to the extent that such requirements exceed cash provided
by operations, if any. The Company also uses the financing available under the
revolving credit agreement to fund operations, investing activities and payments
on long-term debt when necessary. The Company measures its liquidity based upon
the amount of funds that the Company is able to borrow under the Loan Agreement,
which varies based upon operating performance and the value of current assets
and liabilities.
Cash Flows From Financing Activities
During the seven months prior to the Acquisition ended October 30, 1994,
the Company generally maintained its outstanding borrowings under the revolving
credit agreement at the maximum amount permitted. Financing available to the
Company during this period was not sufficient to fund the working capital,
capital expenditure and debt service requirements of the Company, and the
Company was unable to meet its accrued liability and supplier obligations as
they became due. In April 1994, amounts borrowed under the revolving credit
agreement between the Company and its bank exceeded the maximum amount
permitted. However, the Company and its bank entered into an amendment that
provided for an over-advance of $300,000 that was repaid by May 31, 1994 in
accordance with the terms of the amendment.
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During the seven months ended October 30, 1994, the Company was in default
of the terms of unsecured promissory notes, with outstanding balances
aggregating $425,536 at April 1, 1994, as a result of its failure to make
certain royalty payments. However, on November 9, 1994, the Company entered into
an amendment agreement which brought the Company into compliance with the terms
of the note agreements. The Company executed a non-interest bearing promissory
note payable in nineteen equal monthly installments in the principal amount of
$206,595 representing unpaid royalties as of October 30, 1994. This note was
repaid during the year ended March 28, 1997.
In June 1994, the Company borrowed $400,000 from its preferred stockholders
and issued a master subordinated promissory note payable on demand bearing
interest at a rate of 10% per annum. Under the terms of the master subordinated
promissory note, a loan preference fee in an escalating amount which, when added
to accruing interest, would equal 5% of the outstanding principal for each month
the note was outstanding became immediately due and payable upon a change in
ownership of the Company. In connection with the Acquisition, the subordinated
master promissory note together with accrued interest and preference fees in the
amount of $96,000 were retired.
Concurrently with the issuance of the subordinated master promissory note,
the Company and its bank entered into an amendment to the Loan Agreement and a
$500,000 installment note obligation with a then outstanding balance of $62,500.
The Company borrowed $402,500 and executed an amended installment note in the
amount of $465,000 payable in eighteen monthly installments of $25,000 and one
final installment of $15,000. This note was repaid during the year ended March
29, 1996.
Pursuant to the October 31, 1994 Investment Agreement entered into in
connection with the Acquisition, the Company borrowed $2.8 million from Wexford
and Acor and issued 10% interest bearing subordinated promissory notes due
November 1, 1999. The Company issued a 10% interest bearing subordinated note to
Wexford in the principal amount of $2,361,082 dated October 31, 1994. The
Company issued 10% interest bearing subordinated promissory notes to Acor in the
principal amount of $208,216.73 dated October 31, 1994, $99,591.93 dated October
31, 1994, $83,497.82 dated November 10, 1994 and $47,611.52 dated December 23,
1994.
Concurrently with the Acquisition, the Loan Agreement was amended, and $2.2
million of debt outstanding under the revolving credit agreement was converted
into a term note payable on November 30, 1997. However, proceeds of $2,569,298
from the subordinated promissory notes dated October 31, 1994 issued to Wexford
and Acor were used to retire debt outstanding under the revolving credit
agreement, and after such repayment, the initial principal balance outstanding
under the $2.2 million term note on October 31, 1994 amounted to $1,291,667.
Between October 31, 1994 and March 31, 1995, the Company borrowed the balance
available under the $2.2 million term note of $908,333, and also re-borrowed
$970,196 under its revolving credit agreement.
Net payments of indebtedness under the Company's revolving credit agreement
during the seven months ended October 31, 1994 and five months ended March 31,
1995 amounted to $1,491,074 and $1,599,102, respectively. Net proceeds under the
revolving credit agreement during the year ended March 29, 1996 amounted to
$123,538. Net proceeds under the Company's revolving credit agreement during the
year ended March 28, 1997 amounted to $2,717,226. Net proceeds under the
revolving credit agreement during the year ended March 28, 1997 reflect the
repayment of $3,808,589 of indebtedness from the proceeds of the Company's
initial pubic offering.
During the year ended March 28, 1997, the Company repaid, from the proceeds
of the Company's initial public offering, $2.8 million of outstanding
indebtedness under the 10% interest bearing subordinated promissory notes issued
to Wexford and Acor.
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Principal payments on other long-term debt and capital lease obligations
during the seven months ended October 30, 1994, five months ended March 31, 1995
and year ended March 29, 1996 amounted to $459,084, $482,307 and $813,754,
respectively. Principal payments on other long-term debt and capital lease
obligations during the year ended March 28, 1997 aggregated $2,599,521,
including repayment of the $2.2 million term note due November 30, 1997 and
repayment of $309,524 outstanding under a $650,000 term note due November 30,
1997 from the proceeds of the Company's initial public offering. Principal
payments on other long-term debt and capital lease obligations during the year
ended March 28, 1997, excluding the repayments of term note indebtedness from
the proceeds of the offering, amounted to $89,997. The decrease in principal
payments (exclusive of repayments made from proceeds of the offering) for the
year ended March 28, 1997 as compared to the year ended March 29, 1996 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.
The Company has also established a cash management program with its bank
under 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 seven months ended October 30, 1994,
five months ended March 31, 1995 and year ended March 29, 1996, the Company's
bank overdrafts increased by $323,633, $120,714 and $501,761, respectively.
During the year ended March 28, 1997, the Company's bank overdrafts decreased by
$759,751.
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 year ended March 28, 1997, the Company issued 5,000 shares of
common stock upon the exercise of incentive stock options at an aggregate
exercise price of $5,000, and issued 6,760 shares of common stock upon the
exercise of rights granted under the Company's 1995 Employee Stock Purchase Plan
for an aggregate purchase price of $51,714.
Cash Flows From Operating Activities
During the seven months ended October 30, 1994, the Company generated
$914,820 of cash from operating activities. The Company used $99,688 of cash,
net of non-cash charges and credits of $323,678, to fund operating losses during
the seven months ended October 30, 1994. Because of recurring losses, the
Company's cash resources during the seven months ended October 30, 1994 were not
sufficient to fund working capital, capital expenditure and debt service
requirements, and the Company was unable to meet all of its accrued liability
and supplier obligations as they became due. However, the Company was able to
generate cash from reductions in accounts receivable and inventories of $577,671
and $1,387,946, respectively, and prepaid expenses of $66,940 during the seven
months ended October 30, 1994. The cash provided from these asset reductions
enabled the Company to begin efforts to decrease its past due obligations, and
during the seven months ended October 30, 1994, $965,672 of cash was used to
reduce accounts payable, accrued liabilities and accrued restructuring charges.
During the five months ended March 31, 1995, the Company used $1,597,674 of
cash to fund operating activities. Cash used to fund operating losses during the
five months ended March 31, 1995 amounted to $358,182, net of non-cash charges
and credits of $707,399. Also, because of an increase in the volume of business,
the Company used $329,469 and $764,211 of cash to fund increases in accounts
receivable and inventories, respectively, during the five months ended March 31,
1995. As a result of the investor financing received in connection the
Acquisition and an increase in deferred revenue which provided $375,000 in cash
(see "Capital Commitments and Liquidity," below), the Company was able to
further pay down its past due liability obligations, and used $618,352 of cash
to reduce its accounts payable, accrued liabilities and accrued restructuring
charges during the five months ended March 31, 1995.
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During the year ended March 29, 1996, the Company generated cash of
$194,390 from operating activities. Cash provided by operations, after
adjustments related to non-cash charges of $1,583,659, during the year ended
March 29, 1996, amounted to $2,761,030. Also, although the Company paid
remaining undisputed past due liability obligations, a net increase in the
Company's supplier and accrued liability obligations, income taxes payable,
deferred revenue and accrued restructuring charges provided cash of $2,600,034
during fiscal 1996. The Company used $4,634,615 in cash used to fund increases
in accounts receivable and inventories of $1,206,385 and $3,428,230,
respectively. In addition, the Company expended $474,095 of cash to fund
increases in other assets including the acquisition of a patent license and the
expenses of the Company's initial public offering during the year ended March
29, 1996. The increases in accounts receivable, inventories and current
liability obligations during the year ended March 29, 1996 were primarily
related to the increase in the volume of business as compared to fiscal 1995.
Cash used to fund operating activities during the year ended March 28, 1997
amounted to $4,995,192. During the year ended March 28, 1997, the Company's
operations generated $2,613,011 in cash, after adjustments related to non-cash
charges and credits of $1,602,352. In addition, a decrease in accounts
receivable caused by sales fluctuations provided cash of $631,595 during the
year ended March 28, 1997. The Company used $2,484,664 in cash to fund an
increase in inventories during the year ended March 28, 1997. This inventory
increase was related to the production of electronic locks and GemStar products
under contractual agreements (see "Capital Commitments and Liquidity," below),
the final production run of Gemini printed circuit board assemblies to meet
anticipated sales requirements until the planned release of the Company's new
smart payphone processor and a slow-down of orders during the latter part of the
year (see "Results of Operations," above). The Company used $418,404 of cash to
fund changes in prepaid expenses and other assets consisting primarily of
capitalized software development expenses. In addition, cash used for decreases
in accounts payable of $3,983,739, income taxes payable of $39,659, deferred
revenue of $541,245 and accrued liabilities, including accrued restructuring
charges, of $771,399 aggregated $5,336,042 during the year ended March 28, 1997.
The decrease in accounts payable is related to the slow-down in sales and the
Company's efforts to reduce contracted manufacturing volume and inventory
balances during the latter part of fiscal 1997. During fiscal 1997, the Company
satisfied its delivery requirements with respect to revenues deferred at March
29, 1996 and deferred revenue decreased accordingly. The decrease in accrued
liability obligations is primarily attributable to the expiration of a smart
product royalty agreement and the payment of remaining royalty obligations
during fiscal 1997 and a decrease in accrued interest due to the repayment of
debt obligations.
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 next year at a cost of
approximately $800,000. 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, operating difficulties or otherwise), the Company would be
required to seek additional financing. In such an event, there can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all.
Extension of credit to customers and inventory purchases represent the
principal working capital requirements of the Company. Significant increases in
accounts receivable and inventory balances could have an adverse effect on the
Company's liquidity. 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
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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 its GemStar smart payphone
processors. 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 committed the Company to
purchase approximately $3.5 million of electronic lock devices over a two-year
period. The Company initially scheduled purchases under these agreements based
on anticipated quantities required to meet its sales commitments. At March 28,
1997, the Company had acquired the majority of committed purchase volume under
these purchase agreements. However, as a result of a decline in sales to SWB,
the Company's inventories related to these agreements increased by approximately
$2 million during the year ended March 28, 1997.
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 a decrease in sales during
the last six months of fiscal 1997 has adversely affected the Company's
liquidity under the revolving credit agreement. The ability of the Company to
improve its liquidity during the next year is dependent on the level of smart
payphone product orders and the extent of the related inventory reduction, if
any.
In December 1994, the Company entered into a sales agreement with SWB under
which SWB committed to purchase $21.3 million of GemStar smart processors,
electronic locks and other components over a three-year period. In connection
with this agreement, 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. At March 28, 1997, the Company
was not obligated and had not paid any royalties under the agreement. The
Company was 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 March 29,
1996 and March 28, 1997. However, in June 1997, the Company entered into an
agreement with SWB that superseded and terminated the December 1994 agreement.
Under the new agreement, the Company agreed to reduce SWB's remaining purchase
commitment to approximately $3 million from approximately $8 million under the
former agreement and, among other things, upgrade SWB's payphone management
system. In return, SWB made a $250,000 cash payment to the Company, terminated
the Company's obligation to pay royalties on sales of licensed products to other
customers and terminated the Company's obligation to repay $375,000 received
from the sale of product software under the December 1994 agreement. SWB also
agreed to make additional cash payments of $250,000 on July 2, 1997, $100,000 on
September 1, 1997, $150,000 on December 31, 1997 and $250,000 on March 31, 1998
to the Company subject to the Company's compliance with the terms and conditions
of the agreement, including conditions with respect to performance, service and
repair. SWB has the right to cancel the agreement upon default by the Company.
Therefore, there is no assurance that the Company will receive the additional
payments or that its will ship the products set forth in the agreement. The
Company believes that it will be able to market inventory quantities of products
manufactured for supply under the former agreement, and presently estimates that
the value of these inventories at March 28, 1997 is not impaired in an amount
that exceeds amounts received under the new agreement.
During October 1994, the Company, its bank and a contract manufacturer
entered into an escrow agreement as security for the payment of the Company's
obligations to the contract manufacturer. In May 1995, the Company issued common
stock purchase warrants that provided the contract manufacturer with the right
to purchase 40,000 shares of the Common Stock at a price of $4.00 per share for
a period of five years in return for extension of credit of $1.5 million and
45-day payment terms to the Company. This agreement had a significant favorable
impact on the Company's liquidity. However, if the Company defaults with respect
to the payment terms, the Company will be required to utilize the escrow account
previously established, which could have a significant adverse effect on the
Company's liquidity.
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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 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 from these customers would have a material adverse effect on the
Company's business. 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. Also, 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 the market
acceptance and success of its smart payphone products, as well as development of
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 that are
presently 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.
In June 1997, a December 1994 sales agreement between the Company and SWB
was terminated and superseded by a new agreement (see Item 1 -- "Business --
Sales and Markets"). Under the new agreement, SWB's purchase commitment was
reduced from approximately $8 million to $3 million. However, SWB has the right
to cancel the agreement upon a default by the Company of any of the terms and
conditions contained in the new agreement.
The assessment of penalties and/or damages under the Company's sales
contracts could have a material adverse effect on the Company's operating
results and liquidity. In April 1995, the Company initiated a recall of products
due to contamination introduced into the manufacturing process by the Company's
contract manufacturer. Although the Company's contract manufacturer was
responsible for the repair or replacement of the recalled product, the Company
incurred liquidated damages under the terms of the sales agreement with its
customer in the amount of $200,000.
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 increase sales prices when product costs increase. In the event the
Company's costs increase without a corresponding price 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 and this competition is beginning to
result in price reductions. The Company reduced its prices to NYNEX upon the
execution of a November 1996 sales agreement based on the planned release of its
new lower cost smart processor during the fourth quarter of fiscal 1997. Until
the Company releases its new smart processor and depletes present inventories,
the Company will experience a reduction in gross profit margins with respect to
smart product sales to NYNEX, and such reduction will be material. Any other
price reductions in response to competition will also result in reduced gross
profit margins unless the Company is able to achieve reductions in product
costs.
36
<PAGE>
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 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. 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.
As a percentage of revenues, the majority of the Company's products 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 those sources. Most 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. In addition, suppliers of certain electronic parts and
components to the Company 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,
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, and those costs could be material. Also, any delays in
redesigning products or obtaining substitute components could adversely affect
the Company's business.
Telecommunication 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. 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.
Net Operating Loss Carryforwards. As of March 28, 1997, the Company had net
operating loss carryforwards for income tax purposes of approximately $14
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. This limitation only affects net operating losses incurred up to the
ownership change and does not reduce the total amount of net operating losses
which may be taken, but limits the amount which may be used in a particular
year. Therefore, in the event the Company maintains profitable operations, such
limitation would have the effect of increasing the Company's tax liability and
reducing net income and available cash resources if the taxable income during a
year exceeded the allowable loss carried forward to that year. In addition,
because
37
<PAGE>
of such limitations, the Company will be unable to use a significant portion of
its net operating loss carryforwards.
Selected Quarterly Data
The following sets forth a summary of selected statements of operations
data (unaudited) for the quarters ended June 30, 1995, September 29, 1995,
December 29, 1995 and March 29, 1996:
Quarter Ended
--------------------------------------------------------
June 30, September 29, December 29, March 29,
1995 1995 1995 1996
----------- ----------- ----------- -----------
Net sales $ 6,354,145 $ 7,737,680 $ 9,585,664 $ 9,524,197
Net income (loss) $ (230,658) $ 236,104 $ 654,957 $ 516,968
The following sets forth a summary of selected statements of operations
data (unaudited) for the quarters ended June 28, 1996, September 27, 1996,
December 27, 1996 and March 28, 1997:
Quarter Ended
--------------------------------------------------------
June 28, September 27, December 27, March 28,
1996 1996 1996 1997
----------- ----------- ----------- -----------
Net sales $12,078,496 $10,061,718 $ 5,651,655 $ 5,680,049
Net income (loss) $ 585,080 $ 385,389 $ 27,145 $ 13,045
--------------------
38
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 40
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 29, 1996 and March 28, 1997 41
Consolidated Statements of Operations for the seven months ended
October 30, 1994, five months ended March 31, 1995
and years ended March 29, 1996 and March 28, 1997 42
Consolidated Statements of Cash Flows for the seven months ended
October 30, 1994, five months ended March 31, 1995
and years ended March 29, 1996 and March 28, 1997 43
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the seven months ended October 30, 1994, five months ended
March 31, 1995 and years ended March 29, 1996 and March 28, 1997 44
Notes to Consolidated Financial Statements 45
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts 89
All other schedules are omitted because they are not required or are
not applicable, or the required information is shown in the financial
statements or notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
--------------------
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Technology Service Group, Inc.
We have audited the accompanying consolidated balance sheets of Technology
Service Group, Inc. and subsidiary as of March 28, 1997 and March 29, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended March 28, 1997 and March 29, 1996,
five months ended March 31, 1995, and the seven months ended October 30, 1994.
Our audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Technology Service Group, Inc.
and subsidiary at March 28, 1997 and March 29, 1996 and the results of their
operations and their cash flows for the years ended March 28, 1997 and March 29,
1996, the five months ended March 31, 1995, and the seven months ended October
30, 1994 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 23, 1997
(June 9, 1997 as to the last
paragraph of Note 14)
40
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 29, March 28,
1996 1997
------------ ------------
ASSETS
Current assets:
Cash $ 19,787 $ 67,880
Accounts receivable, less allowance for
doubtful accounts of $216,000 and $147,000 3,866,372 3,234,777
Inventories 8,658,669 10,879,180
Deferred income taxes 50,544 542,654
Prepaid expenses and other current assets 146,117 140,981
------------ ------------
Total current assets 12,741,489 14,865,472
Property and equipment, net 2,198,625 847,443
Other assets 4,693,650 4,059,467
============ ============
$ 19,633,764 $ 19,772,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 1,002,403 $ 242,652
Borrowings under revolving credit agreement -- 3,810,961
Current maturities under long-term debt and
capital lease obligations 118,444 --
Accounts payable 5,030,945 1,047,206
Income taxes payable 165,666 126,007
Deferred revenue 541,245 375,000
Accrued liabilities 1,472,379 1,015,032
Accrued restructuring charges 16,427 27,794
------------ ------------
Total current liabilities 8,347,509 6,644,652
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 --
------------ ------------
16,034,028 6,644,652
------------ ------------
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, 3,500,000 and
4,701,760 shares issued and outstanding 35,000 47,018
Capital in excess of par value 3,465,000 11,962,856
Retained earnings 111,790 1,122,449
Cumulative translation adjustment (12,054) (4,593)
------------ ------------
Total stockholders' equity 3,599,736 13,127,730
------------ ------------
$ 19,633,764 $ 19,772,382
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
41
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor Company
------------ --------------------------------------------
Seven Months Five Months
Ended Ended Year Ended Year Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 11,108,653 $ 9,161,359 $ 33,201,686 $ 33,471,918
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 9,176,134 8,226,245 26,082,055 26,638,622
General and administrative expenses 1,742,324 850,069 2,204,915 2,391,164
Marketing and selling expenses 366,464 371,757 1,290,349 881,324
Engineering, research and
development expenses 457,553 480,495 1,197,183 1,776,611
Restructuring charges (credits) (534,092) -- -- 62,500
Litigation settlement (261,022) -- -- (105,146)
Interest expense 599,276 356,624 941,261 399,469
Other income (14,618) (58,250) (17,763) (116,664)
------------ ------------ ------------ ------------
11,532,019 10,226,940 31,698,000 31,927,880
------------ ------------ ------------ ------------
Income (loss) before income tax
expense (423,366) (1,065,581) 1,503,686 1,544,038
Income tax expense -- -- (326,315) (533,379)
------------ ------------ ------------ ------------
Net income (loss) $ (423,366) $ (1,065,581) $ 1,177,371 $ 1,010,659
============ ============ ============ ============
Income (loss) per common and
common equivalent share:
Primary $ (0.30) $ 0.30 $ 0.22
============ ============ ============
Assuming full dilution $ (0.30) $ 0.30 $ 0.22
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding:
Primary 3,541,778 3,870,889 4,780,263
============ ============ ============
Assuming full dilution 3,541,778 3,870,889 4,780,263
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
42
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor Company
------------ -----------------------------------------
Seven Months Five Months
Ended Ended Year Ended Year Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (423,366) $(1,065,581) $ 1,177,371 $ 1,010,659
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities
Depreciation and amortization 647,717 407,892 1,060,655 1,072,210
Loss (gain) on sale of assets 18,397 4,936 -- (47,325)
Restructuring charges (credits) (534,092) -- -- 62,500
Provisions for inventory losses and
warranty expense 164,534 298,038 352,256 565,007
Provision for uncollectible accounts
receivable 27,122 (3,467) 10,099 --
Provision for deferred tax expense
(benefits) -- -- 160,649 (50,040)
Changes in certain assets and
liabilities, net of effects of
acquisition
(Increase) decrease in accounts
receivable 577,671 (329,469) (1,206,385) 631,595
(Increase) decrease in inventories 1,387,946 (764,211) (3,428,230) (2,484,664)
(Increase) decrease in prepaid
expenses and other current assets 66,940 90,778 (56,923) 5,136
(Increase) decrease in other assets 3,358 6,501 (474,095) (423,540)
(Decrease) increase in accounts
payable (981,786) (172,369) 2,071,856 (3,983,739)
(Decrease) increase in income taxes
payable -- -- 165,666 (39,659)
(Decrease) increase in deferred
revenue -- 375,000 541,245 (541,245)
(Decrease) increase in accrued
liabilities 458,058 (299,310) (104,843) (761,399)
(Decrease) in accrued restructuring
charges (441,944) (146,673) (73,890) (10,000)
Other (55,735) 261 (1,041) (688)
----------- ----------- ----------- -----------
Net cash provided by (used for)
operating activities 914,820 (1,597,674) 194,390 (4,995,192)
----------- ----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (21,481) (59,956) (251,724) (421,965)
Proceeds from sale of assets 12,001 -- -- 59,050
----------- ----------- ----------- -----------
Net cash used for investing
activities (9,480) (59,956) (251,724) (362,915)
----------- ----------- ----------- -----------
Cash flows from financing activities
Net proceeds (payments) under
revolving credit agreement (1,491,074) (1,599,102) 123,538 2,717,226
Proceeds from initial public offering, net
of offering expenses -- -- -- 8,631,532
Proceeds from exercise of stock options
and warrants -- -- -- 216,714
Proceeds from notes payable to banks 402,500 908,333 -- --
Proceeds from notes payable
to stockholders 400,000 2,800,000 -- --
Payments on notes payable to stockholders -- -- -- (2,800,000)
Principal payments on long-term
debt and capital lease obligations (459,084) (482,307) (813,754) (2,599,521)
Increase (decrease) in bank overdraft 323,633 120,714 501,761 (759,751)
----------- ----------- ----------- -----------
Net cash provided by (used for)
financing activities (824,025) 1,747,638 (188,455) 5,406,200
----------- ----------- ----------- -----------
Increase (decrease) in cash 81,315 90,008 (245,789) 48,093
Cash, beginning of period 94,253 175,568 265,576 19,787
=========== =========== =========== ===========
Cash, end of period $ 175,568 $ 265,576 $ 19,787 $ 67,880
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
43
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series E Series C Series B Series A
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Predecessor
Balance at April 1, 1994 $ 30,000 $ 234,066 30,000 30,667
Net loss for the period
Foreign currency
translation adjustment
============ ============ ============ ============
Balance at October 30, 1994 30,000 $ 234,066 $ 30,000 $ 30,667
============ ============ ============ ============
Company
Balance at October 30, 1994 $ 30,000 $ 234,066 $ 30,000 $ 30,667
Business combination (30,000) (234,066) (30,000) (30,667)
Net loss for the period
Foreign currency
translation adjustment
------------ ------------ ------------ ------------
Balance at March 31, 1995 -- -- -- --
Business combination -
distribution of escrow
consideration
Net income for the year
Foreign currency
translation adjustment
------------ ------------ ------------ ------------
Balance at March 29, 1996 $ -- $ -- $ -- $ --
Net income for the year
Issuance of 1,150,000
shares in initial public
offering, net of offering
expenses
Issuance of 40,000 shares
upon exercise of common
stock purchase warrants
Issuance of 5,000 shares
upon exercise of common
stock options
Issuance of 6,760 shares
under 1995 Employee
Stock Purchase Plan
Foreign currency
translation adjustment
============ ============ ============ ============
Balance at March 28, 1997 $ -- $ -- $ -- $ --
============ ============ ============ ============
<CAPTION>
Common Common
Stock Stock Capital in Retained Cumulative
$.05 Par $.01 Par Excess of Earnings Translation
Value Value Par Value (Deficit) Adjustment Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Predecessor
Balance at April 1, 1994 21,882 -- 22,651,826 (24,449,909) 46,424 $ (1,405,044)
Net loss for the period (423,366) (423,366)
Foreign currency
translation adjustment 7,280 7,280
============ ============ ============ ============ ============ ============
Balance at October 30, 1994 $ 21,882 $ -- 22,651,826 (24,873,275) $ 53,704 (1,821,130)
============ ============ ============ ============ ============ ============
Company
Balance at October 30, 1994 $ 21,882 $ -- $ 22,651,826 (24,873,275) $ 53,704 $ (1,821,130)
Business combination (21,882) 35,000 (19,516,535) 24,873,275 (53,704) 4,991,421
Net loss for the period (1,065,581) (1,065,581)
Foreign currency
translation adjustment 269 269
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1995 -- 35,000 3,135,291 (1,065,581) 269 2,104,979
Business combination -
distribution of escrow
consideration 329,709 329,709
Net income for the year 1,177,371 1,177,371
Foreign currency
translation adjustment (12,323) (12,323)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 29, 1996 $ -- $ 35,000 $ 3,465,000 $ 111,790 $ (12,054) $ 3,599,736
Net income for the year 1,010,659 1,010,659
Issuance of 1,150,000
shares in initial public
offering, net of offering
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 5,000 shares
upon exercise of common
stock options 50 4,950 5,000
Issuance of 6,760 shares
under 1995 Employee
Stock Purchase Plan 68 51,646 51,714
Foreign currency
translation adjustment 7,461 7,461
============ ============ ============ ============ ============ ============
Balance at March 28, 1997 $ -- $ 47,018 $ 11,962,856 $ 1,122,449 $ (4,593) $ 13,127,730
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
44
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Technology Service Group, Inc. (the "Company") was incorporated in the
State of Delaware in 1975. The Company designs, develops, manufactures and
markets public communication products including microprocessor-based ("smart")
wireline and wireless payphone systems, electronic wireline payphone products
and related payphone components. The Company also provides payphone and payphone
component repair, refurbishment and upgrade conversion services. The
accompanying financial statements include the accounts of the Company's
wholly-owned subsidiary, International Service Technologies, Inc. ("IST"), which
has a foreign division located in Taiwan.
2. ACQUISITION
On October 31, 1994, TSG Acquisition Corp. ("TSG Acquisition"), a
non-operating corporation wholly-owned by Wexford Partners Fund, L.P.
("Wexford"), acquired all of the outstanding capital stock of the Company
pursuant to an Agreement and Plan of Merger dated October 11, 1994 (the "Plan of
Merger") between Wexford, TSG Acquisition, the Company and the majority holders
of the Company's capital stock (the "Acquisition"). TSG Acquisition paid an
aggregate of $3.5 million in cash pursuant to the Plan of Merger, including
$329,709 of contingent consideration that was placed in escrow. The
consideration consisted of $3,004,000 to acquire the outstanding capital stock
of the Company and $496,000 to retire a subordinated master promissory note of
$400,000 payable to former stockholders and related accrued interest and
preference fees of $96,000. Cash payments to former stockholders on October 31,
1994 aggregated $2,991,973 after deducting $277,910 to retire certain
obligations of the Company and $230,117 placed in escrow. Consideration placed
in escrow of $329,709 consisting of cash of $230,117 and a subordinated note of
the Company payable to one of the former stockholders in the principal amount of
$99,592 was distributed to former stockholders in September 1995 upon compliance
with indemnification provisions set forth in the Plan of Merger.
In conjunction with the Acquisition, TSG Acquisition was merged into the
Company, which was then wholly-owned by Wexford. The outstanding shares of the
Company's capital stock and rights to purchase the Company's capital stock,
including preferred stock purchase warrants, at October 31, 1994 and the
Company's Incentive Stock Option Plan were cancelled and the outstanding shares
of capital stock of TSG Acquisition were exchanged for one share of the
Company's common stock, $.05 par value (the "merger share"). The Company is
sometimes referred to as the "Predecessor" for periods prior to the Acquisition.
In addition, the Company entered into an Investment Agreement (the
"Investment Agreement") with Wexford and certain former investors (collectively
the "investors"). The Company issued 3.5 million shares of common stock, $.01
par value, in exchange for the merger share held by Wexford. Also, the Company
borrowed $2.8 million from the investors and issued 10% interest bearing
subordinated promissory notes due November 1, 1999 (see Note 7).
The Acquisition has been accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price of $3,170,291 (excluding
contingent consideration) was pushed down and allocated to assets and
liabilities of the Company as of October 31, 1994 (the date of acquisition)
based upon their estimated fair values. The excess of the purchase price over
the fair value of the net assets acquired of $3,853,877 was recorded as goodwill
(see Note 6). The increase in the aggregate purchase price and goodwill upon the
distribution of escrow consideration of $329,709 was recognized in the Company's
financial statements during the year ended March 29, 1996.
45
<PAGE>
A summary of the book value of the assets and liabilities of the Company as
compared to their estimated fair value reflected in the Company's financial
statements as of the date of acquisition is set forth below.
Book Estimated
Value Fair Value
----------- -----------
Cash $ 175,568 $ 175,568
Accounts receivable 2,337,150 2,337,150
Inventories 4,887,167 4,842,433
Prepaid expenses and other current assets 179,972 179,972
Property and equipment 2,601,801 2,984,574
Other assets 215,718 645,447
Bank overdraft (379,928) (379,928)
Borrowings under revolving credit agreement (1,660,965) (1,660,965)
Current maturities under long-term debt
and capital lease obligations (877,557) (888,392)
Accounts payable (3,133,058) (3,133,058)
Accrued expenses (1,624,180) (1,749,039)
Accrued restructuring charges (515,222) (312,312)
Notes payable to stockholders (400,000) --
Long-term debt and capital lease obligations (3,627,596) (3,725,036)
----------- -----------
Net assets acquired (1,821,130) (683,586)
Excess of purchase price over net
assets acquired -- 3,853,877
=========== ===========
$(1,821,130) $ 3,170,291
=========== ===========
The accompanying financial statements at March 29, 1996 and March 28, 1997
and for the five months ended March 31, 1995 and years ended March 29, 1996 and
March 28, 1997 reflect the effects of the Acquisition. Assuming the Acquisition
had occurred on April 2, 1994, the Company's and the Predecessor's net loss for
the year ended March 31, 1995 including proforma adjustments for depreciation,
interest and amortization of assets to give effect to the accounting bases
recognized in recording the Acquisition would have approximated $1,599,000
(unaudited), or a loss of $.45 per share (unaudited), as compared to the
reported loss of $1,488,947 ($423,366 for the seven months ended October 30,
1994 and $1,065,581 for the five months ended March 31, 1995). The proforma
adjustments include an increase in the amortization of goodwill and other
intangible assets of approximately $140,000 (unaudited) due to the increase in
the basis of intangible assets and their estimated useful lives, a decrease in
depreciation of approximately $24,000 (unaudited) due to an increase in the
basis of property and equipment and their estimated useful lives and a decrease
in interest expense of approximately $6,000 (unaudited) due to revaluation of
capital lease obligations, the financing received from the investors and the
repayment of indebtedness under the Company's revolving credit agreement.
46
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed by the Company is
set forth below:
Fiscal Year
The Company operates on a fiscal year ending the Friday nearest March 31
resulting in a 52/53 week year. The accompanying consolidated financial
statements include the audited financial statements of the Predecessor for the
seven months (30 weeks) ended October 30, 1994 and the Company, subsequent to
the Acquisition, for the five months (22 weeks) ended March 31, 1995 and years
(52 weeks) ended March 29, 1996 and March 28, 1997.
Consolidation
All significant intercompany balances and transactions have been eliminated
in consolidation.
Translation of Foreign Currency
The financial position and results of operations of the Company's foreign
division are measured using local currency as the functional currency. Assets
and liabilities of the Company's foreign division are translated into United
States dollars at the applicable exchange rate in effect at the end of the
period. Income statement accounts are translated at the average rate in effect
over the period. Translation adjustments arising from the use of differing
exchange rates from period to period are accumulated in a separate component of
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in income in the period in which these transactions
occur. The effects of foreign currency translation on the Company's financial
position and results of operations are not significant. Also, the operations,
assets and liabilities of the Company's foreign division are not significant.
Cash
The Company's cash balances serve as collateral under a loan agreement (see
Note 7) and, accordingly, are restricted.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
based upon the first-in, first-out ("FIFO") method or standard cost, which
approximates cost on a FIFO basis.
Reserves to provide for potential losses due to obsolescence and excess
quantities are established in the period in which such losses occur.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the established
useful lives of the assets as follows:
Predecessor Company
----------- ---------
Building and building improvements 30 years 30 years
Machinery and equipment 2-10 years 2-5 years
Furniture and fixtures 2-10 years 2-3 years
Leasehold improvements 5-15 years 5 years
47
<PAGE>
Additions, improvements and expenditures that significantly extend the
useful life of an asset are capitalized. Expenditures for repairs and
maintenance are charged to operations as incurred. When assets are retired or
disposed of, the cost and accumulated depreciation thereon are eliminated from
the accounts, and any gains or losses are included in income.
Revenue Recognition
Sales and related costs are recorded by the Company upon shipment of
products. Deferred revenue consists of prepayments from customers and the
refundable portion of proceeds received from the sale of software (see Note 14)
which is classified according to the terms of the repayment obligation. Deferred
revenue is recognized as earned upon shipment of products or pursuant to the
terms of the sales contract.
Engineering, Research, and Development Costs
Costs and expenses incurred for the purpose of product research, design and
development are charged to operations as incurred. Engineering, research and
development costs consist primarily of costs associated with development of new
products and manufacturing processes. The Company capitalizes as other assets
certain product software development costs once technological feasibility has
been achieved. Commencing upon initial product release, these costs are
amortized based on the straight-line method over the estimated useful life of
the product, which is generally five years. Capitalized software development
costs are reported at the lower of cost, net of accumulated amortization, or net
realizable value (see Note 6). Software development costs incurred prior to
achieving technological feasibility are charged to research and development
expense as incurred.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, defines a fair value based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. This statement gives entities a choice of
recognizing related compensation costs by adopting the new fair value method or
to continue to measure compensation using the intrinsic value approach contained
in Accounting Principles Board Opinion 25 ("APB 25"), the former standard. If
the former standard for measurement is elected, SFAS 123 requires supplemental
disclosure to show the effects of using the new measurement criteria. The
Company has elected to continue to apply the former standards contained in APB
25, and as a result, the Company adopted the pro forma disclosure requirements
of SFAS 123 during the year ended March 28, 1997 (see Note 9). APB 25 requires
compensation expense for stock-based compensation plans to be recognized based
on the difference, if any, between the per-share market value of the stock and
the option exercise price on the measurement date, which is generally the grant
date. The Company has not recognized any compensation expense with respect to
stock options granted under the Company's plans in accordance with the
requirements of APB 25.
Fair Value of Financial Instruments and Concentration of Credit Risk
The estimated fair value of the Company's cash, accounts receivable,
accounts payable and outstanding indebtedness approximates the carrying amounts
due principally to their short maturities. Accounts receivable represent the
primary financial instrument which potentially subjects the Company to
concentrations of credit risk. The Company does not require its customers to
provide collateral with respect to amounts owed, but periodically evaluates the
credit of its customers (see Note 14). The allowance for non-collection of
accounts receivable is estimated based upon the expected collectibility of all
accounts receivable.
Goodwill
The excess of the purchase price over the fair value of the Company's
assets and liabilities at the date of the Acquisition is being amortized to
operations on a straight-line basis over a period of 35 years. At each balance
sheet date, the Company evaluates the realizability of goodwill based on its
expectations of future
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nondiscounted cash flows. Based on the Company's most recent analysis, the
Company believes that no material impairment of goodwill exists at March 28,
1997.
Income Taxes
Income tax expense (benefit) is based upon income (loss) recognized for
financial statement purposes and includes the effects of temporary differences
between such income (loss) and that recognized for tax purposes in accordance
with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Using the enacted tax rate
in effect for the year in which the differences are expected to reverse,
deferred tax assets and liabilities are determined based upon the differences
between the financial reporting basis and income tax basis of the assets and
liabilities (see Note 10). A valuation allowance is established for deferred tax
assets to the extent realization thereof is not assured.
Income (Loss) Per Common and Common Equivalent Share
Income (loss) per common and common equivalent share for the five months
ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997 is
computed on the basis of the weighted average number of common 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 year ended March 28, 1997 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, stock issued and stock options covering 89,000
shares of common stock granted during the 12 months prior to a May 10, 1996
initial public offering (see Note 9) at prices below the public offering price
have been included in the calculation of weighted average number of common and
common equivalent shares outstanding as if they were outstanding as of the
beginning of the period. Also, as a result of the Acquisition, income (loss) per
share is not presented for periods prior to the five months ended March 31, 1995
in accordance with SECSAB Topic 1:B2.
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. The adoption of SFAS 128
is required for fiscal years ending after December 15, 1997, and earlier
adoption is not permitted. 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.
Also, 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
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and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. INVENTORIES
Inventories at March 29, 1996 and March 28, 1997 consisted of the
following:
March 29, March 28,
1996 1997
------------ ------------
Raw materials $ 7,403,532 $ 6,153,808
Work-in-process 1,207,080 2,117,668
Finished goods 1,654,252 4,036,191
------------ ------------
10,264,864 12,307,667
Reserve for potential losses (1,606,195) (1,428,487)
------------ ------------
$ 8,658,669 $ 10,879,180
============ ============
Substantially all inventories are pledged to secure notes payable (see
Note 7).
