UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 18, 1997
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
0-15205 59-2518405
(Commission File Number) (IRS Employer Identification No.)
6428 Parkland Drive, Sarasota, Florida
(Address of principal executive offices)
34243
(Zip Code)
(941) 758-0389
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
On December 24, 1997, Elcotel, Inc., a Delaware corporation ("Elcotel"),
filed with the Securities and Exchange Commission a Current Report on Form 8-K
with respect to Elcotel's acquisition of Technology Service Group, Inc. ("TSG").
This amendment is being filed for the purpose of including financial statements
and pro forma financial information and should be read in conjunction with the
Form 8-K.
This report contains certain forward looking information with respect
to plans, projections or future performance of Elcotel, the occurrence of which
involve certain risks and uncertainties that could cause Elcotel's actual
results to differ materially from those expected by Elcotel, including the
risk of adverse regulatory action affecting Elcotel's business or the business
of Elcotel's customers, the integration of operations resulting from recent
acquisitions, competition, the risk of obsolescence of its products, changes
in the international business climate, general economic conditions,
seasonality, changes in industry practices, the outcome of the Bethlahmy class
action law suit, and uncertainties detailed in Elcotel's filings with the
Security and Exchange Commission.
(a) Financial Statements of Business Acquired
The consolidated balance sheets of TSG as of March 28, 1997 and
March 29, 1996 and the related consolidated statements of operations, changes
in stockholders' equity (deficit), and cash flows for the years ended
March 28, 1997 and March 29, 1996, five months ended March 31, 1995, and
seven months ended October 30, 1994 (the "audited consolidated financial
statements of TSG") are set forth in Appendix C (pages C-1 through C-28) of
Elcotel's Registration Statement on Form S-4, Registration No. 333-38439,
dated October 22, 1997, which financial statements are incorporated herein by
reference.
The consolidated balance sheet of TSG as of March 28, 1997, which has
been derived from the audited financial statements of TSG set forth in Elcotel's
Registration Statement on Form S-4, Registration No. 333-38439, dated
October 22, 1997, the unaudited consolidated balance sheet of TSG at
December 18, 1997 (the acquisition date), and the related unuadited consolidated
statements of operations and cash flows for the period March 29, 1997 to
December 18, 1997 and for the nine months ended December 27, 1996 and statement
of changes in stockholders' equity for the period March 29, 1997 to
December 18, 1997 are set forth herein beginning on page 3.
(b) Pro Forma Financial Information
The condensed consolidated balance sheet of Elcotel at
December 31, 1997 which reflects the acquisition of TSG is set forth on pages
1 through 11 of the Elcotel's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997, which balance sheet is incorporated herein by
reference.
The proforma consolidated statements of operations of Elcotel for the
nine months ended December 31, 1997 (which include the results of operations
of TSG from the date of acquisition) and the year ended March 31, 1997 are
set forth herein beginning on page 13.
(c) Exhibits
Exhibit
Number Description
------- ------------
23.1 Consent of Deloitte & Touche LLP with respect to the
financial statements of Technology Service Group, Inc.