5. PROPERTY AND EQUIPMENT
Property and equipment at March 29, 1996 and March 28, 1997 consisted of
the following:
March 29, March 28,
1996 1997
----------- -----------
Land $ 120,633 $ --
Building and building improvements 877,187 --
Machinery and equipment 2,009,159 2,287,656
Furniture and fixtures 119,879 111,057
Leasehold improvements 151,116 167,784
----------- -----------
3,277,974 2,566,497
Accumulated depreciation (1,079,349) (1,719,054)
----------- -----------
$ 2,198,625 $ 847,443
=========== ===========
Substantially all property and equipment is pledged to secure notes payable
(see Note 7).
Depreciation expense for the seven months ended October 30, 1994 and five
months ended March 31, 1995 aggregated $454,911 and $308,047, respectively.
Depreciation expense for the years ended March 29, 1996 and March 28, 1997
aggregated $784,039 and $794,928, respectively.
Assets under capital leases are capitalized using interest rates
appropriate at the date of purchase or at the inception of the lease, as
applicable. The following is a summary of the Company's assets under capital
leases which are included in property and equipment at March 29, 1996:
Land $ 120,633
Building and building improvements 877,187
Machinery and equipment 60,445
-----------
1,058,265
Accumulated depreciation (70,762)
-----------
$ 987,503
===========
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During the year ended March 28, 1997, the Company closed a one hundred
thousand square foot manufacturing facility located in Paducah, Kentucky and
assigned its capital lease obligation to an unaffiliated third party.
Accordingly, the Company recorded the retirement of the outstanding capital
lease obligation and the disposition of the property during the year ended March
28, 1997. In connection with this transaction, the Company 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).
6. OTHER ASSETS
Other assets at March 29, 1996 and March 28, 1997, net of accumulated
amortization of $375,481 and $652,762, respectively, consisted of the following:
March 29, March 28,
1996 1997
---------- ----------
Excess of purchase price over fair value of net
assets acquired, net of accumulated
amortization of $169,336 and $278,247 $3,803,057 $3,252,076
Product software, net of accumulated
amortization of $66,300 and $113,100 167,700 542,593
Patents, net of accumulated amortization
of $46,453 and $79,243 117,499 84,709
Customer contracts, net of accumulated
amortization of $55,103 and $93,999 71,309 32,413
Unpatented technology, net of accumulated
amortization of $15,622 and $26,649 44,109 33,082
Patent license, net of accumulated
amortization of $22,667 and $61,524 110,333 71,476
Deferred initial public offering expenses 338,372
Deposits 40,500 40,342
Other 771 2,776
---------- ----------
$4,693,650 $4,059,467
========== ==========
The excess of the purchase price over the fair value of net assets acquired
in connection with the Acquisition, including the escrow consideration
distributed during the year ended March 29, 1996, aggregated $4,183,586. Tax
benefits of acquired deferred tax assets of $211,193 and $442,070 during the
years ended March 29, 1996 and March 28, 1997, respectively, were applied
against the excess purchase price (see Note 10).
Other intangible assets recorded in connection with the Acquisition
consisted of product software of $234,000, patents of $163,952, customer
contracts of $126,412 and unpatented technology of $59,731. These assets are
being amortized over estimated useful lives ranging from less than two years to
five years, and are reported at the lower of cost, net of accumulated
amortization, or net realizable value.
During the year ended March 28, 1997, the Company capitalized software
development costs of $421,693 in connection with the development of new
products. Software development costs during the five months ended March 31, 1995
and year ended March 29, 1996 were not significant.
Amortization expense for the seven months ended October 30, 1994, five
months ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997
amounted to $192,806, $99,845, $276,616 and $277,282, respectively.
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7. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT, LONG-TERM DEBT, CAPITAL LEASE
OBLIGATIONS AND NOTES PAYABLE TO STOCKHOLDERS
Borrowings Under Revolving Credit Agreement
At March 29, 1996, the Company was able to borrow up to a maximum of $9
million under term and installment notes and a revolving credit agreement under
the terms of a Loan and Security Agreement (the "Loan Agreement") between the
Company and its bank. Indebtedness under the Loan Agreement at March 29, 1996
included $2,525,000 outstanding under term and installment notes and $1,093,735
outstanding under the revolving credit agreement.
At March 28, 1997, the Company was able to borrow up to a maximum of $9
million under the revolving credit agreement. At March 28, 1997, the Company had
outstanding debt of $3,810,961 under the revolving credit agreement.
Amounts borrowed under the Loan Agreement are secured by substantially all
assets of the Company including accounts receivable, inventories and property
and equipment. The borrowing limit under the revolving credit agreement is based
upon specified percentages applied to the value of collateral, consisting of
accounts receivable and inventories (less amounts outstanding under a $2.2
million term note at March 29, 1996), and varies based upon changes in the
collateral value. Interest is payable monthly based upon the greater of the
actual outstanding debt balances or $4 million at a variable rate per annum
equal to 1.5% above a base rate quoted by Citibank (8.25% March 29, 1996 and
8.50% at March 28, 1997). The Loan Agreement 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 Company has agreed to pay
termination fees of up to 2% of the average monthly borrowings or the minimum
loan amount ($4 million), whichever is greater, if the Loan Agreement is
terminated on the date other than an anniversary date.
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 any other event of
default, if not waived or corrected, could accelerate the maturity of the
borrowings outstanding under the Loan Agreement. The Company was in compliance
with the covenants and conditions contained in the Loan Agreement at March 29,
1996 and March 28, 1997.
Pursuant to an amendment to the Loan Agreement on October 31, 1994, $2.2
million of debt outstanding under the revolving credit agreement was converted
into a term note payable on November 30, 1997. In addition, the term of the Loan
Agreement was extended from May 31, 1995 to November 30, 1997, and the interest
rate on amounts borrowed under the terms of the Loan Agreement was reduced by
.75%. Proceeds of $2,569,298 pursuant to subordinated promissory notes dated
October 31, 1994 issued to stockholders were used to retire debt outstanding
under the revolving credit agreement. After such repayment, the initial
principal balance outstanding under the $2.2 million term note on October 31,
1994 amounted to $1,291,667. Between October 31, 1994 and March 31, 1995, the
Company borrowed the balance available under the $2.2 million term note of
$908,333.
Pursuant to a June 9, 1994 amendment to the Loan Agreement, the aggregate
principal obligation under an installment note was decreased from $500,000 to
$465,000, and the Company borrowed an additional $402,500. The expiration date
of the Loan Agreement and the due date of the term and installment notes were
extended from February 28, 1995 to May 31, 1995. The monthly principal payment
under the installment note was increased from $20,833 to $25,000. This note was
repaid during the year ended March 29, 1996.
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In May 1996, the Company completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay the Company's then outstanding indebtedness under
the Loan Agreement. Accordingly, the Company classified $1,093,735 of
indebtedness outstanding under the revolving credit facility as a long-term
obligation at March 29, 1996.
Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations payable at March 29, 1996
consisted of the following:
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
===========
At March 31, 1995, the Company had outstanding indebtedness of $203,077
pursuant to 10% interest bearing promissory notes payable to a company
affiliated with certain officers and employees of the Company. Outstanding
indebtedness under these promissory notes was paid in full during the year ended
March 29, 1996. Interest paid pursuant to these notes during the years ended
March 31, 1995 and March 29, 1996 aggregated $48,934 and $9,424, respectively.
On November 9, 1994, the Company executed a non-interest bearing promissory note
in the principal amount of $206,595 representing unpaid royalties at October 31,
1994 due to the company affiliated with certain of the Company's officers and
employees. The note, payable in nineteen equal monthly installments of $10,873
commencing on December 11, 1994, had an outstanding balance of $32,620 at March
29, 1996. This note was paid in full during the year ended March 28, 1997.
In May 1996, the Company completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay the Company's then outstanding indebtedness under
the Loan Agreement. Accordingly, the Company classified indebtedness outstanding
under the $2.2 million term note and $309,524 of indebtedness then outstanding
under the $650,000 term note as long-term obligations at March 29, 1996.
During the year ended March 28, 1997, the Company assigned its capital
lease obligation with respect to a one hundred thousand square foot
manufacturing facility located in Paducah, Kentucky to an unaffiliated third
party. Accordingly, the Company recorded the retirement of the capital lease
obligation with a then outstanding balance of $933,510 (see Note 5) during the
year ended March 28, 1997.
Notes Payable to Stockholders
On June 9, 1994, the Company borrowed $400,000 from its preferred
stockholders and issued a subordinated master promissory note payable on demand
bearing interest at a rate of 10% per annum. This note, accrued interest and
preference fees, which when added to accruing interest would equal 5% of the
outstanding principal amount for each month that the note was outstanding,
became due upon the Acquisition. Accordingly, the subordinated master promissory
note, together with accrued interest and preference fees from the date of
issuance aggregating $96,000, were retired on October 31, 1994.
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On October 31, 1994, the Company entered into an Investment Agreement with
the investors. Under the terms of the Investment Agreement, the Company borrowed
$2.8 million from the investors and issued 10% interest bearing subordinated
promissory notes due November 1, 1999. During the year ended March 28, 1997, the
Company repaid the subordinated promissory notes with a portion of the proceeds
from its initial public offering (see Note 9). Interest accrued under the terms
of the subordinated promissory notes was payable semi-annually beginning May 1,
1995. During the years ended March 29, 1996 and March 28, 1997, the Company paid
interest with respect to the subordinated notes of $279,847 and $151,890,
respectively. At March 29, 1996, interest accrued under the terms of the
subordinated promissory notes aggregated $116,603.
8. ACCRUED LIABILITIES
Accrued liabilities at March 29, 1996 and March 28, 1997 consisted of the
following:
March 29, March 28,
1996 1997
---------- ----------
Workers' compensation and employee group
insurance $ 117,546 $ 103,830
Salaries, wages and related employee benefits
and taxes 339,481 255,410
Interest 149,674 31,792
Royalties 273,169 233
Warranty expense 209,500 366,916
Sales and use taxes 24,651 7,060
Professional fees 99,136 90,673
Environmental costs 12,948 625
Property taxes 20,840 29,674
Bonuses 74,790 62,104
Other 150,644 66,715
---------- ----------
$1,472,379 $1,015,032
========== ==========
9. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized, under its Certificate of Incorporation as
amended on October 31, 1994, to issue up to 100,000 shares of preferred stock,
$100 par value, in one or more series or other designations determined by the
Board of Directors ("Board") of the Company. The Board is authorized to
determine, as to any particular series of preferred stock: the dividend rights,
including annual dividend rates and whether the dividends shall be cumulative or
non-cumulative; redemption provisions; per-share liquidation preferences; voting
powers; conversion terms; and any other rights or preferences. No dividends may
be paid or declared on the Company's common stock or on any other class of stock
ranking junior to the preferred stock, nor shall any shares of common stock or
any other class of stock ranking junior to the preferred stock be purchased,
retired or otherwise acquired by the Company unless all dividends accrued and
payable on preferred shares and all amounts required to retire the preferred
shares have been paid out of assets legally available for the payment of such
obligations.
At March 28, 1997, no preferred stock had been issued, nor has the Board
designated any series of preferred stock for issuance or determined any related
rights or preferences.
In connection with the Acquisition, the then outstanding shares of the
Company's Series A, Series B, Series C and Series E preferred stock were
cancelled. The Series A, Series B, Series C and Series E preferred stock had
per-share liquidation preferences of $15, $5, $2.50 and $2.50, respectively,
plus declared and unpaid
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dividends. The aggregate liquidation preference of the preferred stock in order
of priority were as follows: Series E - $750,000; Series C - $5,851,650; Series
B - $1,500,000; and Series A - $4,600,020. The shares of preferred stock were
convertible into an equal number of shares of common stock, subject to certain
anti-dilution provisions. Shares of Series A, Series B and Series C preferred
stock were convertible into voting common stock. Shares of Series E preferred
stock were convertible into non-voting common stock. Series A, Series B and
Series C preferred shares had voting rights equal to the number of shares of
common stock which would have been received upon conversion to common shares.
The Series E preferred stock had no voting rights.
The Company could not, without the consent of stipulated percentages of
holders of the applicable series of preferred stock, authorize or create any
class or series of capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on a parity with such series of convertible
preferred stock or alter or change the powers, preferences or rights of such
series of convertible preferred stock. Further, the Company could not sell
shares of capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on parity with those of convertible
preferred stock at prices less than the conversion prices or convertible into
common stock at prices less than the conversion prices of convertible preferred
stock without such consent(s).
Common Stock
The Company is authorized, under its Certificate of Incorporation as
amended on October 31, 1994, to issue up to 10,000,000 shares of common stock,
$.01 par value. As described in Note 1, the Company issued 3.5 million shares of
common stock on October 31, 1994 in accordance with the terms of an Investment
Agreement between the Company, Wexford and certain former investors.
Holders of voting common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. No dividends may be paid or declared
on the Company's common stock until all dividends accrued and payable on
preferred shares outstanding have been paid.
In connection with the Acquisition, the then outstanding shares of the
Company's common stock were cancelled. Prior to the Acquisition, the Company was
authorized to issue 11,100,000 shares of common stock, $.05 par value.
Initial Public Offering and Common Stock Purchase Warrants
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. At March 29, 1996, the Company had
incurred, and deferred as other assets, offering expenses of $338,372.
Accordingly, net proceeds during the year ended March 28, 1997 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 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.
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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.
As of October 31, 1994, the Company had outstanding warrants to purchase an
aggregate of 312,000 shares of Series C preferred stock at a price of $2.50 per
share. These warrants were cancelled upon consummation of the Acquisition.
Generally, the warrants were exercisable for five-year periods beginning either
on the issuance date or one year thereafter, and expired on various dates
through March 31, 1996.
On May 23, 1995, the Company issued a warrant to one of its contract
manufacturers 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.
Stock Options
On November 1, 1994, the Company's Board of Directors adopted the 1994
Omnibus Stock Plan (the "Stock Plan"). The Stock Plan provides the Board or a
committee of the Board with the authority to grant to officers and employees of
the Company incentive stock options within the meaning of Section 422A of the
Internal Revenue Code and to grant to directors, officers, employees and
consultants of the Company non-qualified stock options and restricted stock
which do not qualify as incentive stock options. An aggregate of 635,000 shares
of the Company's common stock may be issued under the Stock Plan. The maximum
number of shares with respect to which options may be granted to any one
employee may not exceed 300,000 shares. The Board's authority to grant options
under the Stock Plan expires on November 1, 2004. The Stock Plan is administered
by a Stock Plans Committee consisting of members appointed by the Board.
The Board has the authority to determine option periods, the number of
shares of common stock subject to options granted and such other terms and
conditions under which options may be exercised. The Board also has the
authority to determine at which times options or restricted stock may be
granted, the purchase price of restricted stock, whether an option shall be an
incentive stock option or a non-qualified option, whether restrictions such as
repurchase rights are to be imposed on shares subject to options and restricted
stock, and the nature of such restrictions. The per-share option price of
incentive stock options granted under the Stock Plan shall not be less than the
per-share fair market value, as determined by the Board, of the Company's common
stock as of the date of grant, or 110% of the per-share market value with
respect to incentive stock options granted to employees owning 10% or more of
the total combined voting power of all classes of the Company's stock. Option
periods shall not exceed ten years from the date options are granted, or five
years with respect to incentive stock options to employees owning 10% or more of
the total voting power of all classes of the Company's stock. Options granted
under the Stock Plan generally expire 60 days after termination of employment or
at the end of the option period stipulated by the Board in the option agreement,
whichever is earlier.
The Board has the authority to accelerate the date of exercise of an option
or any installment thereof, unless, in the case of incentive stock options, such
acceleration would violate the annual vesting limitations contained in Section
422(d) of the Internal Revenue Code. The exercise prices of options granted
under the Stock Plan are subject to adjustment upon any subdivision,
combination, merger, splits, split-up, liquidation, or the like, to reflect such
subdivision, combination or exchange. The number of shares of common stock to be
received upon exercise of options granted under the Stock Plan are subject to
adjustment upon declarations of stock dividends between the date of grant and
the date of exercise of options. Also, the number of shares of
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common stock reserved for issuance under the Stock Plan shall be adjusted upon
the occurrence of such events.
The Board may grant restricted stock under the Stock Plan pursuant to a
restricted stock agreement. The Board has the authority to determine the number
of shares of common stock to be issued and to the extent, if any, to which they
shall be issued in exchange for cash and/or other consideration. Shares issued
pursuant to restricted stock may not be sold, transferred, pledged, or otherwise
disposed of, except by the laws of descent and distribution, or as otherwise
determined by the Board for a period as determined by the Board from the date
the restricted stock is granted. The Company has the right to repurchase
restricted stock at such price as determined by the Board on the date of grant.
The repurchase rights are exercisable on such terms as determined by the Board
upon the termination of services of the grantee prior to expiration of the
restriction on transfer of the shares, failure of the grantee to pay the Company
income taxes required to be withheld in respect of the restricted stock or under
such other circumstances as the Board may determine.
The following table summarizes the status and changes in stock options
outstanding under the Stock Plan for the five months ended March 31, 1995 and
years ended March 29, 1996 and March 28, 1997:
<TABLE>
<CAPTION>
Weighted
Incentive Option Average
Stock Price Exercise
Options Range Price
--------- --------------- --------
<S> <C> <C> <C>
Outstanding at October 31, 1994 -- -- --
Options granted 357,000 $1.00 $1.00
-------
Outstanding at March 31, 1995 357,000 $1.00 $1.00
Options granted 89,000 $1.00 - $5.00 $4.78
Options cancelled (11,750) $1.00 $1.00
-------
Outstanding at March 29, 1996 434,250 $1.00 - $5.00 $1.77
Options granted 191,250 $8.00 - $10.781 $9.23
Options exercised (5,000) $1.00 $1.00
Options cancelled (78,500) $1.00 - $9.50 $7.74
-------
Outstanding at March 28, 1997 542,000 $1.00 - $10.781 $3.55
=======
Options Exercisable at March 31, 1995 89,250 $1.00 $1.00
=======
Options Exercisable at March 29, 1996 196,750 $1.00 - $5.00 $1.43
=======
Options Exercisable at March 28, 1997 327,563 $1.00 - $10.781 $2.35
=======
</TABLE>
Options granted and outstanding under the Stock Plan are generally
exercisable in four equal annual installments beginning on the date of grant. At
March 28, 1997, outstanding options under the Stock Plan have a weighted average
remaining contractual life of 8.17 years. At March 29, 1996 and March 28, 1997,
635,000 and 630,000 shares, respectively, were reserved for issuance under the
Stock Plan.
On May 10, 1995, the Board of Directors approved the adoption of the 1995
Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan provides
the Board of Directors with the authority to grant to the Company's officers and
employees the right to purchase up to 100,000 shares of common stock at 85% of
the public market price. However, the Employee Plan did not become effective
until the Company's initial public offering. The rights granted under the
Employee Plan are exercisable for an offering period as determined by the Board
of Directors, which may not exceed 27 months. No employee may be granted an
option under which the employee's right to purchase shares under the Employee
Plan first become exercisable at a rate in excess of $25,000 in fair market
value (determined at the date of grant) in any calendar year. Also, an employee
may not allocate in excess of 10% of his or her compensation for purchase of
stock under the Employee Plan during any offering period. The Stock Plans
Committee of the Board of Directors administers the Employee Plan. The Employee
Plan was approved by the stockholders of the Company on December 26, 1995. At
March 29, 1996
57
<PAGE>
and March 28, 1997, 100,000 and 93,240 shares of common stock, respectively,
were reserved for issuance under the Employee Plan.
During the first offering period ending November 15, 1996, 6,760 shares
were purchased by employees at a price of $7.65 per share. During the second
offering which commenced January 13, 1997 (and which will end on July 11, 1997),
5,930 shares are subject to purchase under the Employee Plan based on the base
compensation of participates and the per-share market price of the Company's
common stock on January 13, 1997. The actual number of shares that may be issued
will vary based upon compensation of the participants during the offering
period, the per-share market value of the Company's common stock on July 11,
1997, and the number of participates who have not withdrawn by the July 11, 1997
end date.
On May 10, 1995, the Board approved the adoption of the 1995 Non-Employee
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
the grant to directors who are not employees of the Company of options to
purchase up to 100,000 shares of common stock. The Director Plan is administered
by the Stock Plans Committee consisting of members appointed by the Board.
Pursuant to the Director Plan, each non-employee director was automatically
granted a non-qualified option to purchase 10,000 shares of common stock upon
the consummation of the Company's initial public offering on May 10, 1996.
Thereafter, on September 1 of each year, each non-employee director receives a
non-qualified option to purchase 3,000 shares of common stock. Any non-employee
director who is first appointed or elected after the Company's initial public
offering will receive a non-qualified stock option to purchase 3,000 shares of
common stock upon such appointment or election and an additional option to
purchase 3,000 shares of common stock on each anniversary of the date of his or
her election, provided that he or she is then serving as a non-employee
director. Options granted upon consummation of the Company's initial public
offering became exercisable six months from the date the offering. All other
options become exercisable on the anniversary of the date of grant. Option
periods shall not exceed ten years from the date options are granted. Options
granted under the Director Plan have an exercise price equal to the market value
per share of the common stock on the date of grant. Options granted expire 180
days after the date a director ceases to serve as a director or 10 years from
the grant date, whichever is earlier. Vesting is accelerated in the event of a
change of control of the Company.
On May 10, 1996, options to purchase 30,000 shares of common stock were
automatically granted to non-employee directors at an exercise price of $8.50
per share. On May 17, 1996, options to purchase 3,000 shares of common stock
were granted at an exercise price of $10.781 to a non-employee director elected
to the Board on that date. On September 1, 1996, options to purchase 9,000
shares of common stock were automatically granted to non-employee directors at
an exercise price of $10.812 per share. On March 14, 1997, options to purchase
3,000 shares of common stock were granted at an exercise price of $5.00 to a
non-employee director elected to the Board on that date. At March 28, 1997
options to purchase 45,000 shares of common stock at a weighted-average exercise
price of $8.88 per share were outstanding under the Director Plan. Options
granted under the Director Plan to purchase 30,000 shares of common stock at a
weighted-average exercise price of $8.50 per share were exercisable at March 28,
1997.
At March 28, 1997, outstanding options under the Director Plan have
exercise prices ranging between $5.00 and $10.812 per share and a weighted
average remaining contractual life of 9.23 years. The Company has reserved
100,000 shares of common stock for issuance under the Director Plan at March 29,
1996 and March 28, 1997.
58
<PAGE>
The following table summarizes information about stock options outstanding
under the Stock Plan and Director Plan at March 28, 1997:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise
or Range Outstanding Life (years) Price Exercisable Price
------------ ----------- ------------ --------- ----------- --------
$1.00 337,250 7.45 $1.00 254,500 $1.00
$5.00 83,000 8.89 $5.00 40,000 $5.00
$8.50 30,000 9.11 $8.50 30,000 $8.50
$9.50 123,500 9.31 $9.50 32,750 $9.50
$10.78-$10.81 13,250 9.33 $10.80 313 $10.78
Total 587,000 8.17 $3.96 357,563 $2.86
On October 31, 1994 upon consummation of the Acquisition, the Company's
Incentive Stock Option Plan (the "Plan") adopted by the Board of Directors
effective June 1, 1992 was cancelled. The Plan provided the Board with the
authority to grant to key employees of the Company incentive stock options to
purchase up to a maximum of 300,000 shares of the Company's common stock.
Options granted under the Plan were intended to constitute incentive stock
options within the meaning of Section 422A of the Internal Revenue Code. The
Board had the authority to determine option periods, the number of shares of
common stock subject to options granted and such other terms and conditions
under which options may be exercised. Options granted under the Plan were to
expire upon termination of employment or at the end of the option period
stipulated by the Board in the option agreement, whichever was earlier. The Plan
specifically limited the aggregate fair market value of options which could be
exercised by an employee in any one calendar year to $100,000. The Board's
authority to grant options under the Plan was to expire on May 31, 2002. On
August 4, 1994, the Board of Directors authorized management to grant options
covering 253,500 shares of common stock to employees. However, as of the date of
cancellation of the Plan, no options had been granted.
Stock Option Compensation
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options and
purchase rights granted under the Company's plans in accordance with the
requirements of APB 25. Had compensation cost related to stock options and
purchase rights granted under the Company's plans been recognized based on the
fair value of awards on the grant dates consistent with SFAS 123, the Company
would have recorded compensation expense of $54,972 and $613,447 during the
years ended March 29, 1996 and March 28, 1997.
59
<PAGE>
The fair value of each option or right granted under the Company's stock
option and purchase plans is estimated on the date of grant using the
Black-Scholes option pricing model. The significant weighted-average assumptions
used during the years ended March 29, 1996 and March 28, 1997 to estimate the
fair values of options and rights granted under the Company's plans are
summarized in the following table.
Year Ended Year Ended
March 29, March 28,
1996 1997
---------- ----------
Stock Plan:
Expected volaltility 74.80% 72.30%
Expected life 3.5 years 3.5 years
Risk-free interest rate 5.22% 6.35%
Expected dividend yield None None
Director Plan:
Expected volaltility -- 76.00%
Expected life -- 2.67 years
Risk-free interest rate -- 6.30%
Expected dividend -- None
Employee Plan:
Expected volaltility -- 76.90%
Expected life -- .5 years
Risk-free interest rate -- 5.32%
Expected dividend -- None
Based on these assumptions, the weighted-average fair value of each option
and right granted under the Company's plans for the years ended March 29, 1996
and March 28, 1997 amounted to $2.63 and $4.70, respectively. The
weighted-average fair value of each option granted under the Stock Plan during
the years ended March 29, 1996 and March 28, 1997 was $2.63 and $5.04,
respectively. The weighted-average fair value of each option granted under the
Director Plan during the year ended March 28, 1997 was $4.53. The
weighted-average fair value of each purchase right granted under the Employee
Plan during the year ended March 28, 1997 was $1.91.
A comparison of the Company's net income and net income per share as
reported and on a pro forma basis had compensation cost been recorded based on
the fair value at the grant dates for options and rights granted under the
Company's plans in accordance with SFAS 123 for the years ended March 29, 1996
and March 28, 1997 is set forth below:
Year Ended Year Ended
March 29, March 28,
1996 1997
----------- ----------
Net income As reported $ 1,177,371 $1,010,659
Pro Forma $ 1,143,618 $ 634,924
Net income per share - primary As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14
Net income per share - assuming
full dilution As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14
60
<PAGE>
Common Stock Reserved
Common stock reserved for issuance pursuant to the Company's stock option
and purchase plans and outstanding common stock warrants at March 29, 1996 and
March 28, 1997 is summarized as follows:
March 29, March 28,
1996 1997
--------- ---------
Stock Option and Purchase Plans 835,000 823,240
Redeemable Warrants -- 575,000
Underwriter Warrants -- 100,000
Common Stock Purchase Warrants 40,000 --
--------- ---------
875,000 1,498,240
========= =========
10. INCOME TAXES
There was no income tax expense (benefit) for the seven months ended
October 30, 1994 and five months ended March 31, 1995. Income tax expense for
the years ended March 29, 1996 and March 28, 1997 is summarized as follows:
Year Ended Year Ended
March 29, March 28,
1996 1997
--------- ---------
Current tax expense:
Federal $ 101,615 $ 564,265
State 64,051 19,154
--------- ---------
Total current 165,666 583,419
--------- ---------
Deferred tax (benefit) expense:
Federal 150,019 (52,969)
State 10,630 2,929
--------- ---------
Total deferred 160,649 (50,040)
--------- ---------
$ 326,315 $ 533,379
========= =========
Income tax expense differs from the amount of income taxes determined by
applying the applicable U.S. statutory federal income tax rate to income (loss)
before income taxes as a result of the following:
Seven Months Five Months Year Year
Ended Ended Ended Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
--------- --------- --------- ---------
Statutory U.S. tax rates $(143,944) $(362,298) $ 511,253 524,973
State taxes, net -- -- 47,181 12,642
Non-deductible expenses 15,479 41,177 102,866 58,375
Losses for which no tax
benefit was provided 128,465 321,121 --
Utilization of loss
carryforwards -- -- (334,985) (71,995)
Other -- -- -- 9,384
--------- --------- --------- ---------
Effective tax rates $ -- $ -- $ 326,315 $ 533,379
========= ========= ========= =========
61
<PAGE>
Deferred tax assets and liabilities arising from temporary differences
at March 29, 1996 and March 28, 1997 are comprised of the following:
March 29, March 28,
1996 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 6,596,897 $ 5,410,844
Inventories 900,258 907,415
Accrued liabilities 165,816 205,234
Accrued restructuring charges 6,365 10,770
Deferred revenue 145,313 145,313
Accounts receivable 83,528 56,947
Depreciation -- 51,345
Long-term debt 35,976 --
----------- -----------
Total deferred tax assets 7,934,153 6,787,868
----------- -----------
Deferred tax liabilities:
Other assets (72,128) (45,136)
Property and equipment (59,116) (65,125)
Depreciation (87,083) --
----------- -----------
Total deferred tax liabilities (218,327) (110,261)
----------- -----------
Excess of deferred tax assets over liabilities 7,715,826 6,677,607
Valuation allowance (7,665,282) (6,134,953)
=========== ===========
Net deferred tax assets $ 50,544 $ 542,654
=========== ===========
The valuation allowance for deferred tax assets during the seven months
ended October 30, 1994 and five months ended March 31, 1995 increased by
$1,388,060. The valuation allowance for deferred tax assets during the years
ended March 29, 1996 and March 28, 1997 decreased by $1,406,634 and $1,530,329,
respectively. A full valuation allowance was maintained through March 31, 1995
because of the uncertainty of realization of deferred tax assets.
Income taxes currently payable for the years ended March 29, 1996 and March
28, 1997 were reduced by $454,868 and $71,995, respectively, through the
utilization of net operating loss carryforwards. During the years ended March
29, 1996 and March 28, 1997, the Company reduced the valuation allowance and
recorded tax benefits of $50,544 and $492,110, respectively. Deferred tax
benefits from utilization of net operating loss carryforwards and reductions in
the valuation allowance of $211,193 and $442,070 were allocated to reduce
goodwill during the years ended March 29, 1996 and March 28, 1997, respectively.
As of March 28, 1997, the Company has tax net operating loss carryforwards
available to reduce future taxable income of approximately $14 million, which
expire from 1998 through 2010. The utilization of such net operating loss
carryforwards and realization of tax benefits in future years depends
predominantly upon the recognition of taxable income. Further, the utilization
of these carryforwards is subject to annual limitations as a result of the
change in ownership of the Company (as described in Note 2) as defined in the
Internal Revenue Code. The limitation approximates $210,000 annually and
represents the value of the Company's capital 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. This limitation does not
reduce the total amount of net operating losses which may be taken, but rather
substantially limits the amount which may be used during a particular year. As a
result, the Company will be unable to use a significant portion of its net
operating loss carryforwards.
62
<PAGE>
11. RESTRUCTURING CHARGES AND CREDITS
As a result of the Acquisition and additional financing described in Note
2, the Company was able to settle certain severance obligations under terminated
employment contracts and negotiate the termination of certain non-cancelable
lease obligations with respect to facilities closed in connection with a
restructuring initiated in fiscal 1994. The severance and lease obligations were
settled on terms more favorable than previously estimated, which resulted in the
recognition of restructuring credits of $248,684 and $274,659, respectively,
during the seven months ended October 30, 1994. In addition, the Company revised
its estimate of certain other severance obligations, and recorded additional
restructuring credits of $10,749. Accordingly, during the seven months ended
October 30, 1994, the Company realized net restructuring credits of $534,092.
During the year ended March 28, 1997, the Company initiated a consolidation
plan intended to augment its on-going productivity and quality improvement
programs. The consolidation plan provided for the closure of 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 year ended March 28, 1997. These restructuring
charges consist of severance obligations and losses related to abandonment of
assets. Relocation expenses and other incremental costs incurred in connection
with the consolidation and charged to operations during the year ended March 28,
1997 approximated $350,000.
12. PROFIT SHARING RETIREMENT PLAN
On January 1, 1995, the Company adopted a 401(k) retirement and profit
sharing plan. Eligible employees of the Company who are 21 years of age with one
or more years of service and who are not covered by collective bargaining
agreements may elect to participate in the plan. Employees who elect to become
participants in the plan may contribute up to 15% of their compensation to the
plan up to a maximum dollar limit established by law. The Company may also
contribute to the plan at the discretion of the Board of Directors.
Contributions by the Company may consist of matching contributions,
discretionary profit sharing contributions and other special contributions.
During the five months ended March 31, 1995 and years ended March 29, 1996 and
March 28, 1997, the Company accrued profit sharing and retirement expense of
$2,455, $15,650 and $26,808, respectively, pursuant to discretionary matching
contributions authorized by the Board of Directors. Contributions to the plan
funded by the Company during the years ended March 29, 1996 and March 28, 1997
amounted to $14,415 and $26,416, respectively. Participants are 100% vested with
respect to their compensation contributions to the plan. Vesting in Company
discretionary contributions begins at 20% after one year of service and
increases by 20% annually each year until full (100%) vesting upon five years of
service. The plan pays retirement benefits based on the participant's vested
account balance. Benefit distributions are generally available upon a
participant's death, disability or retirement. Participants generally qualify to
receive retirement benefits upon reaching the age of 65. Early retirees
generally qualify for benefits provided they have reached age 55 and have
completed 5 years of service with the Company. Benefits are payable in lump sums
equal to 100% of the participant's account balance.
63
<PAGE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the seven months ended October 30,
1994, five months ended March 31, 1995, excluding the effects of the
Acquisition, and years ended March 29, 1996 and March 28, 1997 consists of the
following:
Seven
Months Five Months Year Year
Ended Ended Ended Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
---- ---- ---- ----
Interest paid $457,019 $225,860 $966,153 $516,489
Income taxes paid -- -- -- 624,644
Non-cash activities:
Deferred offering expenses
charged against proceeds of
initial public offering -- -- -- 338,372
Fixed assets acquired under
capital leases 33,753 9,069 -- --
Retirement of capital lease
obligation and write-off
of related property -- -- -- 933,510
Write-off of property and
equipment against accrued
restructuring charges 185,777 -- -- 41,133
Write-off of property and
equipment against
impairment reserve 117,807 -- -- --
Other current assets
acquired by assumption
of debt obligations 165,102 -- 131,594 --
Accrued liabilities converted
to notes payable -- 206,595 -- --
Write-off of inventory
against accrued
restructuring charges 70,229 -- -- --
Write-off of other
assets against accrued
restructuring charges -- 15,323 -- --
Write-off of property and
equipment against
accounts payable -- -- 1,600 --
Increase in goodwill
from distribution of
escrow consideration -- -- 329,709 --
Tax benefits applied to
goodwill -- -- 211,193 442,070
64
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
Minimum future rental payments at March 28, 1997 under non-cancellable
operating leases with an initial term of more than one year are summarized as
follows:
1998 $331,158
1999 220,902
2000 213,001
2001 210,079
2002 210,079
------------
1,185,219
Less sublease rentals (28,790)
------------
$ 1,156,429
============
Rental expense approximated $257,000 for the seven months ended October 30,
1994, $176,000 for the five months ended March 31, 1995, $376,000, net of
sublease income of approximately $18,000, for year ended March 29, 1996 and
$323,000, net of sublease income of approximately $45,000, for the year ended
March 28, 1997.
Litigation, Disputes and Environmental Matters
During the seven months ended October 30, 1994, the Company settled
litigation against a supplier to recover costs and damages attributable to
defective components supplied to the Company, and realized a gain of $261,000,
net of legal fees of $56,000.
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. Under
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 year ended March 28, 1997.
The Company has been involved in a dispute with a former contract
manufacturer since 1994 with respect to inventories acquired by the manufacturer
for the Company's programs, which approximate $l million, unpaid obligations of
the Company of approximately $265,000, and other matters including an alleged
claim of lost profits by the contract manufacturer of approximately $916,000
related to the Company's minimum contract purchase commitment. The Company has
alleged that the contract manufacturer breached the agreement, is obligated to
pay unpaid obligations to the Company of approximately $125,000 and is obligated
to the Company for lost business and expenses due to the delivery of defective
products and the termination of a significant sales agreement. Neither party is
presently pursuing the dispute. There is no assurance, however, that the dispute
will not be pursued or escalate into litigation. Should the dispute escalate
into litigation, the Company intends to defend and pursue its positions
vigorously. In the opinion of management, the ultimate outcome of this matter
will not have a material impact on the Company's financial position or its
results of operations.
The Company is a potentially responsible party with respect to undertaking
response actions at a facility for the treatment, storage and disposal of
hazardous substances operated by an unaffiliated party. In the opinion of
management, the ultimate outcome of this environmental action will not have a
material impact on the Company's financial position or its results of
operations.
65
<PAGE>
Significant Customers
The Company's primary customers consist of the regional bell telephone
companies. During the seven months ended October 30, 1994, three of the regional
bell telephone companies accounted for 33%, 23% and 11% of the Company's
consolidated sales. During the five months ended March 31, 1995, four of the
regional bell telephone companies accounted for 34%, 23%, 11% and 10% of the
Company's consolidated sales. During the year ended March 29, 1996, three of the
regional bell telephone companies accounted for 47%, 17% and 24% of the
Company's consolidated sales. During the year ended March 28, 1997, three of the
regional bell telephone companies accounted for 14%, 16% and 60% of the
Company's consolidated sales. Accounts receivable at March 29, 1996 and March
28, 1997 consists primarily of amounts due from the regional bell telephone
companies.
Royalty and License Agreements
Pursuant to the terms of an asset purchase agreement entered into on
January 11, 1991, the Company agreed to pay royalties equal to 3.5% of sales of
microprocessor-based components to a company affiliated with certain officers
and employees of the Company. On November 9, 1994, the royalty provisions of the
purchase agreement were amended to eliminate royalties for the period April 2,
1994 to September 30, 1994. In return, the term of the royalty obligation was
extended from December 31, 1995 to June 30, 1996. Royalty expense under this
agreement amounted to $3,900 during the seven months ended October 30, 1994,
$93,578 during the five months ended March 31, 1995, $563,750 during the year
ended March 29, 1996 and $196,144 during the year ended March 28, 1997.
The Company has entered into a patent license agreement providing the
Company with the exclusive world-wide rights to certain algorithm software
covered by a patent application. The Company is obligated to pay license fees
aggregating $200,000 at a rate of $50,000 annually over a four year period
commencing on the date the patent is issued. Further, the agreement provides for
the payment of royalties on products incorporating the licensed software.
Minimum royalties payable upon issuance of the patent will range between
$125,000 and $500,000 annually during the life of the patent. The term of the
license agreement will correspond to the expiration date of the patent upon its
issuance. As of March 28, 1997, the patent has not been issued. Accordingly, the
Company has not recorded the contingent liability in the accompanying financial
statements. Further, as of March 28, 1997, the Company has not sold any products
incorporating the licensed software or incurred any royalty obligations under
the agreement.
In December 1994, the Company sold the rights to certain product software
for an aggregate purchase price of $500,000. The Company received an exclusive
irrevocable perpetual right to sublicense the software in connection with the
sale of products to other customers. In return, the Company agreed to pay
royalties equal to the greater of 4.44% of sales or $10 per unit sold. As of
March 28, 1997, the Company has not sold any products incorporating the licensed
software to other customers or incurred any royalty obligations under the
agreement The Company was obligated to repay, three years from the date of the
contract, a portion of the purchase price up to a maximum amount of $375,000
depending upon the amount of aggregate royalties paid pursuant to the agreement.
However, in May 1997, the Company entered into an agreement that terminated the
Company's royalty and repayment obligations.
Employment Contracts
On October 31, 1994, the Company entered into an employment contract with
one of its executives that provides for minimum annual compensation of $147,200
through December 31, 1996 and $160,000 from January 1, 1997 through December 31,
1997. The contract provides for compensation increases at the discretion of the
Board of Directors, additional compensation in the form of bonuses based on
performance, benefits equal to those provided to other executives of the
Company, reimbursement of business expenses, travel and temporary living
expenses and options to purchase shares of the Company's common stock. The
agreement provides for annual renewals subsequent to December 31, 1997 at the
option of the Company. Termination by the Company
66
<PAGE>
without cause entitles the executive to receive his current salary and benefits
for the remaining term of the agreement or for a period of six months, whichever
is greater. The agreement may be terminated by the executive upon 120 days
notice effective on December 31, 1997 or thereafter.
On October 31, 1994, the Company entered into an agreement with the
Chairman of the Board of Directors that provides for minimum annual compensation
of $60,000 through December 31, 1997. The agreement provides for additional
compensation based on services performed not to exceed $2,500 per month,
benefits equal to those provided to other executives of the Company,
reimbursement of business expenses and options to purchase shares of the
Company's common stock. Termination by the Company without cause entitles the
Chairman to receive his current salary and benefits for the remaining term of
the agreement or for a period of six months, whichever is greater. The agreement
may be terminated by the Chairman upon 90 days written notice. Prior to
execution of the Chairman's Agreement, the Chairman provided consulting
services, as President of Atlantic Management Associates, Inc., to the Company
during the seven months ended October 30, 1994 similar to those provided under
the Chairman's Agreement. In addition, Atlantic Management Services, Inc.
assisted the Company and its stockholders in their efforts to attract a buyer
for the equity of the Company, and received a success fee in connection with the
Acquisition of $75,000 representing compensation for such services. During
fiscal 1995, the Company paid Atlantic Management Associates, Inc. $43,000 for
consulting services, excluding expenses of $7,386, rendered prior to the date of
the Chairman's Agreement. During fiscal 1995, the Company paid the Chairman and
Atlantic Management Associates, Inc. $30,231, excluding expenses of $9,419, for
services rendered under the terms of the Chairman's Agreement. During the year
ended March 29, 1996, the Company paid the Chairman and Atlantic Management
Associates, Inc. $66,000, excluding reimbursed expenses of $9,007, for services
rendered under the terms of the Chairman's Agreement. During the year ended
March 28, 1997, the Company paid the Chairman and Atlantic Management
Associates, Inc. $69,000, excluding reimbursed expenses of $11,003, for services
rendered under the terms of the Chairman's Agreement.
Purchase and Sales Commitments
At March 28, 1997, the Company has outstanding purchase order commitments
to purchase approximately $5.5 million of microprocessor-based products 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 $500,000 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.
In June 1997, the Company entered into an agreement that supersedes and
terminates a December 1994 sales agreement. Under the new agreement, the Company
agreed to reduce the customers remaining purchase commitment of certain smart
processors and other components to approximately $3 million from approximately
$8 million under the former agreement and, among other things, upgrade the
customer's payphone management system. In return, the customer made a $250,000
cash payment to the Company, terminated the Company's obligation to pay
royalties on sales of certain products to other customers and terminated the
Company's obligation to repay $375,000 received from the sale of certain product
software under the December 1994 agreement. The customer also agreed to make
additional cash payments of $250,000 on July 2, 1997, $100,000 on September 1,
1997, $150,000 on December 31, 1997 and $250,000 on March 31, 1998 to the
Company subject to the Company's compliance with the terms and conditions of the
agreement, including conditions with respect to product performance, service and
repair. The customer has the right to cancel the agreement upon default by the
Company. Therefore, there is no assurance that the Company will receive the
additional payments or that its will ship the products set forth in the
agreement.
67
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name and age of each director and executive
officer of the Company, his positions and offices with the Company, his period
of service with the Company and his business experience for at least the past
five years, and with respect to directors, their present principal occupation
and other directorships held in public companies.
Directors
Directors are elected to serve for a one-year term and until their
successors are elected and qualified. The Bylaws of the Company provide that the
number of directors shall be determined from time to time by the Board of
Directors or the stockholders of the Company, but that there shall be at least
one director. Directors of the Company who were serving as such at the end of
the 1997 fiscal year are as follows:
Name Age Director Since
David R. A. Steadman, Chairman 60 1994
D. Thomas Abbott 43 1996
Vincent C. Bisceglia 42 1994
Charles E. Davidson 44 1994
Mark L. Plaumann 41 1997
Olivier Roussel 50 1986
David R. A. Steadman. Mr. Steadman has been President of Atlantic
Management Associates, Inc., a management services firm, since 1988. From 1990
to 1994, Mr. Steadman served as President and Chief Executive Officer of Integra
- -- A Hotel and Restaurant Company, and from 1987 to 1988, as Chairman and Chief
Executive Officer of GCA Corporation, a manufacturer of automated semiconductor
capital equipment. From 1980 to 1987, Mr. Steadman was a Vice President of
Raytheon Company, a defense electronics manufacturer, and served in various
management positions, most recently as President of its venture capital
division. Mr. Steadman is Chairman of the Board of Directors of Wahlco
Environmental Systems, Inc., a manufacturer of environmental conditioning
systems. He is also a director of Aavid Thermal Technologies, Inc., which
manufactures thermal management products and produces computational fluid
dynamics software; Kurzweil Applied Intelligence, Inc., a voice recognition
software company; and Vitronics Corporation, a manufacturer of reflow soldering
ovens. Mr. Steadman was elected Chairman of the Board of Directors pursuant to
an employment agreement described under the heading "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" in Item 11 --
"Executive Compensation."
Thomas Abbott. Mr. Abbott has been Chairman of MeesPierson Holdings Inc.,
the United States operation of a Dutch merchant bank, since 1995. From 1993 to
1995, Mr. Abbott was Chairman and Chief Executive Officer of Savin Corporation,
an office products company, and from 1989 to 1993, he was President of Harvest
Group, Inc., a private investment firm. From 1976 to 1988, Mr. Abbott held
various executive positions with Bankers Trust Company. Mr. Abbott is a director
of International Mezzanine Investment N.V., Precise Holdings Inc., and Coffee
Tree Limited.
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<PAGE>
Vincent C. Bisceglia. Mr. Bisceglia has served as a director and as
President and Chief Executive Officer of the Company since February 1994. Prior
to that he served the Company as a consultant and in various management
positions. From 1982 to 1986, Mr. Bisceglia was Executive Vice President of
Transaction Management, Inc., a manufacturer of point-of-sale systems, and from
1978 to 1982, he held senior marketing positions with National Semiconductor-DTS
and Siemens-Nixdorf Computer Corporation.
Charles E. Davidson. Mr. Davidson has served as Chairman of the Board of
Wexford Capital Corporation, which served as the investment manager to several
private investment funds, including Wexford Partners Fund, L.P., the majority
stockholder of the Company. Since January 1, 1995, Mr. Davidson has been
Chairman of Wexford Management LLC, a private investment management company,
which now serves as the investment manager to Wexford Partners Fund, L.P. From
1984 to 1994, Mr. Davidson was a partner of Steinhardt Partners, L.P., a private
investment firm, and from 1977 to 1984, Mr. Davidson was employed by Goldman,
Sachs & Co., serving as Vice President of corporate bond trading. Mr. Davidson
is Chairman of the Board of DLB Oil & Gas, Resurgence Properties Inc. and
Presidio Capital Corp. and is a director of Wahlco Environmental Systems, Inc.,
a manufacturer of environmental conditioning systems.
Mark L. Plaumann. Mr. Plaumann has been a Senior Vice President of Wexford
Management LLC ("Wexford Management") since January 1996 and since March 1995 a
director and/or Vice President of the general partner of various public
partnerships managed by Wexford Management. Mr. Plaumann joined the predecessor
entities of Wexford Management in February 1995. Prior to joining Wexford
Management, Mr. Plaumann was a Managing Director of Alvarez & Marsal, Inc., a
crisis management consulting firm, from 1990 to 1995, and from 1985 to 1990 he
was with American Healthcare Management, Inc., an owner and operator of
hospitals, where he served in a variety of capacities, most recently as its
President. Prior to that he was with Ernst & Young LLP in its auditing and
consulting divisions for eleven years. Mr. Plaumann is a director of Wahlco
Environmental Systems, Inc., a manufacturer of environmental conditioning
systems.
Olivier Roussel. Mr. Roussel has been Chairman and President of Acor S.A.,
a private investment company, since 1975. From 1974 to 1977, he was a Vice
President of Nobel-Bozel and from 1977 to 1982 he was an Assistant General
Manager of Heli-Union. Mr. Roussel was a Director of Roussel-Uclaf from 1975 to
1982 and Chairman of Eminence S.A. from 1987 to 1990. He is Chief Operating
Officer and a Director of Vacsyn S.A., a biotechnology company, and a director
of Bollore Technologies, a public company listed on the Paris Stock Exchange.
Executive Officers
Executive Officers are elected by the Board of Directors and serve until
they resign or are removed by the Board. The Company's executive officers who
served as such during fiscal 1997 are as follows:
Name Age Positions and Offices
David R. A. Steadman 60 Chairman of the Board of Directors
Vincent C. Bisceglia 42 President and Chief Executive Officer,
Director
M. Winton Schriner 50 Executive Vice President, Operations
Darold R. Bartusek 50 Senior Vice President, Sales and Marketing
William H. Thompson 44 Vice President, Finance, Chief Financial
Officer and Secretary
Allen W. Vogl 49 Vice President, Engineering
The business experience of Messrs. Steadman and Bisceglia is set forth
above under the listing of directors of the Company.
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<PAGE>
M. Winton Schriner. Mr. Schriner has served as Executive Vice President of
Operations since July 1996. From August 1994 to April 1996, he served as
Director of Contract Manufacturing. From 1991 to 1993, Mr. Schriner served the
Company in various capacities including Vice President of Operations, Director
of Marketing and Director of Engineering. Prior to joining the Company in 1991,
he was at BellSouth Telecommunications Company for a period of 12 years in
various management capacities with duties ranging from public communications to
strategic planning and executive support. He holds a B.S. degree in Industrial
Education and an M.S. degree in Vocational Rehabilitation from the University of
Wisconsin.
Darold R. Bartusek. Mr. Bartusek has served as Senior Vice President of
Sales and Marketing since November 1996 and from February 1994 to April 1996 he
was Vice President of Sales and Marketing. From 1991 to February 1994, Mr.
Bartusek served the Company in various capacities including Vice President of
Worldwide Sales and Vice President and General Manager of the Company's Smart
Product Business. From August 1989 to January 1991, Mr. Bartusek served as Vice
President of Marketing of the Public Communication Systems Division of Executone
Information Systems, Inc., a supplier of smart payphone systems. From 1973 to
1988, Mr. Bartusek served GTE Communication Systems Corporation in various
capacities including Director of Public Communications and Director of
Advertising and Sales Promotion. Mr. Bartusek holds a B.B.A. degree from Mankato
State University.
William H. Thompson. Mr. Thompson has served as Vice President of Finance,
Chief Financial Officer and Secretary of the Company since February 1994. From
1990 to 1994, he was Vice President of Finance. Prior to joining the Company,
Mr. Thompson was Controller and Vice President of Finance of Cardiac Control
Systems, Inc., a publicly-held medical device manufacturer, from May 1983 to May
1988 and Executive Vice President of Operations and Finance from May 1988 to
June 1990. From June 1974 to May 1983, he held various positions, most recently
as Audit Manager, with Price Waterhouse LLP, certified public accountants. Mr.
Thompson is a certified public accountant in the State of Florida and holds a
B.S. degree in accountancy from Florida State University.
Allen W. Vogl. Mr. Vogl has served as Vice President of Engineering since
February 1994 and before that, he served the Company in various capacities since
1981, including Vice President of Engineering, Executive Vice President and
Chief Scientist. From 1972 to 1981, he was employed in various engineering and
research and development capacities by Harris Corporation and Storage Technology
Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities ("Insiders") to file reports of ownership and
certain changes in ownership with the Securities and Exchange Commission and to
furnish the Company with copies of those reports. Based solely on a review of
Forms 3 and 4 and amendments thereto during the most recent fiscal year ended
March 28, 1997 and Forms 5 and amendments thereto furnished to the Company with
respect to the fiscal year ended March 28, 1997 and any written representations
by Insiders that no Form 5 is required, Messrs. Abbott, Bartusek, Bisceglia,
Davidson, Roussel, Schriner, Steadman, Thompson and Vogl as well as Wexford
Partners Fund, L.P. each filed late his Form 3, "Initial Statement of Beneficial
Ownership of Securities" (required as a result of the Company's registration
statement relating to its initial public offering becoming effective on May 10,
1996.)
--------------------
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<PAGE>
Item 11. EXECUTIVE COMPENSATION
This item contains information about compensation, stock options grants and
employment arrangements and other information concerning certain of the
executive officers of the Company.
Summary Compensation Table
The following table sets forth the compensation the Company paid for
services rendered during the fiscal years ended March 28, 1997, March 29, 1996
and March 31, 1995 by the Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose compensation exceeded
$100,000 in fiscal 1997 and who were serving at the end of the 1997 fiscal year.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
-------------------------------------------- ------------------------------
Other Annual Securities
Compen- Underlying All Other
Fiscal Salary* Bonus sation (1) Options Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Bisceglia (1) 1997 150,055 71,438 30,729 -- 7,760 (2)
President & Chief Executive 1996 147,200 -- 26,915 -- 5,932
Officer 1995 121,970 52,500 37,405 150,000 4,088
M. Winton Schriner 1997 114,154 -- -- 25,000 6,794 (3)
Executive Vice President, 1996 80,000 -- -- 15,000 5,638
Operations 1995 32,000 -- -- 15,000 1,766
Darold R. Bartusek 1997 104,000 -- -- 25,000 7,390 (4)
Senior Vice President, Sales & 1996 104,000 -- -- 15,000 6,282
Marketing 1995 99,600 17,500 -- 15,000 5,754
William H. Thompson (1) 1997 114,567 -- -- 15,000 7,429 (5)
Vice President, Finance, Chief 1996 107,536 -- -- 10,000 6,063
Financial Officer, Secretary 1995 102,986 35,000 40,147 30,000 6,029
Allen W. Vogl (1) 1997 110,455 -- 28,492 -- 7,037 (6)
Vice President, Engineering 1996 108,400 -- 31,824 15,000 6,456
1995 103,814 35,000 38,269 15,000 6,110
</TABLE>
- -------------
* Includes commissions.
(1) Other Compensation with respect to Mr. Bisceglia and Mr. Vogl represents
the estimated incremental costs to the Company of reimbursements and
payments of their travel expenses to and from the Company and their
respective residences and temporary living expenses, and with respect to
Mr. Thompson, represents reimbursement of relocation expenses.
(2) Of this amount, $198 represents the taxable portion of group term life
insurance provided by the Company; $3,279 represents premiums paid by the
Company for split-dollar universal life insurance; $2,284 represents
premiums paid by the Company for long-term disability insurance; and $1,999
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.
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<PAGE>
(3) Of this amount, $403 represents the taxable portion of group term life
insurance provided by the Company; $3,713 represents premiums paid by the
Company for split-dollar universal life insurance; $2,234 represents
premiums paid by the Company for long-term disability insurance; and $444
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.
(4) Of this amount, $311 represents the taxable portion of group term life
insurance provided by the Company; $3,494 represents premiums paid by the
Company for split-dollar universal life insurance; $2,503 represents
premiums paid by the Company for long-term disability insurance; and $1,082
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.
(5) Of this amount, $139 represents the taxable portion of group term life
insurance provided by the Company; $3,725 represents premiums paid by the
Company for split-dollar universal life insurance; $2,418 represents
premiums paid by the Company for long-term disability insurance; and $1,147
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.
(6) Of this amount, $214 represents the taxable portion of group term life
insurance provided by the Company; $3,581 represents premiums paid by the
Company for split-dollar universal life insurance; $2,773 represents
premiums paid by the Company for long-term disability insurance; and $469
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.
--------------------
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<PAGE>
Option Grants in the Last Fiscal Year
The following table sets forth certain information with respect to
options to purchase shares of common stock of the Company ("Common Stock") that
were granted to each of the Company's executive officers named in the Summary
Compensation Table, above, during the fiscal year ended March 28, 1997.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term (2)
------------------------------------------------------- ------------------------
Number of Percent of Total
Securities Options Granted to Exercise
Underlying Employees in Price Expiration 5% 10%
Name Options Fiscal Year 1997 ($) Date ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Bisceglia None -- -- -- -- --
M. Winton Schriner (1) 25,000 13% 9.50 07/23/06 149,362 378,513
Darold R. Bartusek (1) 25,000 13% 9.50 07/23/06 149,362 378,513
William H. Thompson (1) 15,000 8% 9.50 07/23/06 89,617 227,108
Allen W. Vogl None -- -- -- -- --
</TABLE>
- -------------
(1) These options were granted at an exercise price equal to the per share
market value of the Common Stock on the grant date and vest in four equal
annual installments on the grant date and the first three anniversaries of
the grant date. In the event of a change in control of the Company, 50% of
the shares not then exercisable will become fully exercisable.
(2) The potential realizable value is calculated based on the term of the
option (ten years) at its date of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option; however, the
optionee will not actually realize any benefit from the option unless the
market value of the Company's stock price in fact increases over the option
price.
--------------------
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<PAGE>
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of the Company's executive officers
named in the Summary Compensation Table, above, certain information regarding
exercises of stock options during the fiscal year ended March 28, 1997 and stock
options held at that date. The "Value of Unexercised In-the-Money Options at
Fiscal Year End" is based on the difference between the market price of the
Common Stock subject to the option on March 28, 1997 ($5.25 per share) and the
option exercise (purchase) price per share. During fiscal 1997, there were no
option exercises by any of the executive officers named in the Summary
Compensation Table, above.
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End
(#) ($)
------------------------------------------------ ----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Vincent C. Bisceglia 112,500 37,500 478,125 159,375
M. Winton Schriner 25,000 30,000 49,687 17,812
Darold R. Bartusek 25,000 30,000 49,687 17,812
William H. Thompson 31,250 23,750 96,875 33,125
Allen W. Vogl 18,750 11,250 49,687 17,812
</TABLE>
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Mr. Bisceglia. On October 31, 1994, the Company and Mr. Bisceglia entered
into an employment agreement that expires on December 31, 1997, subject to
certain early termination provisions and automatic renewal provisions. Pursuant
to the agreement, Mr. Bisceglia serves as the President and Chief Executive
Officer and as a director of the Company and is paid an annual salary of at
least $147,200. His base salary is subject to annual review for merit and other
increases at the discretion of the Board of Directors as of January 1, 1996 and
each year thereafter, and as a result of such reviews, Mr. Bisceglia's annual
salary was increased to $160,000 per year on January 1, 1997.
Pursuant to the terms of the agreement, Mr. Bisceglia is entitled to the
same benefits made available to the other senior executives of the Company on
the same terms and conditions as such executives. The agreement provides that
the Company will reimburse and/or pay on Mr. Bisceglia's behalf up to $4,000 per
month of temporary living expenses, including travel to and from the Company and
Mr. Bisceglia's residence, until the Company requires Mr. Bisceglia to relocate,
at the Company's expense. Mr. Bisceglia is also entitled to receive an incentive
bonus for each fiscal year during the term of the agreement equal to 2% of the
operating profits of the Company, defined as net income before taxes,
amortization and depreciation, interest, gains and losses arising from
revaluation of assets, and charges or allocations by a parent or affiliated
company except to the extent that such charges are for expenses that directly
relate to the operations of the Company.
Mr. Bisceglia was also granted pursuant to the agreement an option to
purchase 150,000 shares of Common Stock at an exercise price of $1.00 per share
under the Company's 1994 Omnibus Stock Plan. The shares subject to the option
become exercisable in four equal annual installments commencing on the date of
grant. In the event the Company's majority shareholder, Wexford Partners Fund,
L.P., ceases to own at least 51% of the Company's outstanding voting stock, the
option becomes exercisable in full. The option expires ten years from the date
of grant, unless earlier terminated upon termination of Mr. Bisceglia's
employment for cause or upon Mr. Bisceglia's resignation. The agreement contains
provisions that require the Company, at the option of Mr. Bisceglia, to purchase
unexercised option shares at market value if Mr. Bisceglia's employment is
74
<PAGE>
terminated by the Company for reasons other than cause. Otherwise, the option
remains in effect until its expiration date.
If the agreement is terminated by the Company without cause, Mr. Bisceglia
is entitled to receive the amount of compensation and benefits he would
otherwise have received for the remaining term of the agreement or for six
months, whichever period is longer. The agreement is automatically renewed for
additional one-year periods unless the Company provides Mr. Bisceglia 180 days
notice of non-renewal or Mr. Bisceglia provides the Company with 120 days notice
of termination on December 31, 1997, or on any date thereafter.
Pursuant to the agreement, Mr. Bisceglia is indemnified by the Company with
respect to claims made against him as a director, officer, and/or employee of
the Company or any subsidiary of the Company to the fullest extent permitted by
the Company's Certificate of Incorporation, its by-laws and the General
Corporation Law of the State of Delaware.
Mr. Steadman. Mr. Steadman is employed by the Company pursuant to an
agreement dated October 31, 1994 at the rate of $5,000 per month plus $500 per
day for each day spent on Company business outside of the New England area (in
which Mr. Steadman's office is located), but not to exceed $7,500 in any one
month. Pursuant to the agreement, Mr. Steadman is elected Chairman of the Board
of Directors and in that capacity renders advice to the Board and management on
business, operational and financial matters. Mr. Steadman is entitled to
participate in employee benefit plans made available to other senior executives
of the Company. The agreement also provided for the grant to Mr. Steadman of an
option to purchase 50,000 shares of Common Stock at an exercise price of $1.00
per share. The option has substantially the same terms as those of Mr.
Bisceglia's option, described above.
Other Officers. Effective July 1, 1996, the Company adopted a policy
regarding all officers of the Company, which is described under the heading
"Report of the Compensation Committee on Executive Compensation -- Other
Executive Officers," below.
Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings, including this
Annual Report on Form 10-K in whole or in part, the following report of the
Compensation Committee, and the Performance Graph shall not be deemed to be
incorporated by reference into any such filings.
Report of the Compensation Committee on Executive Compensation
This report has been prepared by the Compensation Committee of the Board of
Directors of the Company and addresses the Company's compensation policies with
respect to the Chief Executive Officer and executive officers of the Company in
general for the fiscal year ended March 28, 1997. Except for Mr. Steadman, each
member of the Committee is a non-employee director. Mr. Steadman's compensation
is based on his employment agreement, described above, which was approved by the
Board of Directors in November 1994.
Compensation Policy
The overall intent of the Committee in respect of executive officers is to
establish levels of compensation that provide appropriate incentives in order to
command high levels of individual performance and thereby increase the value of
the Company to its stockholders, and that are sufficiently competitive to retain
and attract the skills required for the success and profitability of the
Company. The principal components of executive compensation are salary, bonus
and stock options.
75
<PAGE>
Chief Executive Officer's Compensation
The Chief Executive Officer's compensation for fiscal 1997 is based on a
written employment agreement that was negotiated and entered into between him
and the Company in October 1994 and is described above under the heading
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements." The salary in the agreement was determined to be appropriate by
the members of the Committee at the time the agreement was entered into based on
the financial and legal difficulties that the Company had experienced; the
expertise and responsibility that the position requires; the Chief Executive
Officer's experience with the Company in other capacities; and the subjective
judgement of members of a reasonable compensation level. The increase in salary
granted by the Committee in January 1997 was based on Mr. Bisceglia's
performance during fiscal 1997 and that of the Company as a whole and the
subjective judgement of Committee members of a reasonable raise.
Other Executive Officers
Officers' Policy. Effective July 1, 1996, the Company adopted a policy
regarding all officers of the Company to acknowledge that they have extra duties
and responsibilities and that they are held to a higher standard of performance
than employees generally. The policy provides, among other things, for
Company-paid life insurance for each officer in the amount of two and one-half
times base salary; long term disability insurance coverage; the establishment of
an annual pool of funds from the Company's operating profits for the payment of
bonuses; severance benefits in the event the officer's employment is terminated
without cause consisting of a minimum of continued payment of two months' salary
and a maximum of four months' salary, plus the continuation of Company benefits
during the period of continued salary payment; and the acceleration of one-half
of the officer's unvested option shares in the event of a sale of substantially
all of the assets of the Company or a person or entity acquires more than 51% of
the outstanding voting stock of the Company. The policy also provides the same
level of indemnity as for Mr. Bisceglia, described above.
Salary. During fiscal 1997, the salary of each executive officer other than
the salary of the Chairman and the Chief Executive Officer (described above
under the heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements") was based on the level of his prior salary and
on the subjective judgement of members of the Committee as to what constitutes a
compensation level that is fair and calculated to retain the executive in the
Company's employ. In the case of one executive officer, his salary increase was
also based on a promotion to a new position with increased responsibilities.
Bonuses. In July 1996 pursuant to the Officers' Policy described above, the
Compensation Committee adopted a bonus plan for the 1997 fiscal year covering
officers which also covers key employees of the Company other than those covered
under a sales bonus plan of the Company. Bonuses under the plan are to be paid
out of a pool of funds equal to 15% of the net income of the Company (i) before
taxes and before the payment of any bonuses paid outside of the plan, (such as
to the Chief Executive Officer pursuant to his employment agreement) and (ii)
after deducting an amount equal to 15% of stockholders' equity. The allocation
of the fund to individual officers and key employees is based on the
recommendations to the Compensation Committee of the Chairman and Chief
Executive Officer. The decision of the Compensation Committee is final and is
based the recommendations it receives and the subjective judgement of members of
the Committee.
Mr. Bartusek's incentive bonus compensation as Senior Vice President of
Sales and Marketing is based on the difference between the Company's quarterly
revenues in fiscal 1996 and the corresponding quarterly revenues in fiscal 1997.
If 1997 quarterly revenues meet a minimum target established for each quarter,
he is paid a percentage of the difference. The plan was based on the budgeted
revenues for fiscal 1997 and the subjective judgement of the members of the
Committee as to the appropriate level of incentive payment if the budgeted
minimum quarterly revenues are achieved. Payment of the incentive compensation
is made only after the Company's year-end audit has been completed.
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<PAGE>
Stock Options. Stock options are granted by the Stock Plans Committee of
the Board of Directors. The Stock Plans Committee believes that stock ownership
by executive officers is important in aligning management's and stockholders'
interests in the enhancement of stockholder value over the long term. For
options granted during fiscal 1997, the exercise price was equal to the market
price of the Common Stock on the date of grant. The stock option grants made to
the executive officers in fiscal 1997 were made based on the subjective
judgement of the Committee members of the appropriate recognition for their
services to the Company during the 1997 fiscal year and prior years.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code (enacted in 1993) generally disallows a tax deduction to
public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding stock options) is currently and for the foreseeable future
unlikely to reach that threshold. Qualifying, performance-based compensation
will not be subject to the deduction limit if certain requirements are met. The
Committee currently intends to structure stock option grants to executive
officers in a manner that complies with the performance-based requirements of
the statute.
The Compensation Committee: Charles E. Davidson
Mark L. Plaumann
David R. A. Steadman
Stock Plans Committee: Charles E. Davidson
Mark L. Plaumann
Directors' Compensation
Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. Directors who are not employees of
the Company receive no cash compensation for their services as directors. Mr.
Steadman, who is an employee of the Company receives compensation as such. See
"Compensation Committee Interlocks and Insider Participation," below. All
directors are reimbursed for their out-of-pocket business expenses incurred in
attending Board meetings and for performing any other services for the Company.
Non-employee directors of the Company receive "formula" stock option grants
under the Company's 1995 Non-Employee Director Stock Option Plan approved by
stockholders on May 10, 1995. Each non-employee director serving on the date
that the Company's initial registration statement became effective (May 10,
1996) was automatically granted an option to purchase 10,000 shares of Common
Stock (the "Initial Grants") that became fully exercisable six months after the
grant date. After the Initial Grants, each non-employee director is
automatically granted an additional option to purchase 3,000 shares on each
anniversary of September 1, 1996 so long as he is then serving as a non-employee
director. Each non-employee director first elected to the Board after May 10,
1996 automatically receives an option to purchase 3,000 shares of Common Stock
on the date of his or her election and, so long as he or she is then serving as
a non-employee director, an additional option to purchase 3,000 shares of Common
Stock on each anniversary of that date. All options under the Plan are granted
at an exercise price per share equal to the market value of a share of Common
Stock on the date of grant. Except for the Initial Grants, all options vest in
full on the first anniversary of the grant date.
--------------------
77
<PAGE>
Compensation Committee Interlocks and Insider Participation
Decisions concerning executive compensation (other than that of the
Chairman) are made by the Compensation Committee of the Board of Directors,
which currently consists of Messrs. Davidson, Plaumann and Steadman. Mr.
Steadman is Chairman of the Board of Directors and an employee of the Company;
Messrs. Davidson and Plaumann are neither officers nor employees of the Company
or any of its subsidiaries. During fiscal 1997, no executive officer of the
Company served as a director or member of a compensation committee of another
entity with which any director of the Company had any relationship as a director
or officer, except that Mr. Steadman is Chairman of the Board of Directors and a
member of the Compensation Committee of Wahlco Environmental Systems, Inc. of
which Mr. Plaumann is a director and former President.
Mr. Steadman was elected Chairman of the Board of Directors and is employed
by the Company pursuant to an employment agreement that is described under the
heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," above. In fiscal 1997, Mr. Steadman received
compensation of $69,000, plus the reimbursement of $11,003 of out-of-pocket
expenses incurred in rendering services to the Company and was also granted a
stock option to purchase 15,000 shares of Common Stock at $5.00 per share.
Pursuant to an acquisition in January 1991 of the assets of the Public
Communication Systems Division of Executone Information Systems, Inc. ("PCS"),
the Company was obligated to pay OAB, Inc. royalties of 3.5% of the Company's
sales of microprocessor-based components through June 30, 1996. Mr. Bartusek and
certain other employees of the Company, who were employees of PCS, are
stockholders of OAB. Royalty payments under this agreement during fiscal 1997
through the June 30, 1996 expiration date were approximately $420,100 (including
payments of accrued royalties at March 29, 1996 and debt payments on notes
issued in respect of accrued royalties), of which Mr. Bartusek received
approximately $80,000.
Wexford Partners Fund, L.P. and Acor S.A. are parties to an Investment
Agreement pursuant to which they acquired $2,361,082 and $438,918, respectively,
of 10% subordinated notes of the Company in 1994. In May, 1996, the Company
repaid the principal balances of these notes in full -- $2,361,082 to Wexford
and $438,918, to Acor. Interest paid on the notes to Wexford and Acor during
fiscal 1997 was $128,081 and $23,810, respectively.
--------------------
78
<PAGE>
Performance Graph
The following graph assumes an investment of $100 on May 10, 1996 (the date
the Common Stock was first registered under Section 12 of the Exchange Act) and
compares yearly changes thereafter (through March 28, 1997) in the market price
of the Common Stock with (i) the Nasdaq Market Index for U.S. Companies (a broad
market index) and (ii) the Nasdaq Telecommunications Index, a published industry
index.
The performance of the indices is shown on a total return (dividend
reinvestment) basis; however, the Company paid no dividends during the period
shown. The graph lines merely connect the beginning and end of the measuring
periods and do not reflect fluctuations between those dates.
[The following table was represented by a line graph in the printed material]
May 10, March 28,
1996 1997
Technology Service Group, Inc. $ 100.00 $ 54.70
Nasdaq Market Index for U.S. Companies 100.00 98.20
Nasdaq Telecommunications Index 100.00 84.93
--------------------
79
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following tables sets forth certain information regarding beneficial
ownership of the outstanding common stock of the Company ("Common Stock") at
June 1, 1997 by (i) each person known by the Company to own beneficially more
than 5% of the Common Stock; (ii) each of the directors of the Company; (iii)
the executive officers named in the Summary Compensation Table, in Item 11 --
"Executive Compensation" and (iv) all directors and executive officers as a
group. The numbers and percentages assume for each person or group listed, the
exercise of all warrants and stock options held by such person or group that are
exercisable within 60 days of June 1, 1997, in accordance with Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934, but not the exercise of such warrants
and stock options owned by any other person. Except as otherwise indicated in
the footnotes, the Company believes that the beneficial owners of the Common
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to the shares of Common Stock shown as
beneficially owned by them.
Security Ownership of Certain Beneficial Holders
Name and Address Number of Shares
of Beneficial Owner of Common Stock Percentage of Class
Wexford Partners Fund, L.P. 2,444,286 52.0%
411 West Putnam Avenue
Greenwich, CT 06830
Acor S.A. 454,386 9.7%
17 Rue du Colisee
Paris, France 75008
Firlane Business Corp. 235,028 5.0%
Box 202
1211 Geneva 12, Switzerland
A.T.T. IV, NV 549,450 (1) 11.6%
c/o Applied Communications
Technologies, Inc.
20 William Street
Wellesley, MA 02181
- -----------------
(1) Of these shares, 183,150 shares are subject to purchase at $11.00 per
share, (i) 142,857 shares from Wexford Partners Fund, L.P.; (ii) 26,557
shares from Acor S.A.; and (iii) 13,736 shares from Firlane Business Corp.
If the options were exercised in full, Wexford would beneficially own
2,301,429 shares (49%); Acor would beneficially own 427,829 shares (9.1%);
and Firlane would beneficially own 221,292 shares (4.7%) of the Common
Stock.
--------------------
80
<PAGE>
Security Ownership of Management
Shares
Name of Beneficial Owner Beneficially Owned Percentage of Class
D. Thomas Abbott 3,000 (1) *
Vincent C. Bisceglia 114,154 (2) 2.4%
Charles E. Davidson 2,454,286 (3) 52.0%
Mark L. Plaumann 2,444,286 (4) 52.0%
Olivier Roussel 464,386 (5) 9.9%
David R. A. Steadman 45,407 (6) *
Darold R. Bartusek 31,956 (7) *
M. Winton Schriner 31,250 (7) *
William H. Thompson 35,331 (8) *
Allen W. Vogl 19,000 (9) *
All Directors and Executive
Officers as a Group (10 Persons) 3,198,720 /10 64.0%
- --------------
* Represents holdings of less than one percent.
(1) These shares are purchasable within 60 days of June 1, 1997 under a stock
option at $10.71 per share.
(2) Of these shares, 112,500 shares are purchasable within 60 days of June 1,
1997 under a stock option at $1.00 per share.
(3) These shares include 10,000 shares that are purchasable within 60 days of
June 1, 1997 under a stock option at $8.50 per share and 2,444,286 shares
that are owned by Wexford Partners Fund, L.P., of which Mr. Davidson is an
affiliate. Mr. Davidson disclaims beneficial ownership of the shares owned
by Wexford Partners Fund, L.P.
(4) These shares are owned by Wexford Partners Fund, L.P., of which Mr.
Plaumann is an affiliate. Mr. Plaumann disclaims beneficial ownership of
these shares.
(5) These shares include 10,000 shares that are purchasable within 60 days of
June 1, 1997 under a stock option at $8.50 per share and 454,386 shares
that are owned by Acor S.A., of which Mr. Roussel is Chairman and
President. Mr. Roussel disclaims beneficial ownership of the shares owned
by Acor S.A..
(6) These shares include 45,000 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $5.00 per
share.
81
<PAGE>
(7) These shares include 31,250 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $9.50 per
share.
(8) These shares include 35,000 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $9.50 per
share.
(9) These shares include 18,750 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $5.00 per
share, and 50 shares that are purchasable within 60 days of June 1, 1997
under redeemable warrants at a price of $11.00 per share.
(10) These shares include 2,444,286 shares that are owned by Wexford Partners
Fund, L.P., (as to which Messrs. Davidson and Plaumann disclaim beneficial
ownership); 454,386 shares that are owned by Acor S.A. (as to which Mr.
Roussel disclaims beneficial ownership); and 296,750 shares that are
purchasable within 60 days of June 1, 1997 under stock options at prices
ranging from $1.00 to $10.71 per share.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Compensation of Directors" and "Compensation
Committee Interlocks and Insider Participation" in Item 11-- "Executive
Compensation," above.
--------------------
82
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report.
(1) Financial Statements -- See the index to the financial statements in
Item 8 at page 39.
(2) Financial Statement Schedules -- See the index to the financial
statement schedules in Item 8 at page 39.
(3) Exhibits --
Exhibit No. Description of Exhibit
- ----------- ----------------------
3 (i) Certificate of Incorporation (incorporated by reference to
Exhibit 3 (i) to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
3 (ii) By-laws (incorporated by reference to Exhibit 3 (ii) to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).
4.1(a) Warrant Agreement (incorporated by reference to Exhibit 4.1
to Amendment No. 2 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 29,
1996).
4.1(b) Form of Redeemable Warrant (incorporated by reference to
Exhibit 4.1(a) to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).
4.2 Representative's Warrant Agreement including form of
Representative's Warrant (incorporated by reference to
Exhibit 4.2 to Amendment No. 2 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 29, 1996).
4.3 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.3 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).
10.1 Loan and Security Agreement between Barclays Business Credit,
Inc. and International Teleservice Corporation dated February
23, 1990 (incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed
on March 1, 1996).
83
<PAGE>
10.2 Continuing Guaranty Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation dated
February 23, 1990 (incorporated by reference to Exhibit 10.2
to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).
10.3 First Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and International Teleservice
Corporation dated January 11, 1991 (incorporated by reference
to Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.4 Second Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated June 9, 1994 (incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).
10.5 Third Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated July 8, 1994 (incorporated by reference to Exhibit
10.5 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).
10.6 Fourth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated October 31, 1994 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.7** Manufacturing Services Agreement TSG-1O94JLR dated October
21, 1994 by and between Technology Service Group, Inc. and
Avex Electronics Inc. (incorporated by reference to Exhibit
10.8 to Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).
10.8 Fifth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated as of April 22, 1996 (incorporated by reference to
Exhibit 10.9 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).
10.9** Amendment 002 to the Manufacturing Services Agreement
TSG-1O49JLR dated October 21, 1994 by and between Technology
Service Group, Inc. and Avex Electronics Inc. (incorporated
by reference to Exhibit 10.10 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).
84
<PAGE>
10.10 Manufacturing Rights Agreement dated September 16, 1991
between Newco, Inc. (Commtek Industries, Inc.), Dynacom
Corporation and International Service Technologies, Inc.
(incorporated by reference to Exhibit 10.11 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).
10.11 Lease Agreement between Telematics Products, Inc. and William
M. Johnson dated July 14, 1988 (incorporated by reference to
Exhibit 10.13 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.12 Assignment of Lease between Executone Information Systems,
Inc. and Technology Service Enterprises, Inc. dated January
11, 1991 (incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).
10.13 First Amendment to Lease Agreement between Mansell 400
Associates, L.P. and Technology Service Group, Inc. dated
February 1993 (incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).
10.14 Lease between Steroben Associates and Comdial TeleServices
Corporation dated August 1, 1986 (incorporated by reference
to Exhibit 10.16 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.15** Dealer Agreement between Control Module, Inc. and Technology
Service Group, Inc. dated November 18, 1994 (incorporated by
reference to Exhibit 10.17 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).
10.16* Employment Agreement between Technology Service Group, Inc.
and Vincent C. Bisceglia dated October 31, 1994 (incorporated
by reference to Exhibit 10.18 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).
10.17* Chairman's Agreement between Technology Service Group, Inc.
and David R.A. Steadman dated October 31, 1994 (incorporated
by reference to Exhibit 10.19 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).
10.18** Patent License Agreement (incorporated by reference to
Exhibit 10.21 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).
85
<PAGE>
10.19 Warrant Agreement between Technology Service Group, Inc. and
Avex Electronics Inc. dated May 23, 1995 (incorporated by
reference to Exhibit 10.22 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).
10.20* Employee Incentive Stock Option Agreement between Technology
Service Group, Inc. and Vincent C. Bisceglia dated November
1, 1994 (incorporated by reference to Exhibit 10.23 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).
10.21* Incentive Stock Option Agreement between Technology Service
Group, Inc. and David R.A. Steadman dated November 1, 1994
(incorporated by reference to Exhibit 10.24 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).
10.22* Form of Employee Incentive Stock Option Agreement under the
1994 Omnibus Stock Plan of Technology Service Group, Inc.
(incorporated by reference to Exhibit 10.25 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).
10.23 Agreement and Plan of Merger among Wexford Capital
Corporation, TSG Acquisition Corporation, Technology Service
Group, Inc. and certain shareholders of Technology Service
Group, Inc. dated October 11, 1994 (incorporated by reference
to Exhibit 10.26 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.24 Amendment dated October 31, 1994 to Agreement and Plan of
Merger among Wexford Capital Corporation, TSG Acquisition
Corporation, Technology Service Group, Inc. and certain
shareholders of Technology Service Group, Inc. dated October
11, 1994 (incorporated by reference to Exhibit 10.27 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).
10.25 Subordination Agreement between Technology Service Group,
Inc., Wexford Partners Fund, L.P., Acor, S.A. and Barclays
Business Credit, Inc. dated October 31, 1994 (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).
10.26 Investment Agreement between Technology Service Group, Inc.,
Wexford Partners Fund, L.P., Acor, S.A. and Firlane Business
Corp. dated October 31, 1994 (incorporated by reference to
Exhibit 10.30 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
86
<PAGE>
10.27 Amended and Restated Stockholders' Agreement among Technology
Service Group, Inc., Wexford Partners Fund, L.P., Acor, S.A.,
Firlane Business Corp. and A.T.T. IV, N.V. (incorporated by
reference to Exhibit 10.31(b) to the Registrant's Form 10-K
Annual Report for the year ended March 29, 1996).
10.28** Contract No. XO8895D between Technology Service Group, Inc.
and NYNEX (incorporated by reference to Exhibit 10.37 to
Amendment No. 3 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on April 29, 1996).
10.29** Contract No. C5262CO between Technology Service Group, Inc.
and Southwestern Bell Telephone Company (incorporated by
reference to Exhibit 10.38 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).
10.30* 1994 Omnibus Stock Plan (incorporated by reference to Exhibit
10.45 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).
10.31 1995 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.46 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).
10.32* 1995 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.47 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).
10.33*** Lease Agreement between Technology Service Group, Inc. and
McDonald Windward Partners II, L.L.C. dated November 12,
1996.
10.34*** Letter Agreement between Technology Service Group, Inc. and
Mr. James Lacy dated September 18, 1996, amendment thereto
and Assignment and Assumption of Real Estate Lease between
Technology Service Group, Inc., Mr. James Lacy and G.P.E.D.C.
dated November 6, 1996.
10.35*** Lease Extension Agreement Between Steroben Associates and
Technology Service Group, Inc. dated August 1, 1996.
87
<PAGE>
10.36*** Contract No. D08E20H44 between Southwestern Bell Telephone
Company and Technology Service Group, Inc. dated June 9,
1997.
11.*** Statement re computation of per share earnings.
21. Subsidiaries of Registrant: International Service
Technologies, Inc. (a Delaware corporation).
27. Financial Data Schedule (Edgar Filing only).
* Management compensation contracts and plans.
** Registrant has received confidential treatment of a portion of this
Exhibit, which portion has been separately filed with the Commission.
*** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the fiscal year ended March 28, 1997.
88
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions- End
Description of Period Expenses Accounts-Describe Describe of Period
- ----------- --------- -------- ----------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Seven Months Ended October 30, 1994
Allowance for doubtful accounts $ 278,590 $ 27,122 $ 70,000 (3) $(102,494)(1) $ 273,218
Reserve for obsolete and slow moving
inventory 1,643,774 223,064 (19,275)(4) (10,653)(2) 1,836,910
Reserve for impairment of property
and equipment 253,084 (1,375)(6) (117,807)(5) 133,902
Five Months Ended March 31, 1995
Allowance for doubtful accounts 273,218 (3,467) (68,305)(1) 201,446
Reserve for obsolete and slow moving
inventory 1,836,910 80,130 (58,498)(4) (92,343)(2) 1,766,199
Reserve for impairment of property
and equipment 133,902 (133,902)(7) --
Year Ended March 29, 1996
Allowance for doubtful accounts 201,446 10,099 4,014 (1) 215,559
Reserve for obsolete and slow moving
inventory 1,766,199 408,694 (57,511)(4) (511,187)(2) 1,606,195
Year Ended March 28, 1997
Allowance for doubtful accounts 215,559 (70,000)(3) 1,401 (1) 146,960
Reserve for obsolete and slow moving
inventory $1,606,195 $264,151 ($441,859)(2) $1,428,487
</TABLE>
- --------------------
(1) Write-off of uncollected accounts and recoveries.
(2) Write-off of obsolete inventory, net of recoveries.
(3) Charges and credits to cost of goods sold with respect to accounts
receivable and accounts payable offsets.
(4) Credits to cost of goods sold with respect to net realizable value
reserves.
(5) Write-off of assets included in reserve for impairment.
(6) Restructuring charges (credits).
(7) Purchase accounting adjustment.
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized, on the 9th day of June
1997.
TECHNOLOGY SERVICE GROUP, INC.
By: /s/ Vincent C. Bisceglia
--------------------------
Vincent C. Bisceglia
President & Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of Vincent C. Bisceglia, William H.
Thompson and Roger M. Barzun jointly and severally his true and lawful
attorneys-in-fact and agent with full powers of substitution for him and in his
name, place and stead in any and all capacities to sign on his behalf,
individually and in each capacity stated below and to file any and all
amendments to this Annual Report on Form 10-K with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or substitutes
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Vincent C. Bisceglia President & Chief June 9,1997
--------------------------- Executive Officer, Director
Vincent C. Bisceglia
By: /s/ William H. Thompson Vice President, Finance June 9, 1997
--------------------------- Chief Financial Officer
William H. Thompson Secretary (principal financial
and accounting officer)
By: /s/ David R.A. Steadman Director and Chairman June 9, 1997
--------------------------- of the Board
David R.A. Steadman
By: /s/ Charles E. Davidson Director June 9, 1997
---------------------------
Charles E. Davidson
By: /s/ Mark L. Plaumann Director June 9, 1997
---------------------------
Mark L. Plaumann
By: /s/ Olivier Roussel Director June 4, 1997
---------------------------
Olivier Roussel
By: /s/ D. Thomas Abbott Director June 9, 1997
---------------------------
D. Thomas Abbott
90
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit At Page
- ----------- ---------------------- -------
3(i) Certificate of Incorporation (incorporated by reference
to Exhibit 3 (i) to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
3 (ii) By-laws (incorporated by reference to Exhibit 3 (ii) to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
4.1(a) Warrant Agreement (incorporated by reference to Exhibit
4.1 to Amendment No. 2 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 29,
1996).
4.1(b) Form of Redeemable Warrant (incorporated by reference
to Exhibit 4.1(a) to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).
4.2 Representative's Warrant Agreement including form of
Representative's Warrant (incorporated by reference to
Exhibit 4.2 to Amendment No. 2 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 29, 1996).
4.3 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.3 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).
10.1 Loan and Security Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation
dated February 23, 1990 (incorporated by reference to
Exhibit 10.1 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.2 Continuing Guaranty Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation
dated February 23, 1990 (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.3 First Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and International
Teleservice Corporation dated January 11, 1991
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Registration Statement, No.
33-80695, on Form S-1 filed on March 1, 1996).
10.4 Second Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated June 9, 1994 (incorporated by
reference to Exhibit 10.4 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).
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10.5 Third Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated July 8, 1994 (incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).
10.6 Fourth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated October 31, 1994 (incorporated by
reference to Exhibit 10.6 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).
10.7** Manufacturing Services Agreement TSG-1O94JLR dated
October 21, 1994 by and between Technology Service
Group, Inc. and Avex Electronics Inc. (incorporated by
reference to Exhibit 10.8 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).
10.8 Fifth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated as of April 22, 1996 (incorporated by
reference to Exhibit 10.9 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).
10.9** Amendment 002 to the Manufacturing Services Agreement
TSG-1O49JLR dated October 21, 1994 by and between
Technology Service Group, Inc. and Avex Electronics
Inc. (incorporated by reference to Exhibit 10.10 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).
10.10 Manufacturing Rights Agreement dated September 16, 1991
between Newco, Inc. (Commtek Industries, Inc.), Dynacom
Corporation and International Service Technologies,
Inc. (incorporated by reference to Exhibit 10.11 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.11 Lease Agreement between Telematics Products, Inc. and
William M. Johnson dated July 14, 1988 (incorporated by
reference to Exhibit 10.13 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).
10.12 Assignment of Lease between Executone Information
Systems, Inc. and Technology Service Enterprises, Inc.
dated January 11, 1991 (incorporated by reference to
Exhibit 10.14 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
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10.13 First Amendment to Lease Agreement between Mansell 400
Associates, L.P. and Technology Service Group, Inc.
dated February 1993 (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.14 Lease between Steroben Associates and Comdial
TeleServices Corporation dated August 1, 1986
(incorporated by reference to Exhibit 10.16 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.15** Dealer Agreement between Control Module, Inc. and
Technology Service Group, Inc. dated November 18, 1994
(incorporated by reference to Exhibit 10.17 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).
10.16* Employment Agreement between Technology Service Group,
Inc. and Vincent C. Bisceglia dated October 31, 1994
(incorporated by reference to Exhibit 10.18 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.17* Chairman's Agreement between Technology Service Group,
Inc. and David R.A. Steadman dated October 31, 1994
(incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.18** Patent License Agreement (incorporated by reference to
Exhibit 10.21 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695 on Form S-1, filed
on April 29, 1996).
10.19 Warrant Agreement between Technology Service Group,
Inc. and Avex Electronics Inc. dated May 23, 1995
(incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.20* Employee Incentive Stock Option Agreement between
Technology Service Group, Inc. and Vincent C. Bisceglia
dated November 1, 1994 (incorporated by reference to
Exhibit 10.23 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.21* Incentive Stock Option Agreement between Technology
Service Group, Inc. and David R.A. Steadman dated
November 1, 1994 (incorporated by reference to Exhibit
10.24 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
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10.22* Form of Employee Incentive Stock Option Agreement under
the 1994 Omnibus Stock Plan of Technology Service
Group, Inc. (incorporated by reference to Exhibit 10.25
to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.23 Agreement and Plan of Merger among Wexford Capital
Corporation, TSG Acquisition Corporation, Technology
Service Group, Inc. and certain shareholders of
Technology Service Group, Inc. dated October 11, 1994
(incorporated by reference to Exhibit 10.26 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.24 Amendment dated October 31, 1994 to Agreement and Plan
of Merger among Wexford Capital Corporation, TSG
Acquisition Corporation, Technology Service Group, Inc.
and certain shareholders of Technology Service Group,
Inc. dated October 11, 1994 (incorporated by reference
to Exhibit 10.27 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.25 Subordination Agreement between Technology Service
Group, Inc., Wexford Partners Fund, L.P., Acor, S.A.
and Barclays Business Credit, Inc. dated October 31,
1994 (incorporated by reference to Exhibit 10.29 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.26 Investment Agreement between Technology Service Group,
Inc., Wexford Partners Fund, L.P., Acor, S.A. and
Firlane Business Corp. dated October 31, 1994
(incorporated by reference to Exhibit 10.30 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.27 Amended and Restated Stockholders' Agreement among
Technology Service Group, Inc., Wexford Partners Fund,
L.P., Acor, S.A., Firlane Business Corp. and A.T.T. IV,
N.V. (incorporated by reference to Exhibit 10.31 (b) of
Registrant's Form 10-K Annual Report for the year ended
March 29,1996).
10.28** Contract No. XO8895D between Technology Service Group,
Inc. and NYNEX (incorporated by reference to Exhibit
10.37 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on April 29, 1996).
10.29** Contract No. C5262CO between Technology Service Group,
Inc. and Southwestern Bell Telephone Company
(incorporated by reference to Exhibit 10.38 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).
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10.30* 1994 Omnibus Stock Plan (incorporated by reference to
Exhibit 10.45 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).
10.31 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.46 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).
10.32* 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.47 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).
10.33*** Lease Agreement between Technology Service Group, Inc. 96
and McDonald Windward Partners II, L.L.C. dated
November 12, 1996.
10.34*** Letter Agreement between Technology Service Group, Inc. 109
and Mr. James Lacy dated September 18, 1996, amendment
thereto and Assignment and Assumption of Real Estate
Lease between Technology Service Group, Inc., Mr. James
Lacy and G.P.E.D.C. dated November 6, 1996.
10.35*** Lease Extension Agreement Between Steroben Associates 124
and Technology Service Group, Inc. dated August 1, 1996.
10.36*** Contract No. D08E20H44 between Southwestern Bell 126
Telephone Company and Technology Service Group, Inc.
dated June 9, 1997.
11.*** Statement re computation of per share earnings. 179
21. Subsidiaries of Registrant: International Service
Technologies, Inc. (a Delaware corporation).
27. Financial Data Schedule (Edgar Filing only). 180
* Management compensation contracts and plans.
** Registrant has received confidential treatment of a portion of this
Exhibit, which portion has been separately filed with the Commission.
*** Filed herewith.
95
Exhibit 10.33 Lease Agreement between Technology Service Group, Inc. and
McDonald Windward Partners II, L.L.C. dated November 12, 1996
96
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LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between TECHNOLOGY
SERVICE GROUP, INC., a Delaware corporation (hereinafter referred to as
"Tenant"), and McDONALD WINDWARD PARTNERS II, L.L.C., a Georgia limited
liability company (hereinafter referred to as "Landlord");
W I T N E S S E T H
1. PREMISES. For and in consideration of the obligation of Tenant to pay
rent as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant
hereby leases from Landlord certain premises being approximately 39,200 square
feet of space within the building located at 1075 Windward Ridge Parkway (known
as Building 200 at Windward Ridge), Forsyth County, Georgia, described in
Exhibit "A" attached hereto and incorporated herein by reference, together with
all rights, privileges, easements, and appurtenances belonging to or in any way
pertaining to said premises and together with the buildings and other
improvements situated or to be situated upon said premises (said real property,
building and improvements being hereinafter referred to as the "Premises").
TO HAVE AND TO HOLD the Premises for the Demised Term, as hereinafter
defined.
2. TERM. The term of this lease (hereinafter referred to as the "Demised
Term") shall be for a period commencing on the Commencement Date, as hereinafter
defined, and ending sixty (60) months thereafter, unless sooner terminated as
provided in this lease; provided, however, that, in the event the Commencement
Date is not the first day of a calendar month, the Demised Term shall extend for
the remainder of the calendar month in which the Commencement Date occurs plus
said number of months.
The "Commencement Date" shall be the date upon which the buildings and
other improvements erected and to be erected upon the Premises shall have been
substantially completed in accordance with the plans and specifications
described on Exhibit "B" attached hereto and incorporated herein by reference.
Landlord shall notify Tenant in writing as soon as Landlord deems said buildings
and other improvements to be completed and ready for occupancy as aforesaid. In
the event that said buildings and other improvements have not in fact been
substantially completed as aforesaid, Tenant shall notify Landlord in writing of
its objections. Landlord shall have a reasonable time after delivery of such
notice in which to take such corrective action as may be necessary, and shall
notify Tenant in writing as soon as it deems such corrective action has been
completed so that said buildings and other improvements are completed and ready
for occupancy. Taking of possession by Tenant shall be deemed conclusively to
establish that said buildings and other improvements have been completed in
accordance with the plans and specifications and are in good and satisfactory
condition. In the event of any dispute as to substantial completion of work
performed or required to be performed by Landlord, or the date of substantial
completion of such work, the certificate of Landlord's architect or general
contractor shall be conclusive. Tenant acknowledges that no representations as
to the condition of the Premises have been made by Landlord, unless such are
expressly set forth in this lease. After the Commencement Date, Tenant shall,
upon demand, execute and deliver to Landlord a letter of acceptance of delivery
of the Premises.
3. BASE RENT. Tenant agrees to pay Landlord rent for the Premises, in
advance, without demand, deduction or set off, for the Demised Term at the rate
of Seventeen Thousand Eight Hundred Three and 33/100 Dollars ($17,803.33) per
month. One monthly rent installment shall be due and payable on the date hereof
and a like monthly rent installment shall be due and payable on or before the
first day of each calendar month during the Demised Term, except that the rental
payment for any fractional calendar month at the commencement or end of the
Demised Term shall be prorated on the bases of a thirty-day month.
In the event the Commencement Date occurs on or before December 31, 1996,
Base Rent under this Paragraph 3 shall abate during the period beginning on the
Commencement Date and ending on January 31, 1997. In the event the Commencement
Date occurs on or after January 1, 1997, Base Rent under this Paragraph 3 shall
abate during a thirty-day period beginning on the Commencement Date.
4. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord on the date
hereof, in addition to the rent specified in Paragraph 3, the sum of Seventeen
Thousand Eight Hundred Three and 33/100 Dollars ($17,803.33), which sum shall be
held by Landlord, without obligation for interest (except as may be required by
law), as security for the performance of Tenant's covenants and obligations
under this lease, it being expressly understood and agreed that such deposit is
not an advance rental payment or a measure of Landlord's damages in case of
Tenant's default. Upon the occurrence of any event of default by Tenant under
this lease, Landlord may (but without obligation to do so), from time to time,
without prejudice to any other remedy provided herein or provided by law or in
equity, use this security deposit to the extent necessary
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to make good any arrears of rent or other payments due Landlord hereunder, and
any other damage, injury, expense or liability caused by such event of default.
Tenant shall pay Landlord, on demand, the amount of the security deposit so
applied in order to restore the security deposit to its original amount. This
security deposit shall be deemed the property of Landlord, but any remaining
balance of such deposit shall be returned by Landlord to Tenant at such time
after termination of this lease that all of Tenant's obligations under this
lease have been fulfilled.
5. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (other than at retail) and fabricating /
assembling printed circuit boards and products, materials and merchandise made
and/or distributed by Tenant and for such other lawful purposes as may be
incidental thereto, including headquarters offices and administrative functions
of the Tenant. Outside storage, including without limitation, trucks and other
vehicles, is prohibited without Landlord's prior written consent; provided,
however, that Landlord consents to the parking of Tenant's trucks (bobtail and
tractor-trailer), and the use by Tenant of a trash compactor or similar
receptacle, at Tenant's loading docks at the rear of the building. Tenant shall
at its own cost and expense obtain any and all other licenses and permits
necessary for any such use. Tenant shall comply with all governmental laws,
ordinances and regulations applicable to the use of the Premises, and shall
promptly comply with all governmental orders and directives for the correction,
prevention and abatement of nuisances in or upon, or connected with, the
Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action which would constitute a
nuisance or would disturb or endanger any other tenants of the building or
buildings in which the Premises are situated or unreasonably interfere with
their use of their respective premises. Without Landlord's prior written
consent, Tenant shall not receive, store or otherwise handle any product,
material or merchandise which is explosive or highly inflammable. Tenant will
not permit the Premises to be used for any purpose or in any manner (including
without limitation, any method of storage) which would render the insurance
thereon void or the insurance risk more hazardous or cause the State Board of
Insurance or other insurance authority to disallow any sprinkler credits. Tenant
shall not use the Premises for the generation, storage, transportation or
disposal of dangerous, toxic or hazardous materials, chemicals, wastes or
similar substances, except as hereinafter provided below.
Tenant's permitted use of the Premises shall also include printed circuit
board insertion and product assembly operations, soldering and wave-flow
operations, sapanofiers in aqueous cleaning operations with recycling system,
and conformal coating and painting operations. All of Tenant's operations shall
be performed in accordance with acceptable industry standards and shall comply
with all environmental regulations.
Tenant's permitted use of the Premises shall further include the use,
receipt, storage, and handling of: (a) explosive or highly flammable material,
as identified by Tenant on Exhibit "C"; and (b) hazardous materials and related
waste, and the discharge of gases and fumes (by means of external equipment
venting through exhaust curbs), all as identified by Tenant on Exhibit "C".
Tenant may, after receipt of Landlord's written consent (which consent shall not
be unreasonably withheld), modify the list on Exhibit "C" to include additional
materials reasonably required by Tenant in the conduct of its business. Tenant
warrants and agrees: (c) to store, as necessary, all flammable substances in
UL-approved flammable liquid storage cabinets; and (d) to store all hazardous
materials and waste in appropriate containers and at an appropriate location on
the Premises, and to dispose of hazardous waste using state-approved and
licensed subcontractors.
6. TAXES.
A. Landlord agrees to pay before delinquency, all taxes, assessments
and governmental charges of any kind and nature whatsoever (hereinafter
collectively referred to as "taxes") lawfully levied or assessed against
Premises; provided, however, that the maximum amount of taxes to be paid by
Landlord hereunder for the Premises during any one real estate tax year shall be
$.15 per square foot. (the "Landlord's Tax Share"). If in any real estate tax
year during the Demised Term hereof or in any renewal or extension period the
taxes levied or assessed against the Premises during such tax year shall exceed
the sum set forth in the preceding sentence, Tenant shall pay to Landlord as
additional rental, upon demand, the amount of such excess. In the event any such
amount is not paid within thirty (30) days after the date of Tenant's receipt of
Landlord's invoice, the unpaid amount shall bear interest at the rate of fifteen
percent (15%) per annum from the date of the invoice until payment by Tenant.
In the event the Premises constitute a portion of a multiple occupancy
building or there are several buildings located in the tax parcel in which the
Premises are situated, Tenant agrees to pay to Landlord, as additional rent,
upon demand, the amount of Tenant's "proportionate share" of the taxes in excess
of the Landlord's Tax Share. Tenant's "proportionate share", as used in this
lease, shall mean a fraction, the numerator of which is gross square footage
space contained in the Premises and the denominator of which is the gross square
footage contained in the building or buildings located on the tax parcel in
which the Premises are situated.
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B. If at any time during the term of this lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges, levied, assessed or imposed on real estate
and the improvements thereon, there shall be charged, levied, assessed or
imposed on Landlord a capital levy or other tax directly on the rents received
therefrom and/or a franchise tax, assessment, levy or charge measured by or
based, in whole or in part, upon such rents for the present or any future
building or buildings on the Premises, then all such taxes, assessments, levies
or charges, or the part thereof so measured or based, shall be deemed to be
included within the term "taxes" for the purposes hereof.
C. The Landlord shall have the right (but no obligation) to employ a
tax consulting firm to attempt to assure a fair tax burden on the building or
buildings in which the Premises are located and grounds surrounding the Premises
within the applicable tax jurisdiction. Tenant shall pay to Landlord upon demand
from time to time, as additional rent, the amount of Tenant's "proportionate
share" (as defined in subparagraph 6.A herein) of the cost of such service.
D. Any payment to be made pursuant to this Paragraph 6 shall be
prorated in the event any portion of the Demised Term is not within a full real
estate tax year.
7. LANDLORD'S REPAIRS. Landlord shall at its expense maintain only the
roof, foundation and the structural soundness of the exterior walls of the
Premises in good repair, reasonable wear and tear excepted. Tenant shall repair
and pay for any damage caused by the negligence of Tenant, or Tenant's
employees, agents or invitees, or caused by Tenant's default hereunder. The term
"walls" as used herein shall not include windows, glass or plate glass, doors,
special store fronts or office entries. Tenant shall immediately give Landlord
written notice of defects or need for repairs, after which Landlord shall have
reasonable opportunity to repair same or cure such defect. Landlord's liability
with respect to any defects, repairs or maintenance for which Landlord is
responsible under any of the provisions of this lease shall be limited to the
cost of such repairs or maintenance or the curing of such defects.
8. TENANT'S REPAIRS.
A. Tenant shall at its own cost and expense keep and maintain all
parts of the Premises (except those for which Landlord is expressly responsible
under the terms of this lease) in good condition, promptly making all necessary
repairs and replacements, including but not limited to, windows, glass and plate
glass, doors, any special office entry, interior walls and finish work, floors
and floor covering, heating and air condition systems, dock boards, truck doors,
dock bumpers, plumbing work and fixtures, termite and pest extermination, and
regular removal of trash and debris.
Tenant shall provide Landlord with prior notice of any repair to be
undertaken by Tenant costing in excess of $5,000 (in Tenant's reasonable
estimation) and such other information as Landlord may reasonably request with
respect to such repair, except such notice shall not be required if immediate
repair is necessary for security or safety reasons.
B. Tenant shall not damage any wall or disturb the integrity and
support provided by any wall and shall, at its sole cost and expense, promptly
repair any damage or injury to any wall caused by Tenant or its employees,
agents or invitees.
C. In the event the Premises constitute a portion of a multiple
occupancy building, Tenant and its employees, customers and licensees shall have
the exclusive right to use the parking areas located directly in front and to
the rear of the Premises (as expanded or contracted in the future), subject to
such reasonable rules and regulations as Landlord may from time to time
prescribe to rights of ingress and egress of other tenants. Parking in the
street, in the drive along the side of the building, or in the flow of traffic
to the rear of the building is prohibited. Landlord shall not be responsible for
enforcing Tenant's exclusive parking rights against any third parties.
D. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
for serving all hot water, heating and air conditioning systems and equipment
within the Premises. The maintenance contractor and the contract must be
approved by Landlord. The service contract must include all services suggested
by the equipment manufacturer within the operation/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) no later than thirty
(30) days after the Commencement Date).
9. COMMON AREA MAINTENANCE. Tenant shall pay to Landlord as additional rent
a common area operating and maintenance fee equal to Tenant's "proportionate
share" (as defined in subparagraph 6.A. herein) of the cost and expense for the
operation and maintenance of the common areas of the building and park in which
the Premises are located, including, but not limited to, the mowing of grass,
care of shrubs, general landscaping, common sewage line plumbing, maintenance of
building, parking areas, entrances, driveways and management thereof. Landlord
estimates that the common area maintenance charges for 1997 will be $0.31 per
square foot. If Tenant or any other particular tenant of the building can be
clearly identified as being responsible for obstructions or stoppage of the
common sanitary sewage line, then Tenant, if Tenant
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is responsible, or such other responsible tenant, shall pay the entire cost
thereof, upon demand, as additional rent. Payment shall be made on the first day
of each month based on the projected cost of such maintenance. At the end of
each year, Landlord shall determine the actual costs of such maintenance. Any
additional costs due from Tenant based on the actual costs shall be promptly
paid by Tenant. Any savings will be credited against the following year's
payments.
10. TENANT IMPROVEMENTS TO PREMISES. Tenant shall not make any alterations,
additions or improvements to the Premises, exterior or interior, without the
prior written consent of Landlord, except for unattached movable fixtures which
may be installed without drilling, cutting or otherwise defacing, damaging or
overloading the Premises; provided, however, that Tenant may anchor (or
otherwise secure to the floor) its business equipment and fencing, which
equipment and fencing shall be removed by Tenant by the date of termination of
this lease, and Tenant shall repair all damages caused by the installation or
removal thereof. All alterations, additions or improvements erected by Tenant
shall be and remain the property of Tenant during the term of this lease and
Tenant shall, unless Landlord otherwise elects as provided, remove all
alterations, additions or improvements erected by Tenant and restore the
Premises to their original condition, reasonable wear and tear excepted, by the
date of termination of this lease; provided, however, that if Landlord so elects
prior to termination of this lease, such alterations, additions or improvements,
with the exception of Tenant's business equipment discussed in the previous
sentence, shall become the property of Landlord as of the date of termination of
this lease. Tenant may not use or penetrate the roof of the Premises for any
purpose whatsoever without Landlord's prior written consent. Any roof
penetrations and exhaust curbs necessary for the ventilation of Tenant's
equipment shall be performed and/or installed by Landlord's contractor of
choice, at Tenant's sole expense. All construction work done by Tenant in the
Premises shall be performed in a good and workmanlike manner, in compliance with
all governmental requirements, and at such times and in such manner as will
cause a minimum of interference with other construction in progress and with the
transaction of business in the building or buildings in which the Premises are
located.
11. SIGNAGE. Tenant shall not install any signs visible from outside the
Premises except with the prior written consent of Landlord. Any permitted signs
shall be maintained in compliance with applicable governmental rules and
regulations governing such signs. Tenant shall be responsible to Landlord for
any damage caused by the installation, use or maintenance of said signs. Tenant
agrees, upon removal of said signs, to repair all damage (including
discoloration) incident thereto.
12. RIGHT OF ENTRY; INSPECTION. Landlord and Landlord's agents and
representatives shall have the right, upon twenty-four hours notice (except in
the case of emergencies), to enter and inspect the Premises at any reasonable
time during business hours, to ascertain the condition of the Premises, to make
such repairs as may be required or permitted to be made by Landlord under the
terms of this lease, or to show the Premises to prospective purchasers or
tenants for spaces other than the Premises, or to show, during the last six (6)
months of the Demised Term, the Premises for re-leasing. Landlord shall have the
right to place or erect on the Premises a suitable sign indicating the Premises
are available for rent during the last six (6) months of the Demised Term. As a
condition to entry, Landlord and Landlord's agents and representatives shall
observe Tenant's reasonable security and confidentiality rules, except in the
case of emergencies.
Tenant shall arrange to meet with Landlord for a joint inspection of the
Premises prior to vacating. In the event of Tenant's failure to arrange a joint
inspection, Landlord's inspection at or after Tenant's vacating the Premises
shall be conclusively deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration.
13. UTILITIES. Landlord agrees to provide at its cost water, electricity
and telephone service connections into the Premises; but Tenant shall pay for
all water, gas, heat, light, power, telephone, sewer, sprinkler charges and
other utilities and services used in or from the Premises, together with any
taxes, penalties, surcharges or the like pertaining thereto and any maintenance
charges for utilities and shall furnish all electric light bulbs and tubes. If
any such services are not separately metered to Tenant, Tenant shall pay a
reasonable proportion as determined by Landlord of all charges jointly metered
with other premises. Landlord shall in no event be liable for any interruption
or failure of utility services on the Premises.
14. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not, directly or indirectly, have the right to assign
this lease or to sublet the whole or any part of the Premises without the prior
written consent of Landlord. Consent to any assignment or sublease shall not be
deemed a waiver of the right of Landlord to approve or disapprove a further
assignment or subletting. Notwithstanding any permitted assignment or
subletting, Tenant shall at all times remain directly, primarily and fully
responsible and liable for the payment of the rent herein specified and for
compliance with all if its other obligations under the terms, provisions and
covenants of this lease. Upon the occurrence of an "event of default", as
hereinafter defined, if the Premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may at its option
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collect directly from such assignee or subtenant all rents becoming due to
Tenant under such assignment or sublease and apply such rent against any sums
due to Landlord from Tenant hereunder, and no such collection shall be
constructed to constitute a novation or a release of Tenant from the further
performance of Tenant's obligations hereunder. For purposes of this Paragraph
14, each of the following events shall be deemed to be an assignment:
(i) if Tenant is a partnership, a dissolution of the partnership or a
change in ownership, legal or beneficial, of 50% or more of the
partnership interests, whether by withdrawal or admission, voluntary
or by operation of law;
(ii) if Tenant is a corporation, the dissolution, consolidation or merger
of Tenant (except a consolidation or merger in which Tenant is the
surviving company) or the sale or transfer to a single buyer of more
than 50% of the voting stock of Tenant; or
(iii)distribution or sale of over 50% of the value of Tenant's assets (net
of undistributed consideration received) excluding the sale of
inventory other than a bulk sale.
B. In the event that Tenant assigns this lease or sublets the Premises
or any part thereof, as permitted herein, and at any time received rent and/or
other consideration which exceeds that which Tenant would at that time be
obligated to pay Landlord, Tenant shall pay to Landlord 100% of the gross excess
in such rent as such rent is received by Tenant and 100% of any other
consideration received by Tenant from such assignee or subtenant. In addition,
should Landlord agree to an assignment or sublease agreement, Tenant will pay to
Landlord on demand a sum equal to all Landlord's costs, including reasonable
attorney's fees, incurred in connection with such assignment or transfer. If an
assignment or subletting is approved, tenant shall be entitled to deduct from
any excess proceeds described in this subparagraph 14.B. its reasonable
expenses, including attorneys fees and leasing commissions, incurred in
connection with such assignment of subletting.
15. INSURANCE.
A. Landlord agrees to maintain standard fire and extended coverage
insurance covering the building or buildings of which the Premises are a part in
an amount not less than 80% (or such greater percentage as may be necessary to
comply with the provisions of any co-insurance clauses of the policy) of the
"replacement cost" thereof as such term is defined in the Replacement Cost
Endorsement to be attached thereto, insuring against the perils of Fire,
Lightning and Extended Coverage, such coverage and endorsements to be as
defined, provided and limited in the standard bureau forms prescribed by the
insurance regulatory authority for the State in which the Premises are situated
for use by insurance companies admitted in such state for the writing of such
insurance on risks located within such state. Subject to the provisions of this
Paragraph 15, such insurance shall be for the sole benefit of Landlord and under
its sole control.
Notwithstanding the foregoing, the maximum amount Landlord shall pay for
such insurance coverage shall be $.05 per square foot of the Premises for any
one-year period and, if the cost of the insurance coverage exceeds this amount,
the Tenant shall pay to Landlord such excess. Said payments shall be made to
Landlord within thirty (30) days after presentation to Tenant of Landlord's
statement setting forth the amount due. Any payment to be made pursuant to this
subparagraph 15.A. shall be prorated for any portion of the Demised Term which
is not a full premium period under said insurance policy.
B. Tenant shall, throughout the term of this lease, at its cost and
expense, provide and keep in force a comprehensive general public liability
insurance policy in the amount of not less than $1,000,000.00 with respect to
injury or death to any one person, $3,000,000.00 with respect to injury or death
of number of persons and $500,000.00 with respect to fire damage of property.
Tenant shall be solely responsible for keeping insured, to the extent Tenant
elects, its own personal property located on the Premises.
All insurance provided by Tenant as required by this subparagraph 15.B.
shall name, as additional insured, Landlord and any mortgagees or deed to secure
debt holders of the Premises, and be carried by such responsible companies and
in such form satisfactory to Landlord.
Tenant agrees to deliver to Landlord on or before the Commencement Date the
original policy of insurance required by this subparagraph 15.B. or certificate
thereof and evidence of payment of premium. At least thirty (30) days prior to
the expiration of each such policy, Tenant shall deliver to Landlord the new
original policy or certificate for renewal insurance and evidence of payment of
premium.
Tenant shall not violate or knowingly permit to be violated any of the
conditions or provisions of any policy required by this subparagraph 15.B.
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Each insurance policy (including renewal insurance) or certificates thereof
issued by the insurer shall contain an agreement by the insurer that such policy
shall not be cancelled without at least thirty (30) days prior written notice to
Landlord, and in no event shall such policies be cancelled by Tenant without
Landlord's prior written consent.
C. Tenant and Landlord shall cooperate in connection with the
collection of any insurance monies that may be due in the event of loss. Tenant
and Landlord shall execute and deliver such proofs or loss and other instruments
which may be required for the purpose of obtaining the recovery of any such
insurance monies.
D. Any insurance provided for in this Paragraph 15 may be effected by
a policy or policies of blanket insurance; provided, however, that the amount of
the total insurance allocated to the Premises shall be such as to furnish in
protection the equivalent of separate policies in the amount herein required,
and provided further that in all other respects, any such policy or policies
shall comply with the other provisions of this lease. In any such case it shall
not be necessary to deliver the original of any such blanket policy, but rather
a certified duplicate as such policy or certificate thereof.
16. DAMAGE OR DESTRUCTION; SUBROGATION.
A. If the Premises should be damaged or destroyed by fire, tornado or
other casualty, Tenant shall give immediate written notice thereof to Landlord.
B. If the Premises should be totally destroyed by fire, tornado or
other casualty, or if they should be so damaged thereby that rebuilding or
repairs cannot, in Landlord's reasonable estimation, be completed within one
hundred fifty (150) days after the date upon which Landlord is notified by
Tenant of such damage, this lease shall terminate and the rent shall be abated
during the unexpired portion of this lease, effective upon the date of the
occurrence of such damage.
C. If 50% or more of the gross square footage of the building in which
the Premises are located is damaged or destroyed by any peril or casualty,
Landlord shall have the right to terminate this Lease. Subject to the foregoing,
if the Premises should be damaged or destroyed by any peril covered by the
insurance to be provided by Landlord under subparagraph 15.A., but only to the
extent that rebuilding or repairs can in Landlord's estimation be completed
within one hundred fifty (150) days after the date upon which the Landlord is
notified by Tenant of such damage, this lease shall not terminate, and Landlord
shall at its sole cost and expense thereupon proceed with reasonable diligence
to rebuild and repair such buildings to substantially the condition in which
they existed prior to such damage, except that Landlord shall not be required to
rebuild, repair or replace any part of the partitions, fixtures, addition and
other improvements which may have been placed in, on or about the Premises by
Tenant. If the Premises are untenantable in whole or in part following such
damage, the rent payable hereunder during the period in which they are
untenantable shall be reduced to such extent as may be fair and reasonable under
all of the circumstances. In the event that Landlord should fail to complete
such repairs and rebuilding within one hundred fifty (150) days after the date
upon which Landlord is notified by Tenant of such damage, Tenant may at its
option terminate this lease by delivering written notice of termination to
Landlord as Tenant's exclusive remedy, whereupon all rights and obligations
hereunder shall cease and terminate, except as otherwise provided in Paragraph
30.H.
D. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed to secure debt covering
the Premises requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is made by any such holder, whereupon all rights and
obligations hereunder shall cease and terminate, except as otherwise provided in
Paragraph 30.H.
E. Each of Landlord and Tenant hereby releases the other from any loss
or damage to property caused by fire or any other perils insured through or
under them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property, even if such loss or damage shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible. Each of the Landlord and Tenant agrees that it will request its
insurance carriers to include in its policies a clause or endorsement to the
effect that any such release shall not adversely affect or impair said policies
or prejudice the right of the releasor to recover thereunder.
17. LIABILITY. Landlord shall not be liable to Tenant or Tenant's
employees, agents, invitees, patrons or visitors, or to any other person
whomsoever, for any injury to person or damage to property on the Premises,
resulting from and/or caused in part or whole by, the negligence or misconduct
of Tenant, its employees, agents, invitees, patrons or visitors, or of any other
person entering upon the Premises, or caused by the buildings and improvements
located on the Premises becoming out of repair, use, generation, storage or
disposal of toxic or hazardous materials or substances on the premises, or
caused by leakage of gas, oil, water or steam or by electricity emanating from
the Premises, and Tenant hereby covenants and agrees that it will at all times
indemnify and hold safe and harmless the Landlord (including without limitation,
the trustee and
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beneficiaries if Landlord is a trust), Landlord's agents and employees from any
loss, liability, claims, suits, costs, expenses, including without limitation,
attorney's fees and damages, both real and alleged, arising out of any such
damage or injury, except injury to persons or damage to property to the extent
caused by the negligence of Landlord or the failure of Landlord to repair any
part of the Premises which Landlord is obligated to repair and maintain
hereunder within a reasonable time after the receipt of written notice from
Tenant of needed repairs.
18. CONDEMNATION.
A. If 50% or more of the gross square footage of the building in which
the Premises are located should be taken for public or quasi-public use under
governmental law, ordinance or regulation by right of eminent domain, or by
private purchase in lieu thereof, Landlord shall have the right to terminate
this lease and the rent shall be abated effective on the date of Landlord's
election to so terminate. Additionally, if the whole or any substantial part of
the Premises should be taken for any public or quasi-public use under
governmental law, ordinance or regulation, or by right of eminent domain, or by
private purchase in lieu thereof and the taking would prevent or materially
interfere with the use of the Premises for the purpose for which that are being
used, this lease shall terminate and the rent shall be abated during the
unexpired portion of this lease, effective on the date of the physical taking of
the Premises.
B. If part of the Premises shall be taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain, or by private purchase in lieu thereof, and this lease
in not terminated as provided in subparagraph 18A., this lease shall not
terminate but the rent payable hereunder during the unexpired portion of this
lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances.
C. In the event of any such taking or private purchase in lieu
thereof, Landlord and Tenant shall each be entitled to receive and retain such
separate awards and/or portion of lump sum awards as may be allocated to their
respective interests in any condemnation proceedings.
19. HOLDING OVER. Tenant shall, at the termination of this lease by lapse
of time or otherwise, deliver immediate possession of the Premises to Landlord.
If Landlord agrees in writing that Tenant may hold over after the expiration or
termination of this lease, unless the parties hereto otherwise agree in writing
on the terms of such holding over, the hold over tenancy shall be subject to
termination by Landlord at any time upon not less than five (5) days advance
written notice, or by Tenant at any time upon not less than thirty (30) days
advance written notice, and all of the other terms and provisions of this lease
shall be applicable during that period, except that Tenant shall pay Landlord
from time to time, upon demand, as rental for the period of any such hold over,
an amount equal to two hundred percent (200%) of the rent in effect on the
termination date, computed on a daily basis for each day of the hold over
period. No holding over by Tenant, whether with or without consent of Landlord
shall operate to extend this lease except as otherwise expressly provided. The
preceding provisions of this Paragraph 19 shall not be constructed as Landlord's
consent for Tenant to hold over.
20. QUIET ENJOYMENT. Landlord represents and warrants that it has full
right and authority to enter into this lease and that Tenant, upon paying the
rental herein set forth and performing its other covenants and agreements herein
set forth, shall peaceably and quietly have, hold and enjoy the Premises for the
term hereof, subject to the terms and provisions of this lease.
21. EVENTS OF DEFAULT. The following events shall each be deemed to be an
event of default by Tenant under this lease:
A. Tenant shall fail to pay any installment of the rent herein
required when due, or any payment with respect to taxes hereunder when due, or
any other payment or reimbursement to Landlord required herein when due, and
such failure shall continue for a period of five (5) days after written notice
of non-payment.
B. Tenant shall become insolvent, or shall make a transfer to defraud
creditors, or shall make an assignment for the benefit of creditors.
C. Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or statute of the
United States or any State thereof, or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder.
D. A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
E. Tenant shall desert or abandon any substantial portion of the
Premises.
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F. Tenant shall fail to comply with any term, provision or covenant of
this lease (other than as set forth in clauses A. through E. in this Paragraph
21), and shall not cure such failure within thirty (30) days after written
notice thereof to Tenant.
22. REMEDIES. Upon the occurrence of any of the events of default described
in Paragraph 21 hereof, Landlord shall have the option to pursue any one or more
of the following remedies without notice or demand whatsoever:
A. Terminate this lease in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails so to do, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearage in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, by force if necessary (to the extent permitted by law), without being
liable for prosecution or any claim of damages therefor, and Tenant agrees to
pay to Landlord on demand the amount of all loss and damages which Landlord may
suffer by reason of such termination, whether through inability to relet the
Premises on satisfactory terms or otherwise.
B. Enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying the Premises or any part
thereof, by force if necessary (to the extent permitted by law), without being
liable for prosecution or any claim for damages thereof, and relet the Premises
and receive the rent therefor; and Tenant agrees to pay to the Landlord on
demand any deficiency that may arise by reason of such reletting. In the event
Landlord is successful in reletting the Premises at a rental in excess of that
agreed to be paid by Tenant pursuant to the terms of this lease, Landlord and
Tenant each mutually agree that Tenant shall not be entitled, under any
circumstances, to such excess rental, and Tenant does hereby specifically waive
any claim to such excess rental.
C. Enter upon the Premises, by force if necessary (to the extent
permitted by law), without being liable for prosecution or any claim for damages
therefor, and do whatever Tenant is obligated to do under the terms of this
lease; and Tenant agrees to reimburse Landlord on demand for any expenses which
Landlord may incur in thus effecting compliance with Tenant's obligations under
this lease, and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action, whether caused by the
negligence of Landlord or otherwise.
D. Landlord shall have all other rights and remedies provided by law
or in equity.
In the event Tenant fails to pay any installment of rent hereunder within
ten (10) days after such installment is due, to help defray the additional cost
to Landlord for processing such late payments, Tenant shall pay to Landlord a
late charge in an amount equal to three percent (3%) of such installment; and
the failure to pay such amount within ten (10) days shall be an event of default
hereunder. The provision for such late charge shall be in addition to all
Landlord's other rights and remedies hereunder or at law and shall not be
construed as liquidated damages or as limiting Landlord's remedies in any
manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or any damages accruing to Landlord by reason
of the violation of any of the terms, provisions and covenants herein contained.
No act or thing done by the Landlord or its agents during the Demised Term shall
be deemed a termination of this lease or an acceptance of the surrender of the
Premises, and no agreement to terminate this lease or accept a surrender of the
Premises shall be valid unless in writing signed by Landlord. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other violation or breach of any of the terms, provisions and covenants
herein contained. Landlord's acceptance of the payment of rental or other
payments hereunder after the occurrence of an event of default shall not be
construed as a waiver of such default, unless Landlord so notifies Tenant in
writing. Forbearance by Landlord to enforce one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to constitute
a waiver of such default or of Landlord's right to enforce any such remedies
with respect to such default or any subsequent default. If, on account of any
breach or default by Tenant in Tenant's obligations under the terms and
conditions of this lease, it shall become necessary or appropriate for Landlord
to employ or consult with an attorney concerning or to enforce or defend any of
Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable
attorney's fees so incurred.
Tenant agrees to indemnify and hold Landlord harmless from any and all
losses, costs, expenses (including, without limitation, attorney's fees),
liabilities, causes of action, suits, claims, and damages arising out of, or in
connection with any violation or breach of, or failure of Tenant to fully and
completely observe, satisfy, perform and comply with, the terms and conditions
of this lease.
23. [deleted]
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24. MORTGAGES AND GROUND LEASES.
A. Tenant hereby agrees and accepts that this lease is and shall be
subject and subordinate to any mortgage(s) and/or deeds to secure debt
(collectively referred to as the "Mortgage") now or any time hereafter
constituting a lien or charge upon the Premises or the improvements situated
thereon; provided, however, that if the holder of any such Mortgage elects to
have Tenant's interest in this lease superior to any such instrument, then by
notice to Tenant from such holder, this lease shall be deemed superior to such
lien, whether this lease was executed before or after said Mortgage. Tenant
shall at any time hereafter on demand execute any instruments, releases or other
documents which may be required by the holder of the Mortgage for the purpose of
subjecting and subordinating this lease to the lien of any such Mortgage.
If, in connection with obtaining financing or refinancing for the Premises,
or a sale of the Premises, any lender or purchaser shall request reasonable
modifications in this lease as a condition to such financing or purchase, Tenant
will not unreasonably withhold or delay or defer its consent thereto, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially and adversely affect Tenant's rights hereunder.
B. Tenant hereby further agrees and accepts that this lease is and
shall be subject and subordinate to any ground lease now or at any time
hereafter affecting the Premises. Tenant shall at any time hereafter on demand
execute any instruments, releases or other documents which may be required by
the ground lessor of any ground lease affecting the Premises for the purpose of
subjecting and subordinating this lease to any such ground lease.
In the event any ground lessor of a ground lease affecting the Premises
requests reasonable modifications in this lease, Tenant will not unreasonably
withhold or delay or defer its consent thereto, provided that such modifications
do not increase the obligations of Tenant hereunder or materially and adversely
affect Tenant's rights hereunder.
25. MECHANIC'S LIENS. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatever upon
or in any matter to bind, the interest of Landlord in the Premises or to charge
the rental payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs and each such claim shall affect and each such lien
shall attach to, if at all, only the leasehold interest granted to Tenant by
this instrument. Tenant covenants and agrees that it will pay or cause to be
paid all sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises on
which any lien is or can be validly and legally asserted against its leasehold
interest in the Premises or the improvements thereon and that it will save and
hold Landlord harmless from any and all loss, cost or expense based on or
arising out of asserted claims or liens against the leasehold estate or against
the right, title and interest of the Landlord in the Premises or under the terms
of the lease.
26. NOTICES. Any notice, demands, payments or other communications required
or permitted to be delivered under this lease shall be given by personal
delivery or by deposit in the United States Mail, postage prepaid, Certified or
Registered Mail, addressed to the parties hereto at the respective addresses set
out below, or at such other address as they have theretofore specified by
written notice delivered in accordance herewith:
LANDLORD: TENANT (After Commencement):
McDonald Windward Partners II, L.L.C. Technology Service Group, Inc.
3715 Northside Parkway, 1075 Windward Ridge Parkway, Suite 100
Bldg 300, Suite 650 Alpharetta, GA 30202
Atlanta, GA 30327 Attn: President
Attn: John R. McDonald
TENANT (Prior to Commencement):
Technology Service Group, Inc.
20 Mansell Court East, Suite 200
Roswell, GA 30076
Attn: President
With copy to:
Roger M. Barzun
P.O. Box 767
Concord, MA 07142
All notices shall be deemed given upon personal delivery or deposit with a
courier service that provides next-business-day service, except as otherwise
specifically provided in this lease and except as to the payments of rent to
Landlord which shall be effective upon receipt by Landlord.
If and when included within the term "Landlord", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address for the receipt of notices
and payments to Landlord; if and when included within the term "Tenant", as
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used in this instrument, there are more than one person, firm or corporation,
all shall jointly arrange among themselves for their joint execution of such a
notice specifying some individual at some specific address within the
continental United States for the receipt of notices and payments to Tenant. All
parties within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given accordance with the provisions of this Paragraph 26 to the same
effect as if each had received such notice.
27. RESTRICTIVE COVENANTS. Tenant acknowledges that this lease shall be
subject and subordinate at all times to the Declaration of Easements, recorded,
or to be recorded, in Forsyth County, Georgia Records, as the same may be
amended from time to time (hereinafter referred to as the "Declaration"), which
affects the Premises. Tenant agrees to comply with all of the terms and
provisions of the Declaration, and not suffer or cause any act by Tenant or any
of its employees, agents or invitees, which would violate the Declaration;
provided, however, that Landlord warrants that Tenant's permitted use of the
Premises does not violate the Declaration.
28. REAL ESTATE BROKER. Tenant represents and warrants that the Tenant has
dealt with no broker, agent or finder in connection with this lease other than
Brannen Goddard Company, which broker is acting on behalf of Tenant and shall be
paid a commission by Landlord pursuant to a separate agreement, and insofar as
the Tenant knows, no other brokers, agent or finder negotiated this lease or is
entitled to any commission or fee in connection herewith. Tenant agrees to
indemnify, defend and hold Landlord free and harmless from and against all
claims for broker's or agent's commissions or finder's fees by any person
claiming to have been retained by Tenant in connection with this transaction, or
any other losses, costs, expenses (including, without limitation, attorney's
fees), liabilities, damages, causes of actions or suits arising out of the
alleged employment or use of a broker, agent or finder by Tenant.
29. LIMITATIONS AND LANDLORD'S LIABILITY. Any liability for damages or
breach or nonperformance by Landlord, or arising out of the subject matter of
this lease or the relationship created hereby, shall be limited to, and
collectible only out of, Landlord's interest in the Premises and no personal
liability is assumed by, or shall at any time be asserted against, Landlord or
its affiliated corporations, its and their partners, venturers, directors,
shareholders, officers, agents, servants and employees, or any of its or their
successors or assigns; all such liability, if any, being expressly waived and
released by Tenant. If Landlord, in violation of the terms of this lease or the
provisions of law, withholds, denies or delays any consent which Tenant is
required to obtain hereunder, Tenant may seek specific performance but shall not
be entitled to damages therefor. Landlord's review, supervision, commenting on
or approval of any aspect of work to be done by or for Tenant is solely for
Landlord's protection and, except as expressly provided, creates no warranties
or duties to Tenant or to third parties.
30. MISCELLANEOUS.
A. Words of any gender used in this lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in
this lease shall apply to, inure to the benefit of, and be binding upon, the
parties hereto and upon their respective heirs, legal representatives,
successors and permitted assigns, except as otherwise herein expressly provided.
Landlord shall have the right to assign any of its rights and obligations under
this lease.
C. Each party agrees to furnish to the other promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this lease.
D. The captions inserted in this lease are for convenience only and in
no way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
E. Time is of the essence of this lease.
F. Tenant agrees from time to time within ten (10) days after request
of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating whether this lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this lease and such other
matters pertaining to this lease as may reasonably be requested by Landlord. It
is understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this lease.
G. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
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H. All obligations of Tenant and Landlord hereunder not fully
performed as of the expiration or earlier termination of the Demised Term shall
survive the expiration or earlier termination of the Demised Term, including
without limitation, all payment obligations with respect to taxes and insurance
and all obligations concerning the condition of the Premises. Upon the
expiration or earlier termination of the Demised Term, and prior to Tenant
vacating the Premises, Tenant shall pay to Landlord any amount reasonably
estimated by Landlord as necessary to put the Premises, including without
limitation, all heating and air conditioning systems and equipment therein, in
good condition and repair. Tenant shall also, prior to vacating the Premises,
pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation
hereunder for real estate taxes and insurance premiums for the year in which the
lease expires or terminates. All such amounts shall be used and held by Landlord
for payment of such obligations of Tenant hereunder, with Tenant being liable
for any additional costs therefor upon demand by Landlord, or being liable for
any additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and
satisfied, as the case may be. Any security deposit held by Landlord shall be
credited against the amount payable by Tenant under this Paragraph 30.H.
I. If any clause, sentence, paragraph or provision of this lease is
illegal, invalid or unenforceable under present or future laws effective during
the term of this lease, then and in that event it is the intention of the
parties hereto that the remainder of this lease shall not be affected thereby,
and it is also the intention of the parties to this lease that in lieu of each
clause, sentence, paragraph or provision of this lease that is illegal, invalid
or unenforceable, there be added as a part of this lease contract a clause,
sentence, paragraph or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
J. Provided Landlord is the prevailing party, Tenant agrees to pay any
and all attorneys' fees and expenses Landlord incurs in enforcing any of the
obligations of Tenant under this lease. Provided Tenant is the prevailing party,
Landlord agrees to pay any and all attorneys' fees and expenses Tenant incurs in
enforcing any of the obligations of Landlord under this lease.
K. This lease shall create the relationship of Landlord and tenant
between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has
only a usufruct, not subject to levy and sale.
L. Neither this lease, nor any memorandum, affidavit or other writing
with respect thereto, shall be recorded by Tenant or by anyone acting through,
under or on behalf of Tenant, and the recording thereof in violation of this
provision shall make this lease voidable at Landlord's election.
M. Because the Premises are on the open market and are presently being
shown, this lease shall be treated as an offer with the Premises being subject
to prior lease and such offer subject to withdrawal or non-acceptance by
Landlord or to other use of the Premises without notice, and this lease shall
not be valid or binding unless and until accepted by Landlord in writing and a
fully executed copy delivered to both parties hereto.
N. All references in this lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this lease.
O. This lease may be executed in counterparts, each of which shall be
deemed an original, and all of which shall constitute one and the same lease
agreement.
31. MONUMENT SIGNAGE. Tenant is authorized to erect, at its sole cost and
expense, a monument sign identifying the Premises; provided, however, that such
a sign must be: (a) compatible with the architectural standards of Windward
Ridge, (b) in compliance with Windward sign standards, and (c) approved in
advance by Landlord. Tenant shall submit plans to Landlord specifying the
design, materials, and location of such a sign, and upon Landlord's and
Windward's written approval of the plans, Tenant shall erect the sign in
accordance with the approved plans.
32. RENEWAL OPTION. Tenant is hereby granted the option to renew the term
of this lease for a period of five (5) years (the "Renewal Term") in addition to
the initial Demised Term, provided that Tenant shall not be in default hereunder
at the time of exercise of such option or at the expiration of the Demised Term.
Such option shall be exercised by giving Landlord written notice thereof not
later than one hundred eighty (180) days prior to the date on which the term
would otherwise expire. All of the terms, covenants, conditions, and provisions
hereof, with the exception of this Paragraph 32, shall remain in full force and
effect during the Renewal Term; provided, however, that the Base Rent payable
under Paragraph 3 hereof shall increase during the Renewal Term by 115% of the
Base Rent in effect at the expiration of the initial Demised Term.
107
<PAGE>
33. LANDLORD'S IMPROVEMENTS. Landlord's responsibility for the cost of
constructing the improvements to the Premises described on Exhibit "B" shall not
exceed the sum of $300,250.00, and Landlord's obligation for space planning and
construction drawings for Tenant shall not exceed $7,500.00. Any costs in excess
of these amounts, in addition to the cost of work outside of the scope of the
plans and specifications described on Exhibit "B", shall be the sole
responsibility of Tenant. Any modifications to the plans and specifications on
Exhibit "B" (last revised November 6, 1996) must be approved by Landlord, which
approval shall not be unreasonably withheld.
EXECUTED BY LANDLORD, this 12th day of November, 1996.
McDONALD WINDWARD PARTNERS II, L.L.C.,
a Georgia limited liability company
By:_______________________________________
Title:____________________________________
EXECUTED BY TENANT, this 12th day of November, 1996.
TECHNOLOGY SERVICE GROUP, INC.,
a Delaware corporation
By:________________________________________
Title:_____________________________________
By:________________________________________
Title:_____________________________________
108
Exhibit 10.34 Letter Agreement between Technology Service Group, Inc. and
Mr. James Lacy dated September 18, 1996, amendment thereto
and Assignment and Assumption of Real Estate Lease between
Technology Service Group, Inc., Mr. James Lacy and
G.P.E.D.C. dated November 6, 1996
109
<PAGE>
September 18, 1996
Mr. James Lacy
c/o Gilliam Candy Co.
P.O. Box 1060-2401 Powell
Paducah, KY 42002
Re: Lease Assignment
Dear Sirs:
The purpose of this letter (sometimes hereinafter referred to as this
"Agreement") is to set forth our understanding of the terms and conditions on
which Technology Service Group, Inc. ("TSG") will assign to Mr. James Lacy
("Lacy"), with an address of P.O. Box 2828, Cookeville, Tennessee 38502, and
Lacy will assume, all of TSG's rights and obligations under that certain lease
agreement dated November 30, 1990 between G.P.E.D.C., Inc. ("GPEDC") as lessor
and TSG as lessee (the "Lease") relating to an approximately 100,000 square-foot
manufacturing facility located at 2400 South Beltline Road, Paducah, Kentucky
(the "Facility").
1. Background.
(a) The initial term of the Lease is five and one-half years commencing on
December 1, 1990 with an option to renew the Lease for two additional
periods of five years each. The Lease gives TSG an option to purchase
the property at the end of the lease term, including any extensions
thereof, at a price of $10,000.
(b) On March 20, 1996, the initial term of the Lease was extended for a
period of one year to May 31, 1997.
(c) The Lease may be assigned by TSG with the written consent GPEDC.
Accordingly this Agreement is contingent upon TSG obtaining such
consent. If such consent is not given on or before November 1, 1996,
this Agreement shall thereupon become null and void and of no further
force or effect, and neither party shall thereafter be liable
hereunder to the other party in any manner or respect.
2. The Closing.
(a) The closing of the assignment of the Lease shall occur on November 1,
1996 (the "Closing Date").
(b) On the Closing Date, the parties hereto shall execute and deliver,
each to the other, the form of Assignment and Assumption of Real
Estate Lease set forth as Exhibit A (the "Assignment") and Lacy shall
pay to TSG fifty thousand dollars ($50,000) by certified check or wire
transfer, whereupon Lacy shall take possession of the property (the
"Time of Possession").
110
<PAGE>
Gilliam Candy Co.
September 18, 1996
Page 2
(c) In the event that a material adverse change in the condition of the
Facility occurs between the date of this Agreement and the Closing
Date, TSG shall have the option either (i) within thirty (30) days of
the Closing Date to restore, at its expense, the condition of the
Facility to the condition it was in on the date hereof, or (ii) to pay
the cost of such restoration to Lacy on the Closing Date. If TSG shall
fail to restore the condition of the Facility or to pay the costs
thereof to Lacy, this Agreement shall become null and void and of no
further force or effect, and neither party shall thereafter be liable
hereunder to the other party in any manner or respect.
3. Post and Pre Closing Subleases. As further consideration for the Assignment--
(a) From the Closing Date through December 31, 1996, TSG shall have the
right to occupy and use, rent-free, up to 30,000 square feet of
storage space in the Facility. Lacy shall furnish to TSG without
charge therefor such use of the utilities servicing the Facility as
TSG shall reasonably request.
(b) From the date hereof through the Closing Date, Lacy shall have the
right to occupy and use, rent-free, up to 10,000 square feet of
storage space in the Facility. TSG shall furnish to Lacy without
charge therefor such use of the utilities servicing the Facility as
Lacy shall reasonably request.
(c) From and after the Closing, Lacy shall at its own expense carry
property, casualty and liability insurance on the Facility, and so
long as TSG is occupying any part of the Facility, TSG shall at its
own expense carry casualty insurance on its personal property located
in the Facility.
(d) From the date hereof through the Closing Date, so long as Lacy is
occupying any part of the Facility, Lacy shall at its own expense
carry casualty insurance on its personal property located in the
facility.
4. Prorations. Real property taxes, utility charges and all rent under the
Lease shall be equitably pro-rated between the parties as of the Closing
Date.
5. Personal Property. Except as provided herein, all personal property owned
and leased by TSG shall be removed from the premises by TSG on or before
December 31, 1996. TSG shall provide to Lacy, at no additional cost to
Lacy, the Merlin telephone system and all office furniture presently
located in the primary office area. In addition, TSG shall provide Lacy
with the opportunity to bid on any other furniture, fixtures and equipment
that TSG determines to sell or dispose of, but Lacy shall be given no
preference over any other bidder for such property.
111
<PAGE>
Gilliam Candy Co.
September 18, 1996
Page 3
6. Fixtures. Except as set forth herein, TSG shall not remove overhead
lighting fixtures, air supply piping, power feed wiring, air conditioning
system, PBX intercom system or any plumbing, electrical and exhaust systems
or any fixtures, including overhead conveyer systems, that were not
installed by TSG. It is understood that fixtures that were installed by TSG
and that are removable without serious damage to the Facility as set forth
in Exhibit B hereto, may be removed by TSG for relocation, sale or other
disposition. Any damage to the Facility caused by such removal shall be
repaired by TSG at its cost.
Lacy agrees to assume TSG's obligations pursuant that certain equipment and
service agreement between TSG and ADT Security dated January 5, 1994.
7. Due Diligence. Lacy represents and warrants to TSG that it has read the
Lease in its entirety, has been given access to the Facility by TSG to
perform such investigations thereof as it deems necessary, and has had an
opportunity to do such other and further investigations prior to the Time
of Possession as it deems necessary, including environmental tests and
surveys and examinations of official records and the like. If the
environmental due diligence procedures reveal any possible environmental
problems, then Lacy at his option, on or before November 1, 1996, may
declare this Agreement null and void and of no further force or effect, and
neither party shall thereafter be liable hereunder to the other party in
any manner or respect. If Lacy shall assume the Lease, he shall take
possession of the Facility at the Time of Possession in "as is" condition
"with all faults.
8. Miscellaneous.
(a) 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, and no
term hereof shall be waived, 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.
(b) 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 enumerated items.
(c) Each party and its counsel has reviewed this Agreement. Accordingly,
the normal rule of construction that any ambiguities and uncertainties
are to be resolved against the party preparing an agreement will not
be employed in the interpretation of this Agreement; rather the
Agreement shall be construed as if all parties had jointly prepared
it.
(d) 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.
112
<PAGE>
Gilliam Candy Co.
September 18, 1996
Page 4
(e) The failure to insist upon strict compliance with any term, covenant
or condition contained herein shall not be deemed a waiver of such
term, nor shall any waiver or relinquishment of any right at any one
or more times be deemed a waiver or relinquishment of such right at
any other time or times.
(f) The captions of the paragraphs herein are for convenience only and
shall not be used to construe or interpret this Agreement.
If the foregoing sets forth our agreement on the matters contained in this
letter, please so indicate by signing and returning a copy of this letter to
TSG.
Very truly yours,
Technology Service Group, Inc.
By: /s/ Winton Schriner
------------------------------
M. Winton Schriner
Executive Vice President
Accepted and Agreed:
James Lacy
By: /s/ James Lacy
------------------------------
Guarantee:
Gilliam Candy Co.
Gilliam Candy Co., c/o Fine Products Company, Inc., P.O. Box 1060-2401 Powell,
Paducah, KY 42002 hereby guarantees performance of all of the obligations of
Lacy as set forth herein.
By: /s/ James Lacy, Chairman
------------------------------
Name:
Title:
113
<PAGE>
EXHIBIT A
Assignment and Assumption of Real Estate Lease
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby
acknowledged, Technology Service Group, Inc., a Delaware corporation hereby
sells, assigns and transfers to Mr. James Lacy ("Assignee"), with an address of
P.O. Box 2828 Cookeville, Tennessee 38502, all its right, title and interest in
and to that certain lease agreement dated November 30, 1990 between G.P.E.D.C.,
Inc. as lessor and Technology Service Group, Inc. as lessee, AS IS AND WITH ALL
FAULTS, and Assignee hereby assumes and agrees to perform or pay all obligations
of the lessee under the Lease in accordance with and subject to its terms.
IN WITNESS WHEREOF, this instrument has been executed by the parties as of the
day of November 1996.
Technology Service Group, Inc. James Lacy
By: /s/ Winton Schriner By: /s/ James Lacy
-------------------------- --------------------------
M. Winton Schriner
Executive Vice President
Guarantee
Gilliam Candy Co., c/o Fine Products Company, Inc., P.O. Box 1060-2401 Powell,
Paducah, KY 42002 hereby guarantees performance of all of the obligations of
James Lacy pursuant to this Assignment and Assumption of Real Estate Lease.
By: /s/ James Lacy, Chairman
-------------------------
Name:
Title:
----------
THE UNDERSIGNED G.P.E.D.C., INC. HEREBY CONSENTS TO THE FOREGOING ASSIGNMENT AND
FROM AND AFTER THE DATE HEREOF AGREES TO LOOK SOLELY TO MR. JAMES LACY FOR THE
PERFORMANCE OF ALL OF LESSEES' OBLIGATIONS UNDER THE FOREGOING SAID LEASE.
G.P.E.D.C., Inc.
By: _____________________________
Name:
Title:
114
<PAGE>
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by Winton Schriner, on
behalf of Technology Service Group, Inc., this 18th day of September 1996.
My commission expires: 9-21-1999.
/s/ Ruby English
- ----------------------
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by James L. Lacy, on behalf
of Mr. James Lacy, ("Assignee"), this 18th day of September 1996.
My commission expires: 9-21-1999
/s/ Ruby English
- ----------------------
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by James L/ Lacy, on behalf
of Gilliam Candy Co., this 18th day of September 1996.
My commission expires: 9-21-1999
/s/ Ruby English
- -----------------------
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by
___________________________, _____________________________, on behalf of
G.P.E.D.C., Inc. this __ day of November 1996.
My commission expires:____________________.
_______________________
Notary Public
Commonwealth of Kentucky at Large
115
<PAGE>
EXHIBIT B
Fixtures to be Removed by Technology Service Group, Inc.
1. Two Wall mounted Model 200 Degreasers, with power safety switches
2. Three floor gravity skatewheel type conveyor systems
3. Conformal coat Binks spray booth
4. Two Simplex digital time clocks
5. Electrovert Model EPK-1 Econopak SMT wave solder machine with vent and
blower, including transformer, 3-phase control panel and 3 wall
mounted control panels
6. Electrovert Model Ultraclean water ultrasonic cleaner
7. R&S Water Service water softener, with Technetic 1000 metering pump
8. Ruddglass commercial water heater, 120 gallons
9. P&G Pram Machine & Pram sand blast cabinet
10. P&G Sandblast Hopper
11. Power roller belt conveyor, two drives
12. Blasdel Enterprises, Inc. infrared drying oven
13. Overhead paint conveyor, chain & link type, with drive
14. DeVilbiss 7-1/2 hp horizontal tank mounted reciprocating air
compressor
15. Sullair Model 10B-24H, 25 hp Rotary Screw air compressor, horizontal
tank
16. Sears 3 hp Vertical tank mounted air compressor
17. Kellog American 5 hp horizontal tank mounted reciprocating air
compressor
18. Washing machine & Dryer
19. First aid boxes
20. Rotary drill, with venting
21. Acroprint time clock
116
<PAGE>
Assignment and Assumption of Real Estate Lease
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby
acknowledged, Technology Service Group, Inc., a Delaware corporation hereby
sells, assigns and transfers to Mr. James Lacy ("Assignee"), with an address of
P.O. Box 2828, Cookeville, Tennessee 38502 all its right, title and interest in
and to that certain lease agreement dated November 30, 1990 between G.P.E.D.C.,
Inc. as lessor and Technology Service Group, Inc. as lessee, AS IS AND WITH ALL
FAULTS, and Assignee hereby assumes and agrees to perform or pay all obligations
of the lessee under the Lease in accordance with and subject to its terms.
IN WITNESS WHEREOF, this instrument has been executed by the parties as of the
day of November 1996.
Technology Service Group, Inc. James Lacy
By: /s/ Winton Schriner By: /s/James Lacy
------------------------------ --------------------------
M. Winton Schriner
Executive Vice President
Guarantee
Gilliam Candy Co., c/o Fine Products Company, Inc., P.O. Box 1060-2401 Powell,
Paducah, KY 42002 hereby guarantees performance of all of the obligations of
James Lacy pursuant to this Assignment and Assumption of Real Estate Lease.
By: /s/ James Lacy, Chairman
------------------------------
Name:
Title:
----------
THE UNDERSIGNED G.P.E.D.C., INC. HEREBY CONSENTS TO THE FOREGOING ASSIGNMENT AND
FROM AND AFTER THE DATE HEREOF AGREES TO LOOK SOLELY TO MR. JAMES LACY FOR THE
PERFORMANCE OF ALL OF LESSEES' OBLIGATIONS UNDER THE FOREGOING SAID LEASE.
G.P.E.D.C., Inc.
By: /s/ Kristin Reese
------------------------------
Name: Kristin Reese
Title: President & CEO
117
<PAGE>
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by Winton Schriner, on
behalf of Technology Service Group, Inc., this 18th day of September 1996.
My commission expires: 9-21-1999 .
/s/ Ruby English
- -------------------------
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY )
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by James L. Lacy, on behalf
of Mr. James Lacy, ("Assignee"), this 18th day of September 1996.
My commission expires: 9-21-1999
/s/ Ruby English
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY)
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by James L/ Lacy, on behalf
of Gilliam Candy Co., this 18th day of September 1996.
My commission expires: 9-21-1999
/s/ Ruby English
Notary Public
Commonwealth of Kentucky at Large
COMMONWEALTH OF KENTUCKY)
COUNTY OF McCRACKEN ) ss:
The foregoing instrument was acknowledged before me by Kristin Reese, President
& CEO, on behalf of G.P.E.D.C., Inc. this 6th day of November 1996.
My commission expires: 4/15/99
_________________________________
Notary Public
Commonwealth of Kentucky at Large
118
<PAGE>
AMENDMENT TO LEASE ASSIGNMENT
================================================================================
This Amendment to Lease Assignment ("Amendment") is entered into between
Mr. James Lacy ("Lacy") and Technology Service Group ("TSG") as of November 5,
1996.
Whereas, Lacy and TSG had previously entered into a Lease Assignment dated
September 18, 1996 (the "Lease Assignment"); and
Whereas the Lease Assignment was subject to the approval of G.P.E.D.C.,
Inc. ("GEPDC") and the Kentucky Development Finance Authority ("KDFA"), and
Whereas, GPEDC requires certain changes to the Lease Assignment for its
consent to the assignment; and
Whereas, the Lease Assignment was to have been finalized on November 1,
1996, but was not completed by that date; and
Whereas, Lacy and TSG desire to complete the assignment of the lease and
agree to the changes set forth below in order to complete the Lease Assignment.
1. TSG represents and warrants for itself and International Teleservice
Corporation (ITC), that TSG and ITC are in full compliance with section 15 of
the lease between GPEDC and ITC dated November 30, 1990 (the "Lease").
2. TSG and ITC further represent and warrant that by December 31, 1996 they
will remove all of their assets in such a manner as to comply with section 15 of
the Lease. TSG will enter into the Environmental Indemnity Agreement with James
Lacy which is attached hereto as Exhibit A and is incorporated herein by
reference. The "As Is" character of the lease assignment shall not apply to any
recovery pursuant to section 15 of the Lease or the Environmental Indemnity
Agreement.
3. The representations and warranties of TSG pursuant to items 1 and 2
above shall survive the closing of the Lease Assignment and a period of 2 years
thereafter.
4. Since the time for the closing of the Lease Assignment was extended from
November 1, 1996 to November 6, 1996, Lacy will be responsible for rent for the
entire month of November, without any proration.
5. TSG will maintain insurance coverage on the leased premises until the
parties close the Lease Assignment.
6. Gilliam Candy Co., Inc., hereby signs this Amendment to indicate its
consent to the amendment of the Lease Assignment, since Gilliam guaranteed the
performance of all the obligations of Lacy pursuant to the Lease Assignment.
7. This Amendment shall be binding upon and inure to the benefit of the
parties and their successors and assigns.
119
<PAGE>
8. The parties by their signatures below hereby ratify and affirm the Lease
Assignment dated September 18, 1996, in all respects, except as modified by this
Amendment.
TECHNOLOGY SERVICE GROUP, INC.
By: /s/ Winton Schriner /s/ James Lacy
---------------------------- ---------------------------
M. WINTON SCHRINER JAMES LACY
Executive Vice President
GILLIAM CANDY CO., INC.
By: /s/ James Lacy
----------------------
JAMES LACY, Chairman
120
<PAGE>
EXHIBIT A TO AMENDMEMT TO LEASE AGREEMENT
Environmental Indemnity Agreement
THIS ENVIRONMENTAL INDEMNITY AGREEMENT (this "Agreement") is made as of this 5th
day of November, 1996 by and between Technology Service Group, Inc. (hereinafter
referred to as "TSG") and James Lacy (hereinafter referred to as "Lacy").
Background
On the date of this Agreement, TSG is assigning to Lacy, and Lacy is assuming,
all of TSG's rights and obligations under that certain lease agreement dated
November 30, 1990 (the "Lease") relating to a manufacturing facility located at
2400 South Beltline Road, Paducah, Kentucky (the "Facility"). The parties are
entering into this Agreement to establish the liabilities of the parties with
respect to environmental matters arising at the Facility.
THEREFORE, 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, it is hereby agreed as follows:
1. TSG Environmental Representations
(a) To its knowledge, TSG has complied with all environmental laws
relating to its operation of the Facility and no action, suit,
proceeding, complaint, or notice has been received by TSG relating to
the Facility alleging any failure to so comply. Without limiting the
generality of the preceding sentence, to its knowledge TSG has
obtained and been in compliance with all of the terms and conditions
of all environmental permits, licenses, and other authorizations that
are required under, and has complied with all other conditions that
are contained in, all environmental laws except to the extent that
failure to so comply would not have a material adverse effect on TSG.
(b) To its knowledge, TSG has not operated the Facility in a manner that
could form the basis for any present or future action, suit,
proceeding or complaint giving rise to any liability for damage to the
site on which the Facility is located under any environmental law.
2. TSG's Obligations. TSG shall assume responsibility and liability for, and
shall indemnify Lacy from and against, (a) any violation of any
environmental laws whether federal, state or local, and (b) any
environmental liabilities relating to the Facility any of which arose out
of the conduct of TSG at the Facility and that occurred prior to the date
hereof or out of the conduct of TSG while occupying a portion of the
Facility hereafter; provided, however, that TSG shall not be obligated to
perform or pay the cost of any remediation at the Facility under this
indemnity unless such remediation is required by a governmental authority
pursuant to an applicable environmental law. The foregoing notwithstanding,
TSG shall at its cost and expense, dispose of in an environmentally
acceptable manner, all paint thinners and any other chemicals, solvents or
cleaning agents that were used by TSG during the period that it occupied
the Facility.
Exhibit A Page 1
121
<PAGE>
3. Lacy's Obligations. Lacy shall assume responsibility and liability for, and
shall indemnify TSG from and against, (a) any violation of any
environmental laws, whether federal, state or local, and (b) any
environmental liabilities relating to the Facility, any of which arises out
of the operation, possession or occupation of the Facility by Lacy on or
after the date hereof, except for any violation that is attributable to TSG
under Section 2, above.
4. Cooperation. Each party as an indemnified party hereunder shall provide
prompt notification to the other (indemnifying) party of any claim for
indemnification under this Agreement and shall provide all reasonable
cooperation to the indemnifying party in presenting or defending a claim
(including the filing or defending of a suit or other judicial or
administrative proceeding for contribution, indemnification, cost recovery,
reimbursement, or other cause of action) against or by any entity or
person, such cooperation to include the provision of personnel and
documents. Any out-of-pocket expenses incurred by the indemnified party in
complying with this Section 4 shall be reimbursed by the indemnifying
party.
5. Miscellaneous.
(a) This Agreement contains the entire understanding of the parties on the
subject matter hereof; shall not be amended, and no term hereof shall
be waived, 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.
(b) 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 enumerated items.
(c) Each party and its counsel has reviewed this Agreement. Accordingly,
the normal rule of construction that any ambiguities and uncertainties
are to be resolved against the party preparing an agreement will not
be employed in the interpretation of this Agreement; rather the
Agreement shall be construed as if all parties had jointly prepared
it.
(d) 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.
(e) The failure to insist upon strict compliance with any term, covenant
or condition contained herein shall not be deemed a waiver of such
term, nor shall any waiver or relinquishment of any right at any one
or more times be deemed a waiver or relinquishment of such right at
any other time or times.
Exhibit A Page 2
122
<PAGE>
6. The captions of the paragraphs herein are for convenience only and shall
not be used to construe or interpret this Agreement.
7. The recitals set forth in "Background," above, are incorporated herein and
made a part hereof as the agreements of the parties as fully and with the
same force and effect as if reiterated herein in full.
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.
By: /s/ Winton Schriner /s/ James Lacy
------------------------------------ ----------------------------
Winton Schriner
Executive Vice President Operations
Exhibit A Page 3
123
Exhibit 10.35 Lease Extension Agreement Between Steroben Associates and
Technology Service Group, Inc. Dated August 1, 1996.
124
<PAGE>
LEASE EXTENSION AGREEMENT
This agreement made and entered into this 30th day of August, 1996, by and
between STEROBEN ASSOCIATES, hereinafter called the "Lessor" and Technology
Service Group, Inc., hereinafter referred to as "Lessee".
Whereas by Lease dated August 1, 1986, Lessor or predecessors in title leased
unto Lessee or predecessor in title, certain premises situate in the Town of
Orange in the County of Orange, Virginia, and fronting along the northern margin
of 315 Byrd Street in said town.
Whereas, Lessor and Lessee mutually desire to extend said lease as set forth
below:
1. Now Therefore, in consideration of the premises and other good and valuable
consideration, parties mutually agree to extend the said lease referenced above,
for an additional term of one (1) year from August 1, 1996 to July 31, 1997,
upon the same terms, conditions and covenants as therein contained, yielding and
paying therefore during the continuance of this lease extension, a monthly
rental of Six Thousand Six Hundred Seventy Five Dollars ($6,675.00), payable
monthly in advance, with the right herein given to Lessee to renew the lease for
five (5) additional terms of one (1) year each, by giving Lessor ninety (90)
days written notice prior to the end of the then current term. If the lease is
not renewed for any additional term of one (1) year the lease will run on a
month to month basis and can be terminated by either party by giving ninety (90)
days prior written notice to the other party.
2. All other terms and conditions of the original lease dated August 1, 1986,
will remain in full force and effect throughout the extension periods.
The rights, privileges and terms herein shall extend to and be binding upon the
Lessor and Lessee and their representatives, heirs, successors and assigns.
In witness whereof, Lessor and Lessee have hereunto set their hands and seals
the day and year first written above.
Signed sealed and delivered in the presence of:
STEROBEN ASSOCIATES
_____________________________ BY: /s/ HB Sedwick (SEAL)
---------------------------
GENERAL PARTNER
TECHNOLOGY SERVICE GROUP, INC.
/s/ Juanita Estes BY: /s/ Ned Rebich (SEAL)
- ----------------------------- ---------------------------
125
Exhibit 10.36 Contract No. D08E20H44 Between Southwestern Bell Telephone
Company and Technology Service Group, Inc. Dated June 9, 1997.
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Southwestern Bell Telephone Company ("Buyer")
A Missouri Corporation
One Bell Center
St. Louis, Missouri 63101
And
Technology Service Group, Inc. ("Seller")
A Delaware Corporation
20 Mansell Court East - Suite 200
Roswell, Georgia 30076
CONTRACT NO. D08E20H44
June 9, 1997
DATE OF EXECUTION
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective Companies.
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TABLE OF CONTENTS
PREAMBLE 1
COMMITMENTS OF THE PARTIES 2
AFFILIATED COMPANIES 7
ASSIGNMENT 8
BREACH BY BUYER 8
BREACH BY SELLER 8
CHANGES TO MATERIAL AND CLASSIFICATION THEREOF 9
CHOICE OF LAW 10
COMPLIANCE WITH LAWS 10
CONFLICT OF INTEREST 11
CONTINUING AVIALABILITY OF REPLACEMENT AND REPAIR PARTS 11
CUSTOM SOFTWARE DEVELOPMENT 12
EMERGENCY SUPPORT SERVICE 12
ENGINEERING COMPLAINTS 14
ERROR CORRECTIONS 15
EXECUTION/ENTIRE AGREEMENT 19
F.O.B 19
FORCE MAJEURE 19
FREIGHT CLASSIFICATION 20
HAZARDOUS MATERIALS/REGULATED SUBSTANCES 20
HEADINGS 21
INFANT MORTALITY 21
INFRINGEMENT 21
INSIGNIA 23
INSURANCE 23
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LIABILITY AND INDEMNIFICATION 24
LICENSES 25
MATERIAL/SOFTWARE DOCUMENTATION 25
MODIFICATION TO CONFORM TO LAWS 26
MONTHLY SHIPMENT REPORTS 26
NON-EXCLUSIVE DEALING 26
NON-WAIVER 27
NOTICES 27
PLANT AND WORK RULES 27
PUBLICITY 28
QUALITY ASSURANCE 28
RECORDS AND AUDIT 29
RELEASES VOID 30
RELIABILITY 30
REPAIR SERVICES FOR MATERIAL/SELECTION OF OUTSIDE REPAIR VENDOR 31
RIGHT OF ACCESS 35
SELLER'S INFORMATION 35
SELLER'S LIMITATION ON PAYMENTS TO BUYER 35
SEVERABILITY 35
SHIPMENTS TO BUYER 35
SHIPPING AND BILLING 36
SHIPPING PRIORITY 37
SOFTWARE MAINTENANCE 37
SOFTWARE UPDATES 38
SOURCE CODE REQUIREMENTS 38
SUPPORT OF PREVIOUS VERSIONS OF SOFTWARE 39
SURVIVAL OF OBLIGATIONS 39
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TAXES 39
TECHNICAL SUPPORT FOR COINNET AND MATERIAL 40
TERMINATION 41
TESTING 42
TITLE AND RISK OF LOSS 42
TRAINING 42
USE OF INFORMATION 43
WARRANTY 43
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This contract ("the Contract") by and between Southwestern Bell Telephone
Company ("SWBT" or Buyer"), a Missouri Corporation, with its principal place of
business located at One Bell Center, St. Louis, Missouri, 63101 and Technology
Service Group, Inc. ("TSG" or "Seller"), a Delaware corporation, with its
principal place of business located at 20 Mansell Court East, Suite 200,
Roswell, Georgia 30076, is entered into this 9th day of June, 1997.
PREAMBLE
TSG has previously delivered computer products ("CoinNet") and associated
telephone equipment ("Material") to SWBT. CoinNet presently includes computer
hardware and peripherals, software including Station Message Detail Record
("SMDR") software added to the CoinNet software before the execution of the
Contract (the "pre-existing SMDR software"), and chassis firmware. The Material
includes TSG electronic chassis, including GemStar 4032-GS, upgraded GemStar
4032-GS, GemStar 4032-GSX, and all Gemini chassis (hereinafter referred to
collectively as the "chassis"), CMI-30C electronic locks (hereinafter the
"locks"), CMI 2752-001 electronic keys (hereinafter the "keys"), CMI 2680-001
electronic key controllers (hereinafter the "controllers") and associated power
sources (hereinafter the "adaptors"). TSG agrees to provide additional CoinNet
hardware and peripherals, software, services and Material to SWBT, as specified
herein. TSG agrees that its provision of CoinNet, services and Material
hereunder will be governed by the terms, conditions, covenants, standards,
benchmark measurements, specifications and other requirements as set forth
herein, including Attachments A through G, which are attached hereto and by this
reference made a part hereof.
COMMITMENTS OF THE PARTIES
1. TSG warrants that CoinNet and all Material deployed by SWBT as of 5:00 p.m.
CDT July 2, 1997, which includes the CoinNet computer hardware and
peripherals, software, chassis firmware and Material (including, but not
limited to, four hundred sixty-seven (467) new CMI keys and controllers
delivered to SWBT in April and May 1997) previously provided to SWBT by TSG
and for which SWBT has paid in full, will operate as an integrated system
(the "Integrated System") to provide the features and functionalities, and
perform per the technical standards, benchmark measurements, product
specifications, requirements, processes, procedures and guidelines agreed
upon by the parties herein, including Attachments A through G, and in the
Bellcore and other technical documents referenced in the Contract,
including any said technical documents referenced in said Attachments,
provided that CoinNet is operated by Buyer in accordance with the COINNET
OPERATING GUIDELINES contained in Attachment A. All such technical
standards, benchmark measurements, specifications, requirements, processes,
procedures and guidelines are hereinafter referred to collectively as the
"REQUIREMENTS" and each individually as a "REQUIREMENT".
In the event that any REQUIREMENT contained in Attachment A is inconsistent
or in conflict with any REQUIREMENT contained elsewhere in the Contract, or
in any other Attachment or referenced document, the REQUIREMENT in
Attachment A shall control. Except as to Attachment A, if any REQUIREMENT
in a document incorporated into the
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Contract by reference only (i.e., not physically attached) is inconsistent
or in conflict with any REQUIREMENT contained elsewhere in the Contract,
including in any Attachment or other document incorporated by reference and
physically attached to the Contract, then the REQUIREMENT contained in the
Contract or Attachment so attached, shall control.
In complying with its obligations under the Contract, TSG may employ the
computer hardware and peripherals currently used, or already purchased by
SWBT for use, with the existing CoinNet system.
TSG warrants that, as of 5:00 P.M. CDT on July 2, 1997, the following will
occur:
(a) TSG will provide all Material/Software documentation in compliance with the
MATERIAL/SOFTWARE DOCUMENTATION clause of the Contract and with Attachment
A, Section III. "Documentation," as used in the Contract to refer to
software or firmware documentation, includes without limitation, all
documentation as described in Attachment A, Section III;
(b) TSG must comply with all provisions of the SOURCE CODE REQUIREMENTS clause
of the Contract.
2. After 5:00 P.M. CDT on July 2, 1997, as recertified chassis (as described
in paragraph 3, immediately below) and new GemStar 4032-GSX chassis
purchased hereunder are deployed, the Integrated System will continue to
perform per the REQUIREMENTS. It is understood by TSG that this additional
deployment could result in a total deployment of up to 75,000 TSG
electronic chassis to be supported as part of the Integrated System.
3. TSG will test, repair if necessary, and recertify all chassis purchased
prior to execution of the Contract and never deployed ("warehoused"
chassis) and used chassis, up to a total of 13,000 chassis. "Recertify" as
used in the Contract, means that TSG will test and repair as necessary the
chassis submitted by SWBT for recertification, and certify that such
chassis will perform per the REQUIREMENTS. "Recertification" as used in the
Contract, means the process of recertifying, carried to completion.
TSG will perform the recertification of warehoused and used chassis at SWBT
premises designated by SWBT or at TSG's premises located at 315 Byrd
Street, Orange, Virginia, 22960. TSG may request that warehoused and used
chassis which require testing before recertification be shipped to said TSG
premises. In the event of such a request, said chassis are to be packed (in
a manner equivalent to the packing employed when said chassis were
originally shipped to SWBT) and shipped by SWBT.
SWBT will make its best efforts to ship said warehoused chassis to said TSG
premises on or before June 16, 1997, at SWBT's expense. SWBT will make its
best efforts to ship said used chassis to said TSG premises on or before
July 2, 1997, at SWBT's expense. SWBT will bear the risk of in-transit
damage or loss for shipments to TSG of chassis to be recertified.
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TSG will bear the expense of repairs required to warehoused chassis. TSG
warrants that all recertified warehoused chassis will perform per the
REQUIREMENTS for one (1) year beginning on the date each such chassis is
shipped or otherwise returned to the possession of SWBT by TSG. After
recertification of warehoused chassis shipped to TSG's premises, TSG will
pack and return ship the chassis to the location(s) designated by SWBT in
writing, at TSG's expense. TSG will bear the risk of in-transit damage or
loss of said return shipments to SWBT.
The repair of used chassis still under the original warranty will be at
TSG's expense. If the original warranty has expired, the repair will be at
SWBT's expense, the cost of such repair to be fifty dollars ($50.00) per
chassis. In the event used chassis returned to TSG for testing and
recertification do not require repair, TSG will recertify and warrant said
chassis for a period of one hundred eighty (180) days or the remainder of
the original warranty, whichever is longer. In the event used chassis
returned to TSG for testing and recertification require repair, TSG will
perform said repair and then recertify and warrant said chassis for a
period of ninety (90) days or the remainder of the original warranty,
whichever is longer. After recertification of used chassis shipped to TSG's
premises, TSG will pack and return ship the chassis to the location(s)
designated by SWBT in writing. Such shipments will be at SWBT's expense,
but TSG will bear the risk of in-transit damage or loss as to such
shipments.
Whether the recertification is performed on SWBT's or TSG's premises, upon
recertification, TSG will place a sticker, stamp or other suitable
indication of recertification on each chassis and the outside of each
packing box. Each such indication of recertification must include the
warranty expiration date.
In addition, in the case of GemStar 4032-GS units shipped to TSG for
recertification, upon request by SWBT, TSG will upgrade said GemStar
4032-GS chassis to GemStar 4032-GSX functionality, at SWBT's expense. The
additional cost of each such upgrade to repaired used ("used-repair
required") chassis will be thirty dollars ($30.00). The additional cost of
each such upgrade to used chassis which do not require repair ("used-repair
not required") will be forty dollars ($40.00) per chassis. The warranty
periods for recertified, upgraded chassis, including "warehoused,"
"used-repair not required" and "used-repair required" chassis, will be the
same as the warranty periods for such recertified chassis which are not
upgraded, i.e., one (1) year, one hundred eighty (180) days and ninety (90)
days, respectively.
No later than the date of each shipment of recertified warehoused and used
chassis to SWBT, TSG will provide notice of each such shipment in writing
in accordance with the NOTICES clause of the Contract. In addition, and on
the same date, TSG will send a facsimile copy of said notice to SWBT's
Director-Technology Integration, fax number 210-222-7702. Each such notice
must include, at a minimum, the ship date, the serial number and warranty
expiration date of each chassis included in each such shipment. As to each
such shipment, TSG will also comply with paragraphs (b) through (j) of the
SHIPPING AND BILLING clause of the Contract. Each recertified chassis,
including electronic lock and cash box out switch, if shipped to TSG as a
unit, will be returned to SWBT as a unit, one unit to a box.
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However, TSG will not be responsible for recertifying electronic locks and
cash box out switches.
SWBT or its representative will have the right to audit the recertification
process, whether performed on SWBT premises or TSG premises. If on TSG
premises, SWBT or its representative will be given access to said premises
within twenty-four (24) hours of SWBT's or its representative's oral or
written request.
All warehoused and used TSG chassis returned by SWBT for recertification
which cannot be repaired will be returned to the location(s) designated by
SWBT, within thirty (30) calendar days. Unrepairable warehoused chassis
will be shipped to SWBT at TSG's risk and expense. Unrepairable used
chassis will be shipped to SWBT at SWBT's risk and expense.
TSG will not be required to repair, certify or warrant any warehoused or
used chassis physically damaged through shipment or storage by SWBT.
TSG will return ship recertified warehoused and used chassis to SWBT in
accordance with the schedule in Attachment E, SCHEDULE FOR TSG SHIPMENT OF
RECERTIFIED CHASSIS TO SWBT. TSG will return ship said warehoused and used
chassis by normal commercial transportation calculated to result in
delivery to SWBT of no more than ten (10) calendar days after date of
shipment.
In the event the Contract is terminated pursuant to the TERMINATION clause
or cancelled pursuant to either the BREACH BY BUYER or BREACH BY SELLER
clause, TSG will, within thirty (30) days ship to the location(s)
designated by SWBT all Material owned by SWBT which is in TSG's possession
in its then present condition, whether or not it has been repaired,
upgraded or recertified. Material under warranty will be shipped to SWBT at
TSG's risk and expense. Material out of warranty will be shipped to SWBT at
TSG's risk but at SWBT's expense. TSG agrees that TSG's unauthorized
holding of any such chassis past thirty (30) calendar days will cause
damages to SWBT that will be difficult to determine. Therefore, TSG agrees
to pay SWBT liquidated damages calculated by multiplying the average
monthly revenues of a deployed SWBT payphone divided by thirty (30), by the
number of chassis withheld, times the number of days past thirty (30) that
expire before the chassis are delivered to SWBT's possession. The parties
agree that such sum constitutes a reasonable estimate of SWBT's actual
financial losses.
4. TSG will select and train an out-of-warranty third party repair vendor
acceptable to SWBT, by December 31, 1997, as set forth in the REPAIR
SERVICES FOR MATERIAL clause of the Contract.
5. SWBT will obtain, on or before the date of execution of the Contract, by
contract or employment, a person with a minimum of three (3) years
experience with UNIX-based computer systems, to actively assist TSG during
the time period June 6, 1997 through July 2, 1997, to effect and implement
the REQUIREMENTS applicable to CoinNet. Such person (or his or her
equivalent) will also be made available by SWBT to administer the system
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throughout the life of the Contract or until such time as SWBT ceases to
use CoinNet, whichever comes first. SWBT's agreement to make such person
available in no way relieves or limits TSG's obligations under the Contract
or the REQUIREMENTS. If, at some later point, SWBT replaces said person
with another, the replacement person will also have a minimum of three (3)
years experience with UNIX-based systems. SWBT will make every reasonable
effort to provide a minimum of thirty (30) days overlap between the
original person and any replacement person.
6. TSG will sell and SWBT will purchase an additional 11,000 new GemStar
4032-GSX kits (which will include the chassis, electronic locks and cash
box out switches) in accordance with the following schedule:
November 3, 1997 . . . . . . . . . . . . . . 1,000 kits
December 1, 1997 . . . . . . . . . . . . . . 2,000 "
January 2, 1998 . . . . . . . . . . . . . . .2,500 "
February 2, 1998 . . . . . . . . . . . . . . 2,500 "
March 2, 1998 . . . . . . . . . . . . . . . .3,000 "
Said 11,000 new chassis will be shipped to SWBT at the location(s)
designated by SWBT in writing. Said chassis will be shipped and delivered
in accordance with the SHIPPING AND BILLING clause of the Contract.
The price of each GemStar 4032-GSX chassis will be $266.50, which price
includes the chassis, CMI-30C electronic lock and cash box out switch, all
of which together constitute one kit.
7. In addition to the purchase price of the 11,000 new GemStar 4032-GSX units,
SWBT will make the following payments ("milestone payments") to TSG:
(a) A payment of $250,000.00 will be placed in the overnight mail to TSG
five (5) days after execution of the Contract;
(b) If TSG is in compliance with all of its obligations under the Contract
which it is required to perform as of July 2, 1997, SWBT will place an
additional payment of $250,000.00 in the overnight mail to TSG on that
date;
(c) If TSG has complied with all of its obligations under the Contract
which it is required to perform by September 1, 1997, SWBT will place
an additional payment of $100,000.00 in the overnight mail to TSG on
that date;
(d) If TSG has complied with all of its obligations under the Contract
which it is required to perform by December 31, 1997, including the
obligation to select and train an outside repair vendor, SWBT will
place an additional payment of $150,000.00 in the overnight mail to
TSG on that date; and
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(e) If TSG has complied with all of its obligations under the Contract
which it is required to perform by March 31, 1998, SWBT will place an
additional payment of $250,000.00 in the overnight mail to TSG on that
date.
8. In addition to the pre-existing SMDR software added to CoinNet prior to the
execution of the Contract, TSG will design and implement new
open-architecture SMDR software ("new SMDR software") by September 30,
1997. TSG warrants that the design and implementation of the new SMDR
software will be completed and will function per the REQUIREMENTS as of
that date. SWBT must procure Operating System and DBMS licenses and
hardware required for the new SMDR software excluding hardware required for
CoinNet.
(a) The new SMDR software must store SMDR data in a non-proprietary data
base so that SWBT may create user friendly ad hoc reports without
conversion or replication of the existing data outside of the CoinNet
system.
(b) Any further reference herein to the "CoinNet software," will mean all
CoinNet software, including the pre-existing and new SMDR software.
9. The parties will begin planning the requirements of a "communications
application program interface" (the "API") by July 2, 1997. The API is to
be used with "open systems" that will allow the API to directly interface
with all TSG chassis in the field, with or without the CMI electronic lock
interface. This module will include the use of protocols and access methods
used by CoinNet and the chassis to establish communication, including
controls used to negotiate and issue and/or receive commands to and/or from
CoinNet and the chassis. TSG will provide, without charge, up to fifty (50)
man days of support for the design, development and implementation of the
API by qualified TSG personnel or TSG designates. One man day is defined as
eight (8) hours. TSG will supply a minimum of ten (10) man days during the
period of July 2, 1997 through September 30, 1997. TSG will supply the
remaining forty (40) man days and any additional support requested by SWBT
as described in the next paragraph below, between October 1, 1997 and March
2, 1998. The parties may mutually agree to amend the timing of this
schedule if necessary due to the development and implementation of the new
SMDR software. TSG agrees to provide such support at SWBT's location, upon
request by SWBT. SWBT agrees to reimburse TSG for all reasonable travel
costs which are mutually agreed upon by the parties. SWBT agrees to notify
TSG at least one week in advance of any such travel request whenever
possible, but no less than seventy two (72) hours in advance.
TSG will provide additional such support for the API, upon request by SWBT.
However, any support requested over and above the aforestated fifty (50)
man days will be provided by TSG at the rate of seventy-five dollars
($75.00) per hour.
TSG will provide written substantiation documenting all support provided
pursuant to this clause. SWBT agrees to provide TSG a non-exclusive,
royalty free license for the API.
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10. SWBT will make every reasonable effort to deploy the recertified chassis in
accordance with the schedule set forth in Attachment F, "SCHEDULE FOR
DEPLOYMENT OF RECERTIFIED CHASSIS BY SWBT."
11. TSG delivered ten (10) new CMI electronic keys (CMI Product No. 2725-001),
ten (10) new electronic key controllers (CMI Product No. 2680-001) and ten
(10) new adaptors to SWBT on April 18, 1997, and an additional four hundred
and fifty-seven (457) of said keys and controllers on May 13, 1997 (without
adaptors). The previous version of the CMI electronic keys and controllers
which were replaced by said four hundred and sixty seven (467) new CMI keys
and controllers will be returned to TSG by SWBT on or before July 2, 1997.
TSG will ensure that SWBT has been provided with the number of SWBT-owned
adaptors needed for the new keys and controllers.
12. TSG will provide to SWBT all services set forth herein, for the agreed upon
time periods, including without limitation, emergency support services,
repair services for Material, software maintenance and support, and
technical support for CoinNet and Material.
13. SWBT will be responsible for maintenance of all computer hardware and
peripherals provided by TSG under the Contract.
AFFILIATED COMPANIES
"Affiliated Company" (or Companies) as used herein means any present or future
affiliate, subsidiary or parent corporation of Buyer.
An Affiliated Company that places an Order with Seller hereunder will
incorporate into such Order the terms and conditions of this Contract. Such
Affiliated Company will be responsible for its own obligations including, but
not limited to, all charges incurred in connection with such Order. Nothing in
this Contract will be construed as requiring Buyer to indemnify Seller for any
acts or omissions of an Affiliated Company.
ASSIGNMENT
Neither party hereto may assign, subcontract or otherwise transfer its rights or
obligations under this Contract except with the prior written consent of the
other party; provided, however, Buyer will have the right to assign this
Contract to any present or future affiliate, subsidiary or parent corporation of
Buyer, without securing the consent of Seller, and may grant to any such
assignee the same rights and privileges Buyer enjoys hereunder. Any attempted
assignment not assented to in the manner prescribed herein, except an assignment
confined solely to money due or to become due, will be void. It is expressly
agreed that any assignment of money will be void if: (a) Seller fails to give
Buyer at least thirty (30) calendar days prior written notice thereof, or (b)
such assignment attempts to impose upon Buyer obligations to the assignee in
addition to the payment of such money or preclude Buyer from dealing solely and
directly with Seller in all matters pertaining to this Contract, including the
negotiation of amendments or settlement of charges due.
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BREACH BY BUYER
SWBT will not be deemed to be in default under any of the terms of this
Contract, and TSG may not seek or attempt to enforce any remedy for any claimed
default, unless SWBT fails to cure or correct same within thirty (30) calendar
days following receipt of written notice thereof from TSG sent by registered
U.S. mail, to the address listed for SWBT in the NOTICES clause herein.
BREACH BY SELLER
In the event that the Integrated System fails to perform per the REQUIREMENTS as
of 5:00 P.M. CDT on July 2, 1997, SWBT shall have the right, unilaterally and at
its sole discretion, to immediately cancel this Contract in its entirety,
without advance notice or opportunity for TSG to cure and without further
obligation or penalty of any kind, including any obligation to make additional
payments to or accept additional shipments from TSG. In the event of such
failure SWBT will also have the right, unilaterally and at its sole discretion,
to continue performance under the Contract, and at the same time require TSG to
continue performance, for an additional period of time as determined by SWBT,
unilaterally and at its sole discretion. The parties agree that SWBT is not
obligated to provide any such extension. However, in the event SWBT extends the
time for performance, such extension will not constitute a waiver of its right
to cancel the contract at any time thereafter, provided the breach has
continued.
If at any point after 5:00 P.M. CDT on July 2, 1997, TSG is not in breach, but
at a later time is in breach or default of any term, condition or covenant of
this Contract, and said breach or default continues for a period of thirty (30)
calendar days after the receipt of written notice thereof from SWBT sent by
registered U.S. Mail, to the address listed for TSG in the NOTICES clause
herein, then, in addition to all other rights and remedies available at law or
in equity, SWBT will have the right to cancel this Contract immediately and
without penalty and without further obligation under this Contract, including
any obligation to make further payments to or accept additional shipments of
Material from TSG. In the event of such failure SWBT also will have the right,
unilaterally and at its sole discretion, to continue performance under the
Contract and at the same time require TSG to continue performance, for an
additional period of time within the life of the Contract as set forth herein,
as determined by SWBT, unilaterally and at its sole discretion. The parties
agree that SWBT is not obligated to provide any such extension. However, in the
event SWBT extends the time for performance, such extension will not constitute
a waiver of its right to cancel the Contract at any time thereafter, provided
the Integrated System's failure to perform per the REQUIREMENTS has continued.
CHANGES TO MATERIAL AND CLASSIFICATION THEREOF
Seller agrees to notify Buyer, in advance, of any change to be made in the
Material that would impact upon either reliability or the form, fit or function
of the Material. Seller further agrees, at the time of such notification, to
provide Buyer with: (a) a change number; (b) a description of the change; (c)
the reason for the change; (d) a description of the impact of the change upon
the following: (i) reliability, (ii) Seller's product specifications, and (iii)
form, fit or function; (e) the name of a designated person and phone number to
contact for information regarding the change;
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(f) a date after which all newly manufactured Material will have the change
applied in the manufacturing process; (g) a date by which all changes are
expected to be completed by Seller for all such Material; and (h) the
recommended repair location (Buyer's or Seller's facility).
In the event SWBT agrees to any such change, it will be Seller's responsibility
to furnish Material change notices for all Material provided hereunder in
accordance with the latest issue of GR-209-CORE, "Generic Requirements for
Product Change Notices." Such Material change notices will be forwarded to the
following address:
Contract Manager
Southwestern Bell Telephone Company
1010 Pine, Suite 900
St. Louis, Missouri 63101-3099
In order for Buyer to review such changes to the Material, a minimum of thirty
(30) calendar days advance notice will be required, except for those cases where
an extremely unsatisfactory condition requires immediate action. The final
classification of any such change to the Material proposed by Seller will be by
mutual agreement between Seller and Buyer.
For changes classified as "A" or "AC", Seller agrees to promptly modify or
replace, at no charge, all affected Material provided hereunder and the
documentation relevant thereto. Buyer will have the right to invoice Seller for
any labor expenses incurred by Buyer attributable to the replacement of such
Material.
For changes classified as "B" or "D", Seller agrees to notify Buyer of the exact
nature thereof and discuss with Buyer the details regarding the proposed
implementation procedure for affected Material which is being or will be
manufactured. Buyer will determine, at its option, if Material previously
shipped will be modified or replaced. Should such modification or replacement be
deemed necessary, Seller will arrange therefor at prices and schedules to be
mutually agreed upon with Buyer prior to implementation. Relevant documentation
for such affected Material will also be provided by Seller at no charge.
In the event that Buyer and Seller fail to reach agreement on any change in
Material proposed by Seller which materially and adversely affects the
reliability of or the form, fit or function of the Material, Buyer will have the
right without penalty to terminate this Contract and any or all additional
purchases of Material affected by any such change. Further, in such event, Buyer
will not be obligated to make any additional payments to Seller under this
Contract which are scheduled to be paid on a date after the date of termination.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
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Seller's obligations under this clause will continue until September 30, 1998
unless SWBT agrees in writing to a different period of time. Seller's
obligations under this clause will survive any termination by Buyer pursuant to
the TERMINATION clause or any cancellation of the Contract by Buyer pursuant to
the BREACH BY SELLER clause.
CHOICE OF LAW
This Contract will be governed by and construed in accordance with the laws of
the State of Missouri.
COMPLIANCE WITH LAWS
Seller agrees to comply with the provisions of the Fair Labor Standards Act, the
Occupational Safety and Health Act ("OSHA"), the National Electrical Safety Code
("NESC") and all other applicable federal, state, county and local laws,
ordinances, regulations and codes (including the identification and procurement
of required permits, certificates, approvals and inspections), in Seller's
performance under this Contract. Seller further agrees, during the term hereof,
to comply will all applicable Executive and Federal regulations as set forth in
Form SW9368, a copy of which is attached hereto as Attachment G. Seller will
defend, indemnify and hold Buyer harmless from and against any loss, liability,
damage or expense, including reasonable attorney fees and court costs sustained
by Buyer because of Seller's noncompliance herewith.
CONFLICT OF INTEREST
Seller represents and warrants that no officer, director, employee or agent of
Buyer has been or will be employed, retained or paid a fee, or otherwise has
received or will receive any personal compensation or consideration, by or from
Seller or any of Seller's officers, directors, employees or agents in connection
with the obtaining, arranging or negotiating of this Contract or other documents
or agreements entered into or executed in connection herewith.
CONTINUING AVAILABILITY OF REPLACEMENT AND REPAIR PARTS
Seller agrees to offer for sale to Buyer, for a period of seven (7) years after
the shipment date of the last GemStar 4032-GSX chassis purchased under this
Contract, functionally equivalent replacement and repair parts for all Material,
at fifteen percent (15%) above TSG's cost. Upon oral or written request, TSG
will provide to SWBT written substantiation of such costs.
In the event Seller is unable to supply such parts or obtain another source of
supply that is acceptable to Buyer, then such inability will be considered to be
noncompliance with this clause and Seller agrees, without obligation or charge
to Buyer, to provide Buyer with the technical information and any other rights
that are owned and/or controlled by Seller, which are required for Buyer to
obtain such parts from other sources. TSG will use reasonable commercial efforts
to assist Buyer to obtain technical information and other rights not owned
and/or controlled by TSG.
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The "technical information" will include, by way of example only and not by way
of limitation:
(a) Manufacturing drawings and specifications of raw materials and components
comprising such parts;
(b) Manufacturing drawings and specifications covering any special tooling and
the operation thereof;
(c) A detailed list of all commercially available parts and components
purchased by Seller on the open market, disclosing the part number, name
and location of the supplier thereof and the price.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
Seller's obligations under this clause will survive any termination by Buyer
pursuant to the TERMINATION clause or any cancellation by Buyer pursuant to the
BREACH BY SELLER clause, for a period of seven (7) years after the shipment date
of the last GemStar 4032-GSX chassis purchased by Buyer hereunder.
CUSTOM SOFTWARE DEVELOPMENT
Custom Software means unique or specialized computer programs developed by
Seller, as requested by Buyer in writing after the date of execution of this
Contract. This provision does not apply to software changes or development
(including, without limitation, the new SMDR software) which TSG is obligated to
provide hereunder. Seller's rate for such development shall not exceed
seventy-five dollars ($75.00) per hour and such charges billed to Buyer shall be
substantiated upon Buyer's request. The time frame for such development shall be
mutually agreed upon in writing by Seller and Buyer on an individual request
basis.
Seller's obligations under this clause will continue through September 30, 1998
and will survive any termination by Buyer pursuant to the TERMINATION clause or
any cancellation of the Contract by Buyer pursuant to the BREACH BY SELLER
clause. However, the parties may extend the provisions of this clause upon
mutual agreement in writing. In such event, TSG's hourly rate of seventy-five
dollars ($75.00) will be subject to renegotiation.
EMERGENCY SUPPORT SERVICE
Material and Service(s)
In the event any natural or other emergency or disaster occurs whereby Material
and/or Service(s) provided pursuant to this Contract is/are rendered inoperative
and such a condition materially
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affects Buyer's ability to provide telecommunications services to its
subscribers, Seller agrees, at Buyer's request, to assist Buyer as follows:
(a) Seller will locate backup or replacement Material and/or Service(s) for
Buyer's use.
(b) Seller will provide Buyer with a periodically updated, current listing of
technical support personnel, together with after-hours telephone contact
procedures, to assist Buyer in resolving out-of-service conditions.
(c) If Material is available from Seller's stock, Seller will make every effort
to ship replacement Material in a manner specified by Buyer within
twenty-four (24) hours of receipt of Buyer's request therefor.
(d) When Material required by Buyer is not available from stock for immediate
shipment, Seller agrees to pursue the following alternative courses of
action:
(i) Assist Buyer in locating functionally equivalent substitute Material.
(ii) If requested by Buyer, schedule the repair or new manufacture of
Material on a priority basis. Buyer will indemnify Seller for any
penalties incurred by Seller as a result of such priority efforts due
to contractual obligations with third parties.
(iii)Assist Buyer by providing field technical personnel to make temporary
modifications and arrangements to mitigate the effects of
out-of-service conditions. If requested by Buyer, Seller will document
such efforts and any associated charges.
Charges for services performed by Seller under this clause and charges for
replacement Material will be at the current Contract price or, if no such
Contract price exists, Seller's then current published selling price. Additional
charges, if any, for Seller's use of overtime and premium transportation
necessary to alleviate the out-of-service condition and authorized by Buyer in
writing, will be included as a separate item on Seller's invoice.
Seller will make available the individual whose title, phone number and location
are listed below to provide assistance and information on a twenty-four (24)
hour basis for all of the support service described above:
Director of Technical Services
20 Mansell Court East, Suite 200
Roswell, Georgia 30076
(770) 587-0208
(770) 641-7528 (FAX)
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Software
(a) So long as Buyer continues to use CoinNet as developed by Seller hereunder,
but no longer than September 30, 1998, in the event of an emergency
out-of-service condition caused by defective software, including firmware,
or a disaster or other occurrence wherein Buyer's copy of such software is
destroyed or rendered unusable, Seller agrees to ship a replacement copy of
the current version of such software as installed at Buyer's installation
sites(s), within two (2) business days of oral or written notification by
Buyer. Buyer will maintain back-up copies of software in accordance with
reasonable disaster recovery procedures.
(b) Seller also agrees that there will be no charge to Buyer for such
replacement copy of the software, other than the cost of the media upon
which the software resides, plus transportation costs.
(c) In the event a situation arises that warrants the initiation of Disaster
Recovery Procedures (the "Procedures") at the installation site where
software is installed, and such Procedures require the temporary movement
of the operations of such location to back-up facilities of another company
or any other temporary back-up facilities, Seller agrees to continue to
provide software maintenance for the software as provided in the SOFTWARE
MAINTENANCE clause of the contract. All rights and/or obligations of this
Contract will remain in effect during the execution of such Procedures.
Material, Services and Software
(a) As to Material and services relating to Material, Seller's obligations
under this clause will continue for a period of seven (7) years after the
date of last shipment of Material under this Contract unless SWBT agrees in
writing to a different period of time. As to software and services relating
to software, Seller's obligations under this clause will continue through
September 30, 1998, unless SWBT agrees in writing to a different period of
time or until SWBT stops using CoinNet as developed by TSG, whichever
occurs first. Seller's obligations under this clause will survive any
termination by Buyer pursuant to the TERMINATION clause or any cancellation
of the Contract by Buyer pursuant to the BREACH BY SELLER clause.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
ENGINEERING COMPLAINTS
Buyer reserves the right to notify Seller in cases where Buyer has identified
current or potential problems or service issues concerning the operation,
maintenance, engineering, installation or design of Material furnished
hereunder. Whenever Buyer exercises such right, Seller agrees, without charge to
Buyer, to:
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(a) Accept such notice (hereinafter referred to as an "Engineering Complaint")
and handle it in accordance with the latest issue of Bell Communications
Research, Inc. ("Bellcore") technical publication GR-230-CORE, entitled
"Engineering Complaints and Service Failure Analysis Reports;"
(b) Acknowledge receipt of such Engineering Complaint and notify Buyer of
Seller's employee or representative responsible for resolving it, said
notice to be provided within fifteen (15) calendar days of Seller's receipt
thereof;
(c) Resolve such Engineering Complaint within ninety (90) calendar days of the
date Buyer's notice is received, unless a later date is mutually agreed
upon by the parties in writing. If unable to resolve an Engineering
Complaint within said ninety (90) day period, Seller will issue an "interim
report" as defined in GR-230-CORE, above;
(d) Furnish to Buyer a monthly report of the status of each open Engineering
Complaint in writing, together with a proposed schedule for the resolution
of each;
(e) Notify Buyer in writing when an Engineering Complaint has been resolved,
within ten (10) calendar days of such resolution.
All notices and reports to SWBT required under this clause will be provided in
accordance with the NOTICES clause of the contract.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of Material pursuant to this Contract
unless SWBT agrees in writing to a different period of time. Seller's
obligations under this clause will survive any termination by Buyer pursuant to
the TERMINATION clause or any cancellation of the Contract by Buyer pursuant to
the BREACH BY SELLER clause. There will be no charge to Buyer for services
provided pursuant to this clause prior to September 30, 1998. After that date,
said services will be provided to Buyer at Seller's established rates, which
rates will not exceed one hundred dollars ($100.00) per hour.
ERROR CORRECTIONS
Seller will supply code corrections to correct CoinNet software and chassis
firmware, errors and/or malfunctions which cause CoinNet either to be
unavailable for use by Buyer or fail to meet the applicable REQUIREMENTS
therefor. Errors and/or malfunctions may be reported to Seller by Buyer either
orally or by written notice to Seller. Seller will notify Buyer in writing of
the existence of any significant error and/or malfunction relating to Buyer's
processing environment
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or use of the CoinNet software within forty-eight (48) hours after Seller
receives notice or otherwise becomes aware of the error and/or malfunction.
"Hardware" as used herein means any equipment associated with the use of CoinNet
or other software.
1. Procedures
The error correction procedures applicable to correct errors in said software or
CoinNet will be in accordance with the following levels of error severity
assigned by Buyer based on the following conditions:
(a) Severity Level 1:
Said software and/or CoinNet functionality is inoperative and/or
intermittent; inability to use is considered by Buyer to have critical
impact to Buyer's operations.
Resolution
Seller will respond and begin diagnosis of the problem immediately.
Resolution will be within four (4) hours after Buyer's oral or written
notification to Seller. Resolution of the error will be in the form of
program code corrections or procedures for Buyer to bypass or work
around the error condition in order to continue operations. If a
bypass procedure is utilized. Seller will continue error correction
activity on a twenty-four (24) hour basis until a permanent correction
is provided to Buyer.
(b) Severity Level 2:
Said software and/or CoinNet is partially inoperative and/or
intermittent; the inoperative portion is a considered by Buyer to have
a less critical impact on Buyer's operations than Severity Level 1
errors, but is considered by Buyer to be severely restrictive.
Resolution of intermittent error conditions will be handled on a
case-by-case basis.
Resolution
Seller will respond and begin diagnosis of the problem immediately.
Resolution will be within eight (8) hours after Buyer's notification
to Seller. Resolution of the error will be in the form of program code
corrections or procedures for Buyer to bypass or work around the error
condition. If a bypass procedure is utilized, the trouble reported
will be downgraded to a Severity Level 3.
(c) Severity Level 3:
Said software and/or CoinNet is usable but with limited functionality.
Error condition is not considered by Buyer to be critical to Buyer's
continuing operations. Buyer has determined a method to work around
the error condition.
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Resolution
Seller will respond and begin diagnosis within six (6) hours.
Resolution will be within seventy-two (72) hours after Buyer's
notification to Seller. Resolution of the error will be either
correction or a report of activities necessary to correct the error
condition. If a report of activities is utilized, correction will be
accomplished within seven (7) days from time of notification.
(d) Severity Level 4:
Said software and/or CoinNet functionality is usable, but correction
is required by the next maintenance release. In the event of a
Severity Level 4 condition, Seller will suggest a resolution to
correct the error condition as soon as possible.
Resolution
Resolution will be implemented by the next regularly scheduled
maintenance release.
2. Escalation Procedures
Seller will correct any and all errors in said software and/or CoinNet in
accordance with the procedures applicable to the respective Severity Levels as
described in this clause, regardless of the source of identification. If Seller
determines that such errors cannot be corrected within the specified intervals,
Seller will immediately initiate an escalation procedure to:
(a) Immediately assign sufficiently skilled personnel to correct the error;
(b) Immediately notify Seller's senior management personnel that such error has
not been corrected and that the escalation procedure has been activated;
(c) Provide weekly written status reports of continuing uncorrected errors to
Buyer in accordance with the NOTICES clause. A copy of each such report
will also be sent via fax to SWBT's Director-Technology Integration at
(210) 222-7702, on the same date.
3. Credits to Buyer
If any software and/or CoinNet error cannot be corrected by Seller in accordance
with this clause, Seller agrees to grant to Buyer, on the next repair invoice,
an "error credit" calculated separately for each error severity level as
follows:
(a) Severity Level 1:
The number of hours or portion thereof of inability to use over four (4)
hours, multiplied by an amount of money equivalent to Seller's average
hourly maintenance rate;
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(b) Severity Level 2:
The number of hours or portion thereof of partial inability to use over
eight (8) hours, multiplied by an amount equivalent to Seller's average
hourly maintenance rate;
(c) Severity Level 3:
The number of business days or portion thereof of limited operation over
five (5) business days, multiplied by an amount equivalent to Seller's
eight hour business day daily maintenance rate;
(d) Severity Level 4:
No credit will be applicable. However, Seller will continue to attempt to
correct all such errors until correction is accomplished.
Seller's obligations under 3(a), (b), (c) and (d) of this clause will
continue for the period from date of execution of the Contract until
September 30, 1998.
4. Rate
Seller's average hourly maintenance rate for purposes of paragraph 3,
immediately preceding, is twenty-five ($25.00) dollars regardless of the
applicable Severity Level.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of new GemStar 4032-GSX kits purchased
under this Contract unless SWBT agrees in writing to a different period of time
or until SWBT stops using CoinNet as developed by TSG, whichever occurs first.
Seller's obligations under this clause will survive any termination by Buyer
pursuant to the TERMINATION clause or any cancellation of the Contract by Buyer
pursuant to the BREACH BY SELLER clause. Services provided by Seller under this
clause will be provided to Buyer at no charge through September 30, 1998. After
that date said services will be provided to Buyer at Seller's established rates,
which rates will not exceed one hundred dollars ($100.00) per hour.
EXECUTION / ENTIRE AGREEMENT
Execution of this Contract will be unqualified and unconditional, and subject to
and expressly limited to the REQUIREMENTS, terms and conditions of this
Contract. All previous offers by Seller are hereby rejected and Buyer will not
be bound by terms additional to or different from
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those contained herein that may appear in any other communication from Seller,
unless such terms are expressly agreed to in a written instrument signed by
Buyer. Acceptance of Material or services, payment, or any inaction by Buyer
will not constitute Buyer's consent to or acceptance of any such additional or
different terms.
Upon execution, the terms contained in this Contract constitute the entire
agreement between Seller and Buyer with regard to the subject matter hereof and
supersedes any and all prior oral or written communications, agreements and
understandings of the parties, if any, with respect thereto. THIS CONTRACT MAY
NOT BE MODIFIED EXCEPT BY A WRITTEN INSTRUMENT SIGNED ON BEHALF OF EACH PARTY BY
THEIR RESPECTIVE REPRESENTATIVES WHO SIGN THIS CONTRACT, OR THEIR SUCCESSORS IN
TITLE AND AUTHORITY. If either party's representative is no longer employed by
Buyer/Seller or has been demoted, or if the approval level no longer exists, a
manager at a level equal to or exceeding the original level must execute any
revisions to this Contract.
F.O.B.
Material purchased hereunder will be shipped F.O.B. Origin, prepaid.
FORCE MAJEURE
Neither party hereto will be held responsible for any delay or failure in
performance of any provision of this Contract to the extent that such delay or
failure is caused by fire, flood, explosion, war, strike, embargo, government
requirement, civil or military authorities, Act of God, the public enemy, acts
or omissions of carriers, or any other cause beyond the control of Seller or
Buyer. If any force majeure condition occurs, the party delayed or unable to
perform will give immediate notice thereof to the other party (the "affected
party") and the affected party may elect to:
(a) Terminate this Contract or any purchase of Material not already shipped or
services not already performed, after six (6) months notice of the force
majeure condition and said condition is not cured, provided that any such
termination will not occur prior to March 31, 1998; or
(b) Immediately suspend this Contract for the duration of the force majeure
condition, buy or sell elsewhere the Material to be bought or sold or
services not already performed hereunder, deduct from the quantity of any
purchase commitments under this Contract the quantity bought or sold or for
which such purchase commitments have been made elsewhere; not make any
further payments to Seller for new chassis to be purchased hereunder except
for product actually delivered to Buyer; and not make additional milestone
payments scheduled herein.
However, if any such force majeure condition affects only Seller's ability
to deliver said Gemstar 4032-GSX kits to be purchased hereunder, Buyer will
not be required to make any further payments for such Gemstar 4032-GSX kits
not already shipped and/or received but,
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in such event, the other provisions of the Contract will remain in full
force and effect and the parties' respective obligations under such other
provisions will continue as set forth in the Contract. In such event, Buyer
may terminate any obligation under the Contract to purchase new GemStar
4032-GSX kits not already shipped, after six (6) months notice of the force
majeure condition and said condition is not cured, provided that any such
termination will not occur prior to March 31, 1998.
(c) In the event of either (a) or (b), resume performance hereunder once the
force majeure condition ceases, provided that, if performance is resumed,
the party suffering the force majeure condition will have the option to
extend the term of this Contract up to the length of time the force majeure
condition endured.
Unless written notice to the contrary is given within thirty (30) days after the
affected party is notified of the force majeure condition, option (b) above will
be deemed selected.
FREIGHT CLASSIFICATION
Material purchased hereunder will be shipped to Buyer subject to freight charges
appropriate for goods as classified in the "National Motor Freight
Classification Catalog."
HAZARDOUS MATERIALS / REGULATED SUBSTANCES
A "regulated substance," as referenced in this clause, is a generic term used to
describe all materials that are regulated by the federal or any state or local
government during transportation, handling and/or disposal. This includes, but
is not limited to, materials that are regulated as: (a) "hazardous materials"
under the "Hazardous Materials Transportation Act;" (b) "chemical hazards" under
current Occupational Safety and Health Administration ("OSHA") standards; (c)
"chemical substances or mixtures" under the "Toxic Substances Control Act;" (d)
"pesticides" under the "Federal Insecticide, Fungicide and Rodenticide Act;" and
(e) "hazardous wastes" as defined or listed under the "Resource Conservation and
Recovery Act," and all amendments to any of the foregoing.
If any Material purchased under this Contract contains a regulated substance,
Seller agrees to notify Buyer immediately and provide to Buyer all necessary
notification and other information (including but not limited to OSHA Material
Safety Data Sheets) regarding said regulated substance required by law. Seller
further agrees to defend, indemnify and hold Buyer harmless from and against any
loss, liability, damage or expense (including attorney fees and court costs)
sustained by Buyer because of Seller's noncompliance herewith.
HEADINGS
The headings of the clauses herein are inserted for convenience only and are not
intended to affect the meaning or interpretation of this Contract.
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INFANT MORTALITY
Unless otherwise agreed to in writing by Buyer, Seller hereby agrees that
Material furnished hereunder by Seller will, at the time of shipment, have
sufficient burn-in operating time at the component, circuit pack and/or system
level to assure an Infant Mortality Factor ("IMF") of not more than 3.2,
compiled with a minimum sample test of three pieces in accordance with Bellcore
Specification TR-TSY-000456, Issue 1, Section 7.2.1 (November 1989). The IMF is
the ratio of the failures experienced in the first year of operation (8,760
hours) to the failures experienced in a year of operation at Steady State
Reliability ("SSR") assuming a Weibull Infant Mortality Model with a slope of
0.75 and 10,000 hours to reach SSR.
Seller further agrees that it will, at no charge, provide Buyer or its
representative the accessibility and assistance necessary for Buyer or its
representative to verify that Material purchased hereunder satisfies the IMF and
SSR requirements.
Nothing contained herein will affect Buyer's rights hereunder, under any
warranty, or under any other provisions of the Contract.
INFRINGEMENT
Seller agrees to indemnify and hold Buyer harmless from and against any loss,
liability, damage or expense (including increased damages for willful
infringement, punitive damages, attorney fees and court costs) that may result
by reason of any infringement, or claim of infringement, of any trade secret,
patent, trademark, copyright or other proprietary interest of any third party
based on the normal use or installation of any Material, software,
documentation, program or services furnished to Buyer hereunder, whether arising
during or after performance pursuant to the Contract, except to the extent that
such claim arises from Seller's compliance with Buyer's detailed instructions
for which Buyer agrees to indemnify Seller. Such exception will not, however,
include:
(a) Merchandise available on the open market or the same as such merchandise.
(b) Items of Seller's origin, design or selection.
Seller warrants that it has made reasonable independent investigation to
determine the legality of its right to produce and sell the Material, other
products and services provided pursuant to this Contract.
If an injunction or other order is obtained against Buyer's use of any Material,
software, documentation, program or services, or if in Seller's opinion any
Material, software, documentation, program or service is likely to become the
subject of a claim of infringement, Seller will, at its expense:
(i) Procure for Buyer the right to continue using the Material, software,
documentation, program or service; or
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(ii) After consultation with Buyer, replace or modify the Material, software,
documentation, program or service so that it constitutes substantially
similar, functionally equivalent, noninfringing Material, software,
documentation, program or service.
If the Material, software, documentation, program or service is purchased or
licensed and neither (i) or (ii) above is possible, Buyer may cancel the
applicable order and/or require Seller to remove such Material, software,
documentation, program or service from Buyer's location and refund to Buyer any
charges paid therefor.
In no event will Buyer be liable to Seller for any charges after the date that
Buyer no longer uses the Material, software, documentation, program or service
because of actual or claimed infringement.
Each party hereto agrees to defend or settle, at its own expense, any action or
suit against the other party hereto for which it is responsible under this
clause. Each party further agrees to notify the other party promptly of any
claim of infringement for which the other party is responsible hereunder and
cooperate in every reasonable way to facilitate the defense thereof.
In the event that Seller, after notification of any claim for which Seller is
responsible, does not assume the defense of such action, Seller will reimburse
Buyer for all of its costs incurred in the defense of the claim, including, but
not limited to, attorney fees and interest on Buyer's payment of said amounts
from the date of said payment.
INSIGNIA
Upon Buyer's written request, Seller will affix certain of Buyer's trademarks,
trade names, insignia, symbols, decorative designs or evidences of Buyer's
inspection (hereafter collectively called "Insignia") to the Material furnished
hereunder. Such Insignia will not be affixed, used or otherwise displayed on or
in connection with the Material, without Buyer's prior written approval. The
manner in which such Insignia will be affixed must be approved in writing by
Buyer.
Seller agrees to remove all Insignia from Material rejected or not purchased by
Buyer prior to any sale, use or disposition thereof by Seller. Seller further
agrees to defend, indemnify and hold Buyer harmless from and against any claim,
loss, damage or expense (including attorney fees and court costs) arising out of
Seller's failure to so remove the insignia. This clause will in no way alter or
modify Seller's obligations under the USE OF INFORMATION clause of the Contract.
INSURANCE
With respect to performance hereunder, Seller agrees to maintain, at all times
during the term of this Contract, or period during which Seller's obligations
hereunder survive termination or cancellation of the Contract, the following
insurance coverage and any additional insurance and/or bonds required by law:
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(a) Workers' Compensation insurance with benefits afforded under the laws of
the state in which the work is to be performed.
(b) Employer's Liability insurance with minimum limits of $100,000 for bodily
injury by accident or disease, per employee, and $500,000 for bodily
injury by accident or disease, policy aggregate.
(c) General Liability insurance with minimum limits of $1,000,000 per
occurrence for bodily injury and property damage arising out of
Premises/Operations, $1,000,000 per occurrence Personal Injury and
$1,000,000 General Policy Aggregate (applicable to Commercial General
Liability Policies), and $1,000,000 per occurrence/aggregate for
Products/Completed Operations. Coverage must include Blanket Contractual,
Independent Contractor's Liability and Broad Form Property Damage and name
Buyer as an "Additional Insured."
(d) If use of motor vehicles is required, Automobile Liability insurance with
minimum limits of $1,000,000 per occurrence for bodily injury and property
damage, which coverage extends to all owned, hired and non-owned autos.
Insurance companies affording coverage hereunder must have a Best's Rating of
B+VII or better.
Upon Buyer's request, Seller agrees to furnish certificates or other acceptable
proof of the foregoing insurance which will provide for Buyer to be notified in
writing at least thirty (30) days prior to cancellation of or any material
change in any of the insurance evidenced thereby.
LIABILITY AND INDEMNIFICATION
SELLER AGREES TO INDEMNIFY AND SAVE BUYER (AND ALL PARENT, AFFILIATE AND
SUBSIDIARY COMPANIES, AND INCLUDING ALL OFFICERS, DIRECTORS, AGENTS AND
EMPLOYEES THEREOF) HARMLESS FROM AND AGAINST ANY AND ALL LIABILITY, LOSS, DAMAGE
OR EXPENSE (INCLUDING ATTORNEY FEES AND COURT COSTS) INCURRED BY BUYER IN
CONNECTION WITH ANY CLAIM, DEMAND OR SUIT FOR DAMAGES, INJUNCTION OR OTHER
RELIEF, CAUSED BY, RESULTING FROM OR ATTRIBUTABLE TO THE MATERIAL OR THE ACTS OR
OMISSIONS OF SELLER (INCLUDING ANY OF ITS SUPPLIERS, AGENTS OR SUBCONTRACTORS,
BUT EXCEPTING NEGLIGENT ACTS OR OMISSIONS SOLELY ATTRIBUTABLE TO BUYER), WHETHER
ARISING DURING OR AFTER PERFORMANCE PURSUANT TO THE CONTRACT, IN FURNISHING THE
MATERIAL OR PERFORMING SERVICES HEREUNDER. THIS INDEMNITY WILL SURVIVE THE
DELIVERY, INSPECTION AND ACCEPTANCE OF MATERIAL OR PERFORMANCE OF SERVICES
HEREUNDER.
SELLER FURTHER AGREES TO DEFEND BUYER (AND ALL PARENT, AFFILIATE AND SUBSIDIARY
COMPANIES, INCLUDING ALL OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES THEREOF), AT
BUYER'S REQUEST, AGAINST ANY SUCH CLAIM, DEMAND OR SUIT AND BUYER AGREES TO
PROMPTLY NOTIFY
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SELLER OF ANY CLAIM OR DEMAND AGAINST BUYER FOR WHICH SELLER IS OR MAY BE
RESPONSIBLE UNDER THIS CLAUSE.
SELLER'S FOREGOING AGREEMENT TO INDEMNIFY AND SAVE BUYER (AND ALL PARENT,
AFFILIATE AND SUBSIDIARY COMPANIES, INCLUDING ALL OFFICERS, DIRECTORS, AGENTS
AND EMPLOYEES THEREOF), HARMLESS AND DEFEND INCLUDES, BUT IS NOT LIMITED TO, ANY
CLAIM, SUIT OR ACTION OF INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT, TRADE
SECRET OR ANY OTHER INTELLECTUAL PROPERTY OF ANY THIRD PARTY.
SELLER AGREES NOT TO IMPLEAD OR BRING ANY ACTION AGAINST BUYER (AND ALL PARENT,
AFFILIATE AND SUBSIDIARY COMPANIES, INCLUDING ALL OFFICERS, DIRECTORS, AGENTS
AND EMPLOYEES THEREOF), BASED ON ANY CLAIM BY ANY PERSON FOR PERSONAL INJURY OR
DEATH THAT OCCURS IN THE COURSE OR SCOPE OF EMPLOYMENT OF SUCH PERSON BY SELLER
AND THAT ARISES OUT OF MATERIAL OR SERVICES FURNISHED UNDER THIS CONTRACT OR
RESULTING FROM SELLER'S BREACH OF THE USE OF INFORMATION CLAUSE OF THE CONTRACT.
LICENSES
No licenses, express or implied, under any patents are granted by Buyer to
Seller under this Contract.
MATERIAL/SOFTWARE DOCUMENTATION
Seller agrees to provide, at no charge to Buyer, copies of all pertinent
Material/Software documentation so that Buyer will have a complete set of
documentation to operate, support, maintain, order, and install the
Material/Software purchased by or provided to Buyer. As to software and
firmware, such documentation includes without limitation, the source code,
program materials and other documentation described in Attachment A, Section
III. Any and all such documentation is confidential and proprietary, if so
marked by Seller.
Seller further agrees to provide to Buyer all documentation associated with any
Material change/correction, whether in or out of warranty, and all changes,
corrections or revisions to software and services provided to Buyer pursuant to
this Contract. This documentation will be provided to Buyer by Seller before any
Material, software or service is installed, delivered, implemented and/or
accepted, except as otherwise mutually agreed in writing. In the event of a
software overwrite correcting an emergency, service-affecting problem/defect,
any and all of the information necessary to resolve such problem/defect will be
provided in writing via facsimile or, if requested by Buyer, orally by
telephone. There will be no charge to Buyer for this documentation and/or
information, including the delivery mechanism and periodic updates. The medium
on which such documentation is to be provided will be by mutual consent. All
documentation subject to the provisions of this clause will be provided to Buyer
on or before the
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dates set forth in the SOURCE CODE REQUIREMENTS clause of the Contract. Buyer
may reproduce any and all documentation marked by Seller as proprietary or
confidential, for its own internal use, and will include Seller's copyright
notices, if any, on all such reproductions.
Buyer may modify any documentation for its own use, and at its own expense, to
meet its specific requirements. The conditions and charges, if any, for Seller's
support of such modifications will be subject to agreement between Seller and
Buyer. Any unmodified portion of such modified documentation will be subject to
the same conditions and limitations as have been designated herein for the
original documentation. Title to any such modified documentation will reside
with Buyer.
As to Material and services relating to Material, Seller's obligations under
this clause will continue for a period through September 30, 1998 unless SWBT
agrees in writing to a different period of time. As to software and services
relating to software, Seller's obligations under this clause will continue for a
period through September 30, 1998 unless SWBT agrees in writing to a different
period of time or until SWBT stops using CoinNet as developed by TSG, whichever
occurs first. Seller's obligations under this clause will survive any
termination by Buyer pursuant to the TERMINATION clause or any cancellation of
the Contract by Buyer pursuant to the BREACH BY SELLER clause.
MODIFICATION TO CONFORM TO LAWS
This Contract and all obligations hereunder will be subject to all applicable
laws, court orders, rules and regulations (collectively "Laws"), including, by
way of illustration and not limitation, the Telecommunications Act of 1996. In
the event this Contract, or any of the provisions hereof or the operations
contemplated hereunder, are found to be inconsistent with or contrary to any
such Laws, the latter will be deemed to control and, if commercially
practicable, this Contract will be regarded as modified accordingly and will
continue in full force and effect as so modified. If such modified Contract is
not commercially practicable, in the opinion of either party, then the parties
agree to meet promptly and discuss any necessary amendments or modifications in
order to comply with any such Laws, and if mutual agreement cannot be reached,
then this Contract may be terminated immediately by either party.
MONTHLY SHIPMENT REPORTS
Seller shall provide Buyer a completed Monthly Shipment Report for Material
purchased, repaired or recertified and shipped to Buyer in the preceding month
(including recertified chassis returned to SWBT) by the fifteenth (15th)
calendar day of the following month. The first report will be for the month of
June 1997, and reports shall continue from month to month thereafter. Each
report will be delivered to SWBT in accordance with the NOTICES clause of the
Contract. A copy of each report will also be sent via facsimile to SWBT's
Director-Technology Integration, (210) 222-7702, on the same date.
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NON-EXCLUSIVE DEALING
It is expressly understood and agreed that this Contract does not grant Seller
an exclusive privilege to sell to Buyer all Material which Buyer may require. It
is, therefore, understood that Buyer may contract with other manufacturers and
suppliers for the procurement of comparable products or services. However, in
such event, Buyer does not waive any of Seller's obligations under the Contract.
As to the 11,000 new GemStar 4032-GSX kits to be purchased hereunder, however,
except as otherwise provided in the Contract, Buyer is required to purchase all
of said new GemStar kits from Seller.
NON-WAIVER
No course of dealing or failure of either party to strictly enforce any term,
right or condition of this Contract will be construed as a waiver of such term,
right or condition. The waiver by Buyer in one instance of any default of Seller
hereunder will not be deemed a waiver of any other default of Seller. The
express provision herein for certain rights and remedies of Buyer are in
addition to any other legal and equitable rights and remedies to which Buyer
would otherwise be entitled.
NOTICES
Any notice, demand or report which under the terms of this Contract or otherwise
must or may be given or made by Seller or Buyer to the other, will be in writing
and given or made by overnight delivery service, facsimile, telegram or similar
communication or by certified or registered mail, return receipt requested,
addressed to the respective parties as shown:
(a) If to Buyer: Southwestern Bell Telephone Company
Procurement Contracting
1010 Pine - Suite 900
St. Louis, Missouri 63101
Attn: Mrs. Gail Meyers
(b) If to Seller: Technology Service Group, Inc.
20 Mansell Court East - Suite 200
Roswell, Georgia 30076
Attn: President
A copy of each such notice, demand or report to SWBT will also be sent via fax
to SWBT's Director-Technology Integration, (210) 222-7702, on the same date the
original is sent.
Unless otherwise provided, such notice or demand will be deemed to have been
given or made when sent, if sent by overnight delivery service, facsimile,
telegram or similar communication, or when deposited, postage prepaid, in the
U.S. mail.
The above addresses may be changed at any time by giving thirty (30) days prior
written notice as provided above.
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PLANT AND WORK RULES
Each party's employees and agents will, while on the premises of the other or at
any other location while performing services under this agreement for SWBT,
comply with all plant rules and regulations, including, but not limited to, the
section of SBC Communications Inc.'s "Code of Business Conduct," a copy of which
is available upon request, which prohibits the possession of any weapon or
implement which might be used as a weapon, on SWBT premises or properties. In
addition, the parties agree that, where required by government regulations,
Seller will submit satisfactory clearance from the U.S. Department of Defense
and/or other federal authorities concerned.
PUBLICITY
Seller agrees not to advertise or, except as required by the disclosure
requirements of the U.S. Securities and Exchange Commission ("SEC"), otherwise
make known to others any information regarding this Contract. Seller further
agrees not to use in any advertising or sales promotions, press releases or
other publicity matters, any endorsements, direct or indirect quotes, or
pictures implying endorsement by Buyer or any of its employees. Seller agrees to
require its subcontractors to comply with these restrictions. Buyer will provide
a copy of the final version of the Contract, except for Attachments B, C and D,
to Seller on a diskette.
QUALITY ASSURANCE
1. Seller hereby agrees that the Material furnished hereunder by Seller will
be subject to:
(a) Seller's quality control activities and procedures, including any
performance measurements, testing, quality process reviews or inspections
to implement such procedures, which are hereinafter collectively referred
to as the Quality Program Standards ("QPS").
(b) The requirements contained in the current issues of the following Bellcore
documents and subsequent issues thereof:
TR-NWT-000332 - "Reliability Prediction Procedure for Electronic Equipment"
TR-TSY-000357 - "Component Reliability Assurance Requirements for
Telecommunications Equipment"
TR-NWT-000078 - "Generic Physical Design Requirements for
Telecommunications Products and Equipment"
TR-NWT-001037 - "Statistical Process Control Program Generic Requirements"
TR-NWT-001359 - "Supplier Data - Basic Generic Requirements"
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GR-1252-CORE - "Quality System Generic Requirements For Hardware"
2. Process Surveillance procedures may be initiated by Buyer or its
representative. Seller further agrees that it will:
(a) Notify Buyer or its representative when Material is ready for examination
and give Buyer or its representative reasonable opportunity to examine
Material at any time prior to the scheduled shipment date. At Buyer's
option, examination of Material may be performed prior to final assembly
and/or completion of manufacturing or repair processes in accordance with
the above-referenced requirements;
(b) Provide Buyer or its representative with copies of Seller's and Seller's
sub-contractor(s)' quality manual(s), current inspection procedures and/or
product specifications for the Material furnished hereunder, provided the
same can be obtained from Seller's sub-contractor(s) and provided Seller's
sub-contractor(s) consent to such disclosure. Seller will make commercially
reasonable efforts to comply with this provision by July 2, 1997;
(c) Maintain and make available to Buyer or its representative the data
obtained through Seller's quality control procedures which demonstrate that
the Material meets the specified quality and reliability requirements;
(d) Provide Buyer or its representative, at no charge, access to Seller's test
equipment, facilities, data and specifications, assistance from Seller's
personnel and sufficient working space to enable Buyer or its
representative to perform said Quality Assurance Examination and/or Process
Surveillance and/or a review of Seller's total quality program at Seller's
facilities;
(e) Only Material subject to review by Buyer or its representative will be
accepted for delivery to Buyer. Where Seller is authorized by Buyer to
establish a stock of Material for future shipment, such Material will be
available for examination by Buyer or its representative prior to reserving
same for Buyer and such reserved Material will not be shipped on orders to
anyone other than Buyer; and
(f) The purchase of any Material hereunder is subject to Buyer's inspection and
acceptance after delivery thereof.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
RECORDS AND AUDIT
Seller agrees to maintain complete and accurate records of all amounts billable
to and payments made by Buyer hereunder in accordance with standard recognized
accounting practices. Seller
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shall retain such records for a period of three (3) years from the date of final
payment for Material or services specified. Seller further agrees to provide
written substantiation of any disputed invoice amount to Buyer within thirty
(30) calendar days after receipt of written notification of such dispute.
Seller agrees that Buyer shall have the right through its accredited
representatives to inspect and audit, during normal business hours, the time and
material charges invoiced to Buyer hereunder. This right to audit shall be
limited to validating the accuracy of Seller resources utilized and associated
charges to Buyer and expressly excludes the right to audit the composition of
rates invoiced, any cost or pricing data, records and information pertaining to
any other Buyer or Seller's accounting policies or practices. Should Buyer
request an audit, Seller will make available the pertinent utilization records
and files. All costs directly attributable to such audit will be paid by Buyer.
RELEASES VOID
Neither party will require waivers or releases of any personal rights from
representatives of the other in connection with visits to each other's
respective premises, and no such releases or waivers will be pleaded by Seller,
Buyer or third persons in any action or proceeding.
RELIABILITY
Beginning July 2, 1997, Buyer and Seller will monitor the cumulative failure
rate of the Material specified below. If the cumulative failure rate of any such
Material exceeds that identified in paragraph (a) or (c) of this clause, or if
CoinNet fails to perform as set forth in (d), any such failure(s) will
constitute a breach of contract by Seller.
(a) Chassis
For purposes of this clause the term "cumulative base chassis" means the
total number of chassis recertified by TSG (as described above in the
COMMITMENTS OF THE PARTIES clause) and new chassis purchased hereunder,
which are deployed by SWBT in the field. The term "cumulative failure rate"
means the percentage of the cumulative base chassis which fail to perform
per the REQUIREMENTS. TSG warrants that the cumulative failure rate of the
cumulative base chassis will not exceed six percent (6%). The first
cumulative failure rate calculation will be on October 31, 1997. Subsequent
cumulative failure rate calculations will be made as of the last business
day of each month after October 1997. Failures, for purposes of cumulative
failure rate calculations as described in this clause, include infant
mortality and out of box failures. Cumulative failure rate calculations
will be adjusted as necessary for any errors identified by Buyer or its
representatives pursuant to the REPAIR SERVICES FOR MATERIAL and
COMMITMENTS OF THE PARTIES clauses of the Contract, including any and all
errors made by Seller in the designation of cumulative base chassis as No
Trouble Found ("NTF") chassis.
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(b) If the NTF's for all chassis returned to TSG for repair (excluding chassis
returned for recertification) for any one calendar month after June 1997
exceed ten percent (10 %) of the total number of chassis returned for
repair during that month, Buyer will pay Seller a charge of twenty-five
dollars ($25.00) for each of the chassis which exceed ten percent (10%).
(c) TSG warrants that, beginning with June 1, 1997, the cumulative failure rate
of the four hundred sixty-seven (467) new CMI electronic keys delivered in
April and May 1997 will not exceed six percent (6%). The cumulative failure
rate of said keys will be the percentage of the four hundred sixty-seven
(467) keys which fail to perform per the REQUIREMENTS. The first cumulative
failure rate calculation date of the keys will be August 31, 1997.
(d) TSG warrants that, beginning at 5:00 P.M. CDT, July 2, 1997, CoinNet will
perform per the REQUIREMENTS at all times up to and including September 30,
1998.
REPAIR SERVICES FOR MATERIAL/SELECTION OF OUTSIDE REPAIR VENDOR
TSG will provide repair services for Material still under warranty and for
Material which is out-of-warranty, as follows:
(a) Material Under Warranty
Seller will provide repair services for Material still under warranty
throughout the warranty period, at no charge to Buyer.
Material repaired while still under warranty will be warranted by TSG to
perform per the REQUIREMENTS for the balance of the original warranty
period or ninety (90) days, whichever is greater.
If a unit of Material under warranty is returned to Seller as provided in
this clause, and is determined to be beyond repair, Seller will so notify
Buyer and will provide a replacement to Buyer, which replacement will be
warranted by Seller for the balance of the original warranty period or
ninety (90) days, whichever is greater.
All transportation charges for and risk of in-transit damage or loss to
Material still under warranty shipped to Seller by Buyer for repair, will
be borne by Seller. All transportation charges for and risk of in-transit
damage or loss to repaired Material shipped to Buyer by Seller, will also
be borne by Seller.
(b) Material Not Under Warranty
Seller agrees to provide out-of-warranty repair service on all Material
purchased by Buyer before or after execution of the Contract, at Buyer's
expense. Out-of-warranty material will be shipped by Buyer to Seller for
repair to a destination designated by Seller.
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Out-of-warranty Material returned to Seller for repair will be repaired by
TSG and warranted to perform per the REQUIREMENTS for ninety (90) days from
the date of return shipment.
If out-of-warranty material returned for repair is determined to be beyond
repair, Seller will so notify Buyer. If requested, Seller will sell Buyer a
replacement at the higher of the Contract price or Seller's then current
published price or, if no such prices exist, at a price to be mutually
agreed upon by the parties. In such event, the replacement will be
warranted by Seller to perform per the REQUIREMENTS for a period of one (1)
year.
All transportation charges for and risk of in-transit damage or loss to
out-of-warranty Material returned to Seller for repair under this clause,
will be borne by Buyer. All transportation charges associated with the
return of such repaired or replacement Material to Buyer, will be borne by
Buyer but prepaid by Seller and listed as a separate item on Seller's
invoice for repair. Seller will bear the risk of in-transit damage or loss
for shipments of repaired or replacement Material to Buyer.
The cost to Buyer of out-of-warranty repair for chassis will be fifty
dollars ($50.00) per chassis, which cost will be subject to annual rate
increases of no more than five percent (5%).
(c) Procedures Applicable to Both Under Warranty and Out-of-Warranty Repair
Buyer may contact Seller concerning any questions that may arise concerning
repair, at no charge to Buyer.
Buyer shall furnish the following information with Material returned to
Seller for repair: (a) Buyer's name and complete address; (b) name(s) and
telephone number(s) of Buyer's employee(s) to contact in case of questions
about the Material to be repaired; ( c) "ship to" address for return of
repaired Material if different from address in (a); (d) a complete list of
Material returned; (e) the nature of the defect or failure, if known; and
(f) whether or not the returned Material is still under warranty.
Repair or replacement Material will be marked by Seller to show the
warranty expiration date, stenciled or otherwise identified in a permanent
manner, at a readily visible location on the Material and packing box.
All invoices originated by Seller for repair services must be clearly
identified as such, and must contain a reference to Buyer's order for said
repair services. Invoices for repair services will be paid by Buyer, net
thirty (30) days.
In addition to the foregoing, TSG will provide Monthly Repair Reports to
SWBT in accordance with the NOTICES clause of the Contract. A copy of each
report will also be sent via facsimile to SWBT's Director-Technology
Integration, (210) 222-7702, on the same date. Each report will include the
preceding calendar month and must be received by SWBT by the fifteenth
(15th) calendar day of the following month. The first report will be for
the month of June 1997. Each report will include the following information:
1) the total number
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of chassis recertified by TSG (as described above in the COMMITMENTS OF THE
PARTIES clause), new chassis purchased hereunder, and deployed TSG chassis
purchased by SWBT prior to the execution of this Contract which are still
under warranty, which were tested by TSG during each such month; 2) the
number of said chassis tested during each such month and found not to
perform per the REQUIREMENTS; 3) the repairs that were required; and 4) the
number of said chassis which were determined by TSG to be NTF during each
such month.
SWBT or its representatives will have the right to audit the testing and
repair performed by TSG pursuant to this clause at any time, wherever
performed, upon giving twenty-four (24) hours oral or written notice to
TSG.
Unless otherwise agreed upon by the parties, Seller will make commercially
reasonable efforts to repair and return ship all repaired and replacement
Material within thirty (30) calendar days of receipt of the Material for
repair.
(d) Selection of Outside Repair Vendor by TSG
TSG, at no charge to SWBT, will select and train a qualified, competent
repair vendor ("outside vendor") acceptable to SWBT by December 31, 1997,
and provide said vendor with all manuals, specifications, documents and
other information needed to perform repair on all Material. SWBT will not
unreasonably withhold its approval of an outside vendor so selected by TSG.
SWBT will have the right to require reasonable assurance from TSG of said
vendor's qualifications and that said outside vendor has been adequately
trained to perform the competent repair of all Material. TSG will also
provide said vendor with a list of all repair parts that are needed, or may
be needed, to repair all Material, and will identify each such repair part
by part number or other identification, and identify the manufacturer
and/or supplier of each such part. It will be TSG's responsibility to reach
agreement with said vendor regarding the protection of TSG's confidential
technical documentation and information.
TSG will sell all parts necessary to make repairs to the Material to the
outside vendor at fifteen percent (15%) above TSG's cost. TSG will provide
written substantiation of such cost to SWBT, upon request.
SWBT will have the right to negotiate the cost of repair of SWBT's Material
directly with the outside vendor selected by TSG. If said outside vendor
will not agree to provide repair services at an average price within one
hundred fifty percent (150%) of TSG's price, TSG will pay to the outside
vendor on Buyer's behalf, the incremental difference between one hundred
fifty percent (150%) of TSG's price and the outside vendor's price, through
September 30, 1998.
TSG's failure to select and train an outside repair vendor as required
herein will constitute a breach of the Contract by TSG, concerning which
breach SWBT is not required to provide advance notice nor allow TSG an
opportunity to cure. In the event of such breach, SWBT
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will have the right to immediately cancel this Contract without penalty or
further obligation to TSG, including the payment to be made to TSG on
December 31, 1997 and all subsequent payments scheduled thereafter under
the Contract. Further, in such event, SWBT will not be obligated to
purchase or accept any additional shipments of new GemStar 4032-GSX kits
scheduled hereunder.
(e) Selection of Outside Repair Vendor by SWBT
TSG will not have the exclusive right to provide repair services for
Materials. SWBT may, at any time during the time TSG is obligated to
provide said repair services hereunder, select a vendor of SWBT's choice to
provide such services. TSG will provide said vendor information,
documentation, repair parts and parts lists ("resources") in accordance
with TSG's obligations to provide such resources to a repair vendor
selected by TSG as described in paragraph (d) of this clause, provided that
such vendor selected by SWBT signs an appropriate non-disclosure agreement
regarding the protection of TSG's proprietary information and
documentation. TSG will provide services under this sub-paragraph (e) at an
hourly rate of seventy-five dollars ($75.00). If travel by TSG personnel is
required, Buyer will reimburse TSG for normal business travel expenses. TSG
will not be responsible to provide computer hardware to any vendor selected
by SWBT.
The foregoing notwithstanding, nothing contained in this clause will waive
or otherwise adversely affect Buyer's rights under the WARRANTY clause or
any other provision of this Contract, and will not alter any time period
within which Seller is obligated to perform as set forth in the Contract.
Seller's obligations under this clause will continue for a period of seven
(7) years after the date of last shipment of Material pursuant to this
Contract unless SWBT agrees in writing to a different period of time.
Seller's obligations under this clause will survive any termination by
Buyer pursuant to the TERMINATION clause or any cancellation of the
Contract by Buyer pursuant to the BREACH BY SELLER clause.
RIGHT OF ACCESS
Both Seller and Buyer will permit reasonable access to the other's facilities in
connection with work hereunder. No charge will be made for such visits. It is
agreed that twenty four (24) hours prior notice will be given when such access
is requested. Seller agrees to remove any of its employees from Buyer's premises
at Buyer's request.
SELLER'S INFORMATION
Information, including specifications, drawings, sketches, models, samples,
tools, computer or other apparatus programs, technical information or data,
written, oral or otherwise, furnished by Seller to Buyer under this Contract or
in contemplation thereof will not be considered to be confidential or
proprietary unless so marked by Seller as confidential or proprietary.
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SELLER'S LIMITATION ON PAYMENTS TO BUYER
Notwithstanding anything in the Contract to the contrary, in no event shall the
damages, charges, credits, assessments or the like, in the aggregate, payable by
Seller arising from the provisions of the SHIPMENTS TO BUYER, RELIABILITY, and
ERROR CORRECTION Clauses hereunder exceed five (5%) percent of the then total
invoice amounts issued by Seller to Buyer hereunder.
SEVERABILITY
If any provision of this Contract is determined to be invalid or unenforceable,
such invalidity or unenforceability will not invalidate or render unenforceable
the entire Contract, but rather the entire Contract will be construed as if it
did not contain the particular invalid or unenforceable provision(s) and the
rights and obligations of Seller and Buyer will be construed and enforced
accordingly.
SHIPMENTS TO BUYER
Seller shall be allowed a maximum shipping interval of thirty (30) calendar days
after each of the purchase dates set forth in the COMMITMENTS OF THE PARTIES
clause, paragraph 6, to ship said kits purchased on each such date. Each such
shipment must be received by Buyer within ten (10) calendar days of the last day
of the maximum shipping interval unless otherwise mutually agreed by the
parties, in writing. Unless mutual agreement is reached, should Buyer request
rescheduling resulting in an extension of the shipping date by more than
fourteen (14) days beyond the maximum shipping interval for any shipment, Seller
shall be entitled to assess a charge of one and one half percent (1.5%) of the
chassis price per month on chassis included in the rescheduled shipment. Should
Seller fail to make each shipment of said chassis within said thirty (30) day
maximum shipping interval, Seller will be in breach of the Contract and Buyer,
without advance notice or opportunity for TSG to cure, will have the right to
immediately cancel the Contract, without penalty or further obligation to TSG,
including the withholding of all subsequent milestone payments and payments for
material and services not already delivered and/or provided to SWBT. In such
event, SWBT will not be obligated to purchase or accept any additional shipments
of new GemStar 4032-GSX kits scheduled hereunder.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
SHIPPING AND BILLING
Seller agrees to:
(a) As to the new GemStar 4032-GSX kits purchased on each date set forth in
the COMMITMENTS OF THE PARTIES clause, paragraph 6, ship the total number
of kits
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purchased on each such date in one shipment, unless instructed otherwise by
Buyer. As to any other Material, ship orders complete unless instructed
otherwise by Buyer;
(b) Ship each shipment to the destination designated by Buyer in accordance
with any specified routing instructions.
(c) Package, mark and label Material in accordance with Buyer's Specification
No. 76295 (except in connection with any bar code requirements) already in
Seller's possession and made a part hereof by this reference. Adequate
protective packaging will be furnished by Seller at no additional charge.
Seller further agrees to use MacPac packaging, unless otherwise mutually
agreed between the parties, and identify repaired Material with green tape
on the exterior of the packing box as well as on the individual unit boxes;
(d) Enclose the appropriate packing memorandum with each shipment and, when
more than one (1) package is shipped, clearly identify the package
containing the packing memorandum;
(e) Mark Buyer's order and/or purchase number, item sequence numbers, and item
identification numbers and descriptions on all packages, subordinate
documents and shipping papers;
(f) Render invoices in duplicate or as otherwise specified by Buyer, showing
Buyer's order and/or purchase number, item sequence numbers, item
identification numbers and descriptions, through routing and weight;
(g) Render separate invoices for each shipment;
(h) Mail bills of lading, if applicable, shipping notices and copies of
transportation bills with Seller's invoices to Buyer's address indicated on
the applicable order or other purchase document.
(i) Include only one (1) such order or shipment on each invoice.
(j) The GemStar 4032-GSX electronic chassis, electronic lock and cash box out
switch which comprise each kit will be shipped as one (1) kit within the
same box.
For shipments made to Buyer's Material Distribution Center ("MDC") in Lancaster,
Texas, if any, Seller agrees to ship Material on pallets with dimensions of 42"
by 42" and stack Material thereon no higher than 48".
If prepayment of transportation charges is authorized, Seller will include the
transportation charges for the Material from the F.O.B. point to the designated
destination as a separate charge on Seller's invoice therefor.
Shipping and routing instructions may be altered by mutual agreement of the
parties in writing. Unless otherwise agreed, all invoices for the new GemStar
4032-GSX kits purchased hereunder will be payable net thirty (30) days from
Buyer's receipt of the invoice or kits, whichever is later.
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As to Seller's provision of other Material and services, invoices will be
payable net thirty (30) days from the date of Buyer's receipt of the invoice or
Material or services, whichever is later. Discounts may be taken when allowed.
C.O.D. shipments will not be accepted. Late payment charges will be assessed at
a rate of one and one-half percent (1.5%) per month.
SHIPPING PRIORITY
Seller will afford Buyer shipping priority over other customers in accordance
with mutually agreed to shipping schedules.
SOFTWARE MAINTENANCE
Seller agrees to furnish software maintenance services to Buyer, at no charge,
through September 30, 1998. After September 30, 1998, Seller agrees to furnish
software maintenance services to Buyer at an hourly rate of seventy-five dollars
($75.00), which rate shall be subject to annual increases of no more than five
percent (5%). "Software maintenance" means any of the services provided by
Seller that are designed to maintain the software in conformance with the
REQUIREMENTS.
Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of Material under this Contract unless
SWBT agrees in writing to a different period of time or until SWBT stops using
CoinNet as developed by TSG, whichever occurs first. Seller's obligations under
this clause will survive any termination by Buyer pursuant to the TERMINATION
clause or any cancellation of the Contract by Buyer pursuant to the BREACH BY
SELLER clause.
SOFTWARE UPDATES
Seller agrees to supply improvements, new releases, updates, extensions, and
other changes to the CoinNet software and firmware, including the pre-existing
and new SMDR software to be developed hereunder, which: (a) Seller provides to
other customers who have a license to use any such software; (b) Seller deems to
be logical improvements or extensions to the original software supplied to
Buyer; or (c) are necessary for the software to continue the computing functions
mutually agreed upon between Seller and Buyer. Buyer will have the right to
accept or reject any such revised version of the software or to remove same and
replace it with the previous version if such new version will degrade or impair
Buyer's computer system. In addition, Seller will insure that software licensed
hereunder is kept current with new releases of the operating system(s) listed in
Seller's standard published specifications or the REQUIREMENTS. Such software
updates will be provided to Seller at no charge. Software updates will be
provided to Buyer at Seller's published prices, after September 30, 1998.
Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of Material under this Contract unless
SWBT agrees in writing to a different period of time or until SWBT stops using
CoinNet as developed by TSG, whichever occurs first. Seller's obligations under
this clause will survive any termination by Buyer pursuant to the
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TERMINATION clause or any cancellation of the Contract by Buyer pursuant to the
BREACH BY SELLER clause.
SOURCE CODE REQUIREMENTS
(a) TSG will provide to SWBT a copy of the most current version of the CoinNet
software source code and documentation as described in Attachment A, as
well as any other information and/or materials required to support,
maintain, order, install, modify or correct said software, by July 2, 1997.
(b) The new SMDR software source code and documentation (source code and
documentation as described in Attachment A, Section III), as well as any
other information and/or materials required to support, maintain, order,
install, modify or correct said software, will be provided to SWBT by TSG
on or before September 30, 1997.
(c) As to the CoinNet software, TSG will provide to SWBT, without charge, a
copy of the source code and documentation of any and all changes and/or
revisions to said software, including all information and/or materials
pertinent thereto, of the same type and/or nature as that described in (a)
and (b) above.
(d) Seller's obligations under this clause will continue through September 30,
1998 unless SWBT agrees in writing to a different period of time or until
SWBT stops using CoinNet as developed by TSG, whichever occurs first.
Seller's obligations under this clause will survive any termination by
Buyer pursuant to the TERMINATION clause or any cancellation of the
Contract by Buyer pursuant to the BREACH BY SELLER clause.
SUPPORT OF PREVIOUS VERSIONS / SOFTWARE
When Seller issues a new version of existing software, as provided in the
SOFTWARE UPDATES clause of the Contract, Seller agrees to provide error
correction and technical support for the previous version of that software,
without charge to Buyer. Services provided under this clause after September 30,
1998, will be provided at a price of seventy-five dollars ($75.00) per hour,
which price will be subject to annual increases of no more than five percent
(5%).
Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of Material under this Contract unless
SWBT agrees in writing to a different period of time or until SWBT stops using
CoinNet as developed by TSG, whichever occurs first. Seller's obligations under
this clause will survive any termination by Buyer pursuant to the TERMINATION
clause or any cancellation of the Contract by Buyer pursuant to the BREACH BY
SELLER clause.
SURVIVAL OF OBLIGATIONS
In addition to the survival of obligations as set forth elsewhere in the
Contract, Seller's obligations hereunder which by their nature would continue
beyond the termination, cancellation or expiration
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hereof, including, by way of illustration only and not limitation, those
obligations in the clauses entitled "COMPLIANCE WITH LAWS," "INFRINGEMENT,"
"LIABILITY AND INDEMNIFICATION," "PUBLICITY," "RELEASES VOID," "SEVERABILITY,"
"USE OF INFORMATION" and "WARRANTY," will survive the breach, termination,
cancellation or expiration of the Contract.
TAXES
In the event that Buyer is liable under federal law for excise taxes or under
state or local law for sales taxes collected by Seller on the Material provided
hereunder, Seller agrees to bill such taxes as separate items, listing each tax
jurisdiction involved. Buyer will have the right to require Seller to contest
with the imposing jurisdiction, at Buyer's expense, any taxes or assessments
which Buyer may deem to be improperly levied. Seller further agrees, upon
request of Buyer, to furnish statements evidencing that taxes and assessments
for which Buyer is responsible hereunder and which have been billed to Buyer by
Seller, have been paid.
TECHNICAL SUPPORT FOR COINNET AND MATERIAL
Buyer shall be entitled to ongoing, timely technical support service, including
field service support and access to Seller by telephone for all CoinNet software
and firmware and Material. The availability or performance of this technical
support service shall not be construed as altering or affecting Seller's
obligations as set forth in the WARRANTY clause or as elsewhere provided in this
Contract. Said support will be provided at no charge through September 30, 1998.
Thereafter, said support will be provided by Seller at a price of seventy-five
dollars ($75.00) per hour, subject to annual price increases of no more than
five percent (5%).
Said ongoing technical support will be available to Buyer from Seller via
telephone during normal working hours. Response to Buyer shall be within one
hour (1) after a request is made provided that the request is made and can be
answered within normal working hours. Technical support for CoinNet and the
Material shall be ongoing and extend beyond the warranty period for seven (7)
years after the last shipment of Material under this Contract, unless SWBT
agrees in writing to a shorter period of time or, as to CoinNet software and
firmware, at such time as Buyer stops using CoinNet as developed by Seller.
Buyer will call Seller for technical support for CoinNet software, firmware and
Material, by calling the following number during the times indicated:
1-800-447-8353
8:00 AM - 5:00 PM EASTERN TIME (M-F)
Seller will give SWBT thirty (30) days advance notice of any change in the
technical support call number.
So long as Buyer continues to use CoinNet, Seller agrees to provide Buyer all
necessary mail and telephone consulting assistance in the event that
difficulties occur in the use of the software or in Buyer's interpretation of
the results of software use. Upon notification by Buyer that such
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consulting service is required, Seller will proceed promptly toward the
resolution of all such reported problems by using and coordinating all Seller
resources which are required to resolve the problem.
Further, as to CoinNet, after July 2, 1997, if a reported problem cannot be
resolved by telephone or written communication within thirty (30) days from the
time Buyer first contacts Seller then, if requested by Buyer, Seller will
provide an employee capable of resolving such problem at the applicable Buyer
installation site for no additional charge, provided that the problem is the
failure of the software to perform per the REQUIREMENTS. However, SWBT agrees to
pay reasonable travel expenses for mutually agreed upon travel of TSG personnel
which is necessary to provide services under this clause. If such failure causes
downtime on Buyer's computer system on which the software is installed, then
Seller will proceed immediately to resolve the problem.
In the event that a problem is found to be due to: (a) a modification to the
software made by Buyer; or (b) use of the software in a manner which is not in
accordance with the instructions provided by Seller to Buyer relating to use of
the software as set forth in the COINNET OPERATING GUIDELINES in Attachment A,
Buyer agrees to pay Seller for all technical support or services performed to
resolve or investigate the particular problem at Seller's then current published
standard time and material rates, and reimburse Seller for any related expenses
incurred, provided that such rates and expenses are reasonable and Seller
furnishes to Buyer supporting documentation therefor.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely affect Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
Seller's obligations under this clause will survive any termination by Buyer
pursuant to the TERMINATION clause or any cancellation of the Contract by Buyer
pursuant to the BREACH BY SELLER clause.
TERMINATION
Buyer may terminate this Contract without cause, in whole or in part, at any
time, by giving Seller at least thirty (30) days prior written notice. Upon
termination, Buyer agrees to pay Seller all amounts due for the new GemStar
4032-GSX kits to be purchased by Buyer hereunder which have not yet been
purchased and paid for, as set forth in the purchase schedule set forth herein,
payments to be made net thirty (30) days after the respective scheduled purchase
dates, provided however, that the chassis to have been purchased on each such
purchase date have been shipped and delivered to SWBT as scheduled and ownership
thereof has passed to SWBT.
The milestone payments to be made to Seller on July 2, September 1, and December
31, 1997, and on March 31, 1998, will also be paid as scheduled. In the event of
such termination, Buyer will pay any amount due to Seller for performance of
services under this Contract, payable net
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thirty (30) days from receipt of invoice. Upon request from Buyer, Seller will
provide written substantiation of all such services billed to Buyer.
In the event SWBT elects to terminate the Contract in accordance with the
TERMINATION clause of the Contract, or cancels the Contract pursuant to the
BREACH BY SELLER clause of the Contract, TSG will return to SWBT within thirty
(30) calendar days, at the cost of the party who would have otherwise borne the
cost of return shipment as provided herein, all TSG electronic chassis owned by
SWBT in TSG's possession including, but not limited to, chassis returned to TSG
for repair and/or recertification, in their then present condition, whether or
not they have been repaired, upgraded or recertified. TSG agrees that TSG's
unauthorized holding of any such chassis past thirty (30) calendar days, will
cause damages to SWBT that will be difficult to determine. Therefore, TSG agrees
to pay SWBT liquidated damages calculated by multiplying the average monthly
revenues of a deployed SWBT payphone divided by thirty (30) by the number of
chassis withheld, times the number of days past thirty (30) that expire before
the chassis are delivered to SWBT's possession. The parties agree that such sum
constitutes a reasonable estimate of SWBT's actual financial losses.
TESTING
Buyer may, at its expense, have any or all Material tested, repaired,
recertified or purchased hereunder, tested by Bellcore or other independent
vendor selected by Buyer. Failure of the products to test in compliance with the
REQUIREMENTS will be addressed on a priority basis by Seller. Seller and Buyer
will develop a mutually agreed upon time line for Seller to resolve
noncompliance. Failure to correct such problems in accordance with the time line
may result in termination of this Contract and all commitments will be null and
void on the part of the Buyer.
The foregoing notwithstanding, nothing contained in this clause will waive or
otherwise adversely Buyer's rights under the WARRANTY clause or any other
provision of this Contract, and will not alter any time period within which
Seller is obligated to perform as set forth in the Contract.
TITLE AND RISK OF LOSS
Title to Material purchased hereunder will vest in Buyer when the Material has
been delivered and accepted at the F.O.B. point designated by Buyer. If this
Contract calls for additional services such as unloading, installation or the
like to be performed after delivery, Seller will retain risk of loss to the
Material until the additional services have been performed to Buyer's
satisfaction.
TRAINING
Seller will provide Buyer training, training materials and technical support to
enable Buyer to properly and effectively use CoinNet (including all hardware and
peripherals, software and firmware) and Material, at no charge to SWBT, through
September 30, 1997. Thereafter, such training, training materials and support
will be provided by Seller at a rate of seventy-five dollars ($75.00) per hour,
which rate will be subject to annual increases of no more than five percent
(5%).
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Seller's obligations under this clause will continue for a period of seven (7)
years after the date of last shipment of Material pursuant to this Contract
unless SWBT agrees in writing to a different period of time. Seller's
obligations under this clause will survive any termination by Buyer pursuant to
the TERMINATION clause or any cancellation of the Contract by Buyer pursuant to
the BREACH BY SELLER clause.
USE OF INFORMATION
Any specifications, drawings, sketches, models, samples, tools, computer or
other apparatus programs, technical or business information or data, written,
oral or otherwise (all hereinafter designated "Information"), furnished to
Seller by Buyer in regard to CoinNet or the Material since January 1994, or
under this Contract, or in contemplation thereof, will remain Buyer's property
and all copies thereof, in written, graphic or other tangible form, will be
returned to Buyer upon request. Seller agrees to keep the information
confidential in performing under this Contract and not use same for any other
purpose except upon such terms as may be agreed upon by Seller and Buyer in
writing.
WARRANTY
Seller warrants to Buyer that Material purchased, recertified, repaired or
upgraded hereunder will be merchantable, free from defects in design, material
and workmanship, fit and sufficient for the purposes intended by Buyer for the
applicable warranty period as set forth in the Contract. Material will be free
from all liens and encumbrances and will conform to and perform per the
REQUIREMENTS and in accordance with any other applicable specifications,
drawings and samples.
Seller warrants to Buyer that any services provided hereunder will be performed
in a first-class, workmanlike manner.
Seller warrants to Buyer that the media on which software is furnished will be
free from defects in material and workmanship and free from all liens and
encumbrances. Seller further warrants that the software will conform to and
perform in accordance with any of Seller's documentation, specifications,
drawings, product literature and samples, and the REQUIREMENTS.
In addition, if Material or software contains one or more manufacturer's
warranties from a party other than Seller, Seller hereby assigns such warranties
to Buyer. These warranties will be in addition to all other warranties, express,
implied or statutory.
Seller warrants that Material furnished hereunder conforms with and will perform
in accordance with Attachment A and with Seller's product specifications for
Material described in Attachments B, C, and D. Failure of the Material to
perform per the REQUIREMENTS may result in cancellation of the Contract and
render all commitments of Buyer null and void.
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All warranties will survive inspection, acceptance, payment and use. In addition
to Buyer's other remedies, Material not meeting the warranties contained herein
will, at Seller's option, be repaired or replaced by Seller at no cost to Buyer.
The warranty provisions of this clause apply with equal force to any part of
Seller's obligations under the Contract performed by or dependent on work done
by others (e.g., subcontractors) on behalf of Seller. If any part of the
services or other work performed by Seller is dependent upon work done by
others, Seller will inspect such work and promptly report to Buyer any defect
therein that renders such other work unsuitable for Seller's proper performance
hereunder. Seller's silence will constitute approval of such other work as being
fit, proper and suitable for Seller's performance of the services or other work.
Seller warrants that all Material purchased by SWBT prior to execution of the
Contract which is still within the original warranty period will perform per the
REQUIREMENTS for the remainder of said original warranty period.
Seller warrants that each of the 11,000 new GemStar 4032-GSX kits purchased
hereunder will perform per the REQUIREMENTS for a period through September 30,
1998.
TSG warrants that the Integrated System will perform per the REQUIREMENTS
through September 30, 1998.
Seller's obligations under this clause will survive any termination by Buyer
pursuant to the TERMINATION clause or any cancellation of the Contract by Buyer
pursuant to the BREACH BY SELLER clause.
IN WITNESS WHEREOF, the foregoing Contract has been executed by the parties
hereto, in two originals, as of the dates set forth below:
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________________________________ ________________________________
Vincent C. Bisceglia Date Ronald M. Jennings Date
President and CEO Vice President-General Manager
Technology Service Group, Inc. Public Communications
Southwestern Bell Telephone Company
CORPORATE ACKNOWLEDGMENTS
STATE OF TEXAS )
)
COUNTY OF DALLAS )
Before me, the undersigned Notary Public, on this day personally appeared
Vincent C. Bisceglia, known to me to be the person and officer whose name is
subscribed to the Contract. He acknowledged to me that he is the President and
CEO of Technology Service Group, Inc. and that he executed and is duly
authorized to execute the Contract in the name of and on behalf of Technology
Service Group, Inc., for the purposes and consideration expressed in the
Contract.
GIVEN under my hand and seal of office on the _____ day of June, 1997.
___________________________________________
Notary Public in and for the State of Texas
My commission expires __________
STATE OF TEXAS )
)
COUNTY OF DALLAS )
Before me the undersigned Notary Public, on this day personally appeared
Ronald M. Jennings, known to me to be the person and officer whose name is
subscribed to the Contract. He acknowledged to me that he executed and is duly
authorized to execute the Contract in the name of and on behalf of Southwestern
Bell Telephone Company for the purposes and consideration expressed in the
Contract.
GIVEN under my hand and seal of office on the _____ day of June, 1997.
___________________________________________
Notary Public in and for the State of Texas
My commission expires __________
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ATTACHMENT A
TECHNICAL STANDARDS, BENCHMARK MEASUREMENTS, SPECIFICATIONS
AND OTHER REQUIREMENTS FOR COINNET AND MATERIAL
In addition to the technical standards, benchmark measurements, specifications
and other requirements set forth elsewhere in the Contract, the technical
standards, benchmark measurements, specifications and other requirements set
forth in this Attachment will apply to CoinNet, including computer hardware and
peripherals, software (including pre-existing SMDR software added to the CoinNet
software before execution of the Contract), new SMDR software and chassis
firmware, and all Material, including GemStar 4032-GS, upgraded GemStar 4032-GS,
GemStar 4032-GSX, and all Gemini chassis (hereinafter the "chassis"), CMI-30C
electronic locks (hereinafter the "locks"), CMI 2752-001 electronic keys
(hereinafter the "keys"), CMI 2680-001 electronic key controllers (hereinafter
the "controllers"), and associated power sources (hereinafter the "adaptors"),
which CoinNet and Material are subjects of the Contract to which this Attachment
is attached. All of the technical standards, benchmark measurements,
specifications and other requirements set forth in this Attachment and elsewhere
in the Contract are referred to collectively herein as the "REQUIREMENTS." All
technical standards, benchmark measurements, specifications and other
requirements are subject to Buyer's operation of the Integrated System in
accordance with the instructions set forth in the COINNET OPERATING GUIDELINES,
below.
COINNET HARDWARE AND SOFTWARE REQUIREMENTS
I. Assumptions
1. The term "peak hours" as used herein, means the hours from 10 a.m. to 3
p.m. and from 9 p.m. to 12 a.m., inclusive.
2. All benchmark measurements, except for trunk busy studies, should be
considered to have sampling rates of one every fifteen minutes and be
averaged over a two week period known as the "study period." Trunk busy
studies will provide the total number of occurrences per hour, to be
averaged over a one week period.
3. The system must perform per the REQUIREMENTS with all features and
functionalities as required in the Contract including, without limitation,
the pre-existing SMDR software and the additional SMDR software to be
developed hereunder ("new SMDR software") and support all TSG chassis,
including GemStar 4032-GS, upgraded GemStar 4032-GS, GemStar 4032-GSX, and
all Gemini chassis purchased by SWBT both before and after the execution of
the Contract. TSG understands that the total number of such chassis may be
up to 75,000.
4. CoinNet must simultaneously support all deployed chassis, up to 15
concurrent interactive administrative users, the existing base of 360
technicians who perform installations, collections and repair, up to 20
concurrent reports (with no more than 5 of said reports being SMDR reports)
in normal peak hours operations and up to 15 concurrent manual polls.
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Normal "peak hours" operational functions and reports include:
o Adds, deletes and changes to the phones database.
o Adds, deletes and changes to the options database.
o Global changes to the phones database.
o Building phone groups based on phones database criteria.
o Phone database reports.
o Manual polling of phones.
o System log reports.
o Daily tape backup.
o SMDR reports.
Operational functions that will be performed outside of "peak hours"
include:
o PaSS export for collected phones, exported from phones database. Run
four (4) times a day, two (2) times during "peak hours" and twice
during "non peak" hours.
o PaSS import of route and stop information to the phones database.
o "Needs collect" report processed and faxed to 87 sites.
o FTP of all databases to backup machine.
o Daily maintenance reports processed.
o Autopolling.
TSG will notify SWBT of the impact on CoinNet's ability to perform per the
REQUIREMENTS that may and/or will result from mutually agreed upon changes
to said features, functions, reports or processes.
5. In addition to the REQUIREMENTS set forth elsewhere in this Attachment and
in the Contract, CoinNet, it's features and functionalities, including, but
not limited to, the features, functions, reports and processes mentioned
above, must perform per the specifications of: TSG Document No.
44156-750-05A (12/94), (Attachment B); TSG Document No. 44156-770-01 (4/95
and 6/95) (Attachment C); CMI Document Nos. CS-2680-001 and CS-2752-001
(1996) (Attachment D); and all updates of said documents.
6. SWBT agrees to update all chassis deployed by SWBT with the most recent
TSG-provided software updates by July 2, 1997.
II. SYSTEM HARDWARE REQUIREMENTS
1. Memory
a. Memory utilization must maintain an average during the study period of
no less than ten percent (10%) free pages.
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b. During the study period, the system swap file must maintain an average
of forty percent (40%) free pages.
2. Disk Utilization
a. The percentage of disk subsystem busy with read/write operations
during the study period must never exceed an average of seventy
percent (70%).
b. The disk wait time during the study period must never exceed an
average of twenty (20) milliseconds.
c. Overall disk capacity must never exceed eighty percent (80%) full.
3. CPU Utilization
a. The average percentage of measured CPU utilization must never exceed
ninety percent (90%) during the study period.
b. The average percentage of CPU time waiting on block I/O (as measured
by UNIX or SCO SAR utility) must never exceed forty percent (40%) of
total non-idle processor time during the study period.
4. Busy Line (Trunk Group) Study
a. The number of overflows (also known as incoming busies) compared to
total number of calls on a trunk group must never exceed an average of
nine percent (9%) for peak hours, over any weekly study period.
III. Software/Application Requirements
1. Source Code
The software and source code for CoinNet and SMDR must be provided as required
in this Attachment and elsewhere in the Contract, and will include the
following:
a) TSG must provide to SWBT a copy of CoinNet software, including the
pre-existing SMDR software and new SMDR software, and any other software
developed for SWBT by TSG hereunder, within the respective time frames set
forth in the Contract. The source codes and program materials, as well as
any other documentation required to support, maintain, order, install,
modify, or correct the most current version of said software must also be
provided to SWBT within the respective time frames set forth in the
Contract. SWBT will have the absolute right to make any alterations,
variations, modifications, additions or improvements to the source code of
said software at its own risk and expense, or contract with third parties
for such modifications, provided such third parties are not competitors of
TSG, provided SWBT
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obtains an appropriate non-disclosure agreement from any such third party,
and provided that SWBT shall restrict the use of the source code,
documentation and software to SWBT, its parent, subsidiary and affiliate
companies.
b) Title to deliverables shall reside with TSG. All rights, title, and
interest, including copyright, in all original works for authorship fixed
in any tangible medium, will belong to TSG.
c) All rights, title and interest in and to all intellectual property produced
for SWBT by TSG shall belong to TSG and shall be considered "works made for
hire" in accordance with the United States copyright law. SWBT shall have a
non-exclusive license to use such property, which SWBT may assign to any
parent, affiliate or subsidiary company without the consent of TSG.
2. Documentation
Documentation is defined as all documentation used in relation to CoinNet
(including computer hardware and peripherals, software (including pre-existing
and new SMDR software) and chassis firmware) and Materials (including all TSG
chassis as listed in the PREAMBLE of the Contract, electronic locks, keys,
controllers and adaptors, including system procedures, functions, and database
structures, operating and instruction manuals, system level documentation and
protocols and access methods used by CoinNet and the chassis to establish
communication, including controls used to negotiate and issue and/or receive
commands to and/or from CoinNet and the chassis, and other materials describing
the structure and operation of all CoinNet software and its interfaces. TSG will
provide the documentation to SWBT before July 2, 1997, except as to the new SMDR
software, the documentation for which will be provided to SWBT as soon as the
design thereof has been completed, but no later than September 30, 1997. The
documentation will include the following but may also include other requested
and available information:
a) Library list
b) Module Map-Object Descriptions/Purpose for all objects
c) Process Overview
d) Implementation Notes
e) Description of Use
f) Specific Build Instructions
g) Process flow for application, including each subsystem
h) Current Bug List(unfixed or unresolved problems
i) Description of all development tools used
j) Third party licensing information and reference details
ELECTRONIC LOCKS, KEYS, CONTROLLERS AND ADAPTORS
The electronic locks, the four hundred sixty-seven (467) CMI keys delivered in
April and May 1997, the controllers and adaptors must perform per the
REQUIREMENTS under normal SWBT field operating conditions, including, without
limitation, the specifications and requirements set forth herein and in Control
Module, Inc.'s (CMI's) customer specification documents CS-2680
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- -001 and CS-2752-001 (1996); TSG Document No. 44156-750-05A (12/94); TSG
Document No. 44156-770-01 (4/95 and 6/95); and all updates of said documents.
ELECTRONIC CHASSIS
All new GemStar 4032-GSX chassis (including the electronic lock and cash box out
switch) purchased under the Contract, all recertified chassis (as described in
the Contract), and all other TSG electronic chassis owned by SWBT and still
under warranty, must perform per the REQUIREMENTS, under normal SWBT field
operating conditions, including, without limitation, the specifications and
requirements set forth herein and in TSG Document No. 44156-750-05A (12/94); TSG
Document No. 44156-770-01 (4/95 and 6/95); CMI customer specification documents
CS-2680-001 (1996) and CS-2752-001; and all updates of said documents.
COINNET OPERATING GUIDELINES
SWBT will perform the following procedures which may be modified from time to
time by mutual agreement of the parties.
System Administrator Daily Checks:
o Monitor and clean up unneeded files and reports. Check system clock.
o Check faxserver.
o Check Coinnet Polls.
o Check for any locked up modems. Check that faxed reports have gone
out.
o Check that daily maintenance report has run.
o Daily tape backup.
o Check that databases were FTPed to backup machine.
Operator Basic Guidelines
o Do operating system and voice file downloads on nights and weekends.
o Upgrade all chassis to the latest operating system version (H.EPE for
GS phones, L.eLE for 1 meg phones).
o Setup all 1 meg option files to allow call-ins at 1200 baud.
o Restrict Reports/Globals changes to no more than 20 simultaneously.
Only 5 simultaneous SMDR/CDR reports.
o 60-70 modems should remain dedicated to incoming call traffic during
daytime hours.
o Delete disconnected numbers from the database.
o Investigate no activity phones.
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GENERAL REQUIREMENTS
To the extent that any of the above-referenced TSG and/or CMI documents contain
specifications inconsistent with each other, the specifications contained in
Attachment A will prevail. If any of the specifications, requirements or
instructions contained in said documents have been updated or revised in any
way, TSG will so notify SWBT by 5:00 p.m. CDT on July 2, 1997.
Whether or not specifically identified in the Contract or in the
above-referenced TSG and CMI documents, TSG must provide an Integrated System
that performs per the REQUIREMENTS, the components of which Integrated System
are: CoinNet (computer hardware and peripherals, software and chassis firmware),
pre-existing and new SMDR software, electronic chassis, electronic locks, keys,
controllers and adaptors. Said Integrated System must provide the features and
functionalities set forth in the Contract and in said TSG and CMI documents and
perform per the REQUIREMENTS.
TSG must continue to support CoinNet or do so through its representatives
approved by SWBT, as set forth in the Contract, until SWBT stops using or
modifies the source code of the CoinNet software. Said support must meet the
service levels documented in the Contract including, without limitation, the
following clauses: EMERGENCY SUPPORT SERVICE, ERROR CORRECTIONS, CUSTOM SOFTWARE
DEVELOPMENT, SOFTWARE MAINTENANCE, SOFTWARE UPDATES, SUPPORT OF PREVIOUS
VERSIONS-SOFTWARE, TECHNICAL SUPPORT FOR COINNET AND MATERIAL, REPAIR SERVICES
FOR MATERIAL, CHANGES TO MATERIAL AND CLASSIFICATION THEREOF, ENGINEERING
COMPLAINTS, CONTINUING AVAILABILITY OF REPLACEMENT AND REPAIR PARTS and
MATERIAL/SOFTWARE DOCUMENTATION.
178
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Five
Year Months Year Year
Ended Ended Ended Ended
March 31, March 31, March 29, March 28,
1995 (1) 1995 (1) 1996 (1) 1997 (1)
--------- --------- --------- ---------
(Pro Forma)
<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 (2) 3,500,000 3,500,000 3,500,000 4,549,094
Incremental shares assumed to be
outstanding related to common stock
options granted and outstanding,
excluding options granted within
twelve months of initial public
offering -- -- 345,250 567,580
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 --
Incremental shares assumed to be
outstanding related to common stock
warrants issued and outstanding -- -- 40,000 603,941
Shares of common stock assumed to be
purchased upon exercise of
outstanding options and warrants(3) (47,222) (47,222) (103,361) (940,352)
----------- ----------- ----------- -----------
Weighted average number of common
and common equivalent shares
outstanding - Primary earnings per 3,541,778 3,541,778 3,870,889 4,780,263
share
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 3,541,778 3,541,778 3,870,889 4,780,263
=========== =========== =========== ===========
Net income (loss) $(1,599,000) $(1,065,581) $ 1,177,371 $ 1,010,659
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 -- -- -- 18,785
----------- ----------- ----------- -----------
Net income (loss) as adjusted $(1,599,000) $(1,065,581) $ 1,177,371 $ 1,029,444
=========== =========== =========== ===========
Net income (loss) per share:
Primary $ (0.45) $ (0.30) $ 0.30 $ 0.22
=========== =========== =========== ===========
Assuming full dilution $ (0.45) $ (0.30) $ 0.30 $ 0.22
=========== =========== =========== ===========
</TABLE>
(1) Computations do not reflect exercise of outstanding options and warrants if
the effect thereof is anti-dilutive except for the year ended March 28,
1997 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) Except for the year ended March 28, 1997, the weighted average of number of
shares common stock outstanding represents the number of shares of common
stock issued pursuant to the terms of an Investment Agreement between the
Company, Wexford Partners Fund, L.P., Acor S.A., and Firlane Business Corp.
dated October 31, 1994.
(3) 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.
179
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> MAR-28-1997
<CASH> 67,880
<SECURITIES> 0
<RECEIVABLES> 3,381,737
<ALLOWANCES> (146,960)
<INVENTORY> 10,879,180
<CURRENT-ASSETS> 14,865,472
<PP&E> 2,566,497
<DEPRECIATION> (1,719,054)
<TOTAL-ASSETS> 19,772,382
<CURRENT-LIABILITIES> 6,644,652
<BONDS> 0
0
0
<COMMON> 47,018
<OTHER-SE> 13,080,712
<TOTAL-LIABILITY-AND-EQUITY> 19,772,382
<SALES> 33,471,918
<TOTAL-REVENUES> 33,471,918
<CGS> 26,638,622
<TOTAL-COSTS> 26,638,622
<OTHER-EXPENSES> 1,776,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 399,469
<INCOME-PRETAX> 1,544,038
<INCOME-TAX> 533,379
<INCOME-CONTINUING> 1,010,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,010,659
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