2
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 18, 1997 AND FOR THE PERIOD
MARCH 29, 1997 TO DECEMBER 18, 1997
3
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
BALANCE SHEETS
(Dollars in thousands except per share data)
December 18, March 28,
1997 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 239 $ 68
Accounts receivable, less allowance
for doubtful accounts of $114 and
$147, respectively 3,703 3,235
Inventories 11,103 10,879
Refundable income taxes 469 --
Deferred tax asset 463 543
Prepaid expenses and other current assets 12 141
------- -------
Total current assets 15,989 14,866
Property and equipment, net 662 847
Goodwill 3,122 3,252
Other assets 1,051 807
------- -------
$20,824 $19,772
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 243
Borrowings under revolving credit agreement 3,970 3,811
Accounts payable 3,448 1,047
Income taxes payable -- 126
Deferred revenue -- 375
Accrued liabilities 819 1,015
Accrued restructuring charges -- 28
------- -------
Total current liabilities 8,237 6,645
Long-term liabilities -- --
------- -------
8,237 6,645
------- -------
Commitments and contingencies (Note 8) -- --
Stockholders' equity:
Preferred stock, $100 par value,
100,000 shares authorized, none
issued or outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized, 4,708,851 and 4,701,760
shares issued and outstanding, respectively 47 47
Capital in excess of par value 11,990 11,963
Retained earnings 560 1,122
Cumulative translation adjustment (10) (5)
------- -------
Total stockholders' equity 12,587 13,127
------- -------
$20,824 $19,772
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
March 29, Nine
1997 Months
to Ended
December 18, December 27,
1997 1996
------------ ------------
Net sales $20,304 $27,792
------- -------
Costs and expenses:
Cost of goods sold 17,347 22,199
General and administrative expenses 1,766 1,866
Marketing and selling expenses 565 735
Engineering, research and development expenses 1,286 1,396
Litigation settlement -- (105)
Interest expense 192 304
Restructuring charges -- 63
Other (income) (6) (103)
------- -------
21,150 26,355
------- -------
Income (loss) before income tax
(expense) benefit (846) 1,437
Income tax (expense) benefit 284 (439)
------- -------
Net income (loss) $ (562) $ 998
======= =======
Income (loss) per common and common
equivalent share:
Basic $ (0.12) $ 0.22
======= =======
Diluted $ (0.12) $ 0.21
======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic 4,706 4,498
======= =======
Diluted 4,706 4,863
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
March 29, Nine
1997 Months
to Ended
December 18, December 27,
1997 1996
------------ ------------
Cash flows from operating activities
Net income (loss) $ (562) $ 998
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities
Depreciation and amortization 546 837
Provisions for inventory losses and
warranty expense 457 397
Provision for uncollectible accounts
receivable (37) 14
Loss (gain) on disposition of assets 37 (47)
Restructuring charges -- 63
Deferred tax expense (benefit) 171 (63)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (431) 1,781
(Increase) in inventories (282) (4,630)
(Increase) in refundable income taxes (469) --
(Increase) decrease in prepaid expenses and
other current assets 129 (21)
(Increase) in other assets (354) (282)
Increase (decrease) in accounts payable 2,401 (3,189)
(Decrease) in income taxes payable (126) (2)
(Decrease) in deferred revenue (375) (541)
(Decrease) in accrued liabilities (595) (669)
(Decrease) in accrued restructuring charges (28) (9)
Other (5) --
------- -------
Net cash provided by (used for)
operating activities 477 (5,363)
------- -------
Cash flows from investing activities
Capital expenditures (289) (248)
Proceeds from disposition of assets 40 58
------- -------
Net cash used for investing activities (249) (190)
------- -------
Cash flows from financing activities
Net proceeds (payments) under revolving
credit agreement 159 2,855
Proceeds from initial public offering,
net of issuance expenses -- 8,632
Proceeds from exercise of common stock
options and warrants 27 216
Repayment of notes payable to stockholders -- (2,800)
Principal payments on long-term debt and
capital lease obligations -- (2,600)
Decrease in bank overdraft (243) (725)
------- -------
Net cash provided by (used for)
financing activities (57) 5,578
------- -------
Increase in cash 171 25
Cash, beginning of period 68 20
------- -------
Cash, end of period $ 239 $ 45
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
<TABLE>
TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MARCH 29, 1997 TO DECEMBER 18, 1997
(Dollars in thousands)
(Unaudited)
<CAPTION>
Capital in Cumulative
Common Excess of Retained Translation
Stock Par Value Earnings Adjustment Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 28, 1997 $ 47 $11,963 $ 1,122 $ (5) $13,127
Issuance of 7,091 shares
upon exercise of common stock
options and purchase rights -- 27 -- -- 27
Net loss for the period -- -- (562) -- (562)
Foreign currency translation
adjustment -- -- -- (5) (5)
------- ------- ------- ------- -------
Balance at December 18, 1997 $ 47 $11,990 $ 560 $ (10) $12,587
======= ======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
7
<PAGE>
TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. ACQUISITION
On December 18, 1997, Technology Service Group, Inc. ("TSG") was
acquired by Elcotel, Inc. ("Elcotel") via the merger (the "Merger") of Elcotel
Hospitality Services, Inc. ("EHS"), a wholly owned subsidiary of Elcotel, into
TSG, pursuant to an Agreement and Plan of Merger dated as of August 13, 1997
(as amended) among TSG, Elcotel and EHS (the "Merger Agreement"). Immediately
following the consummation of the Merger, TSG became a wholly owned subsidiary
of Elcotel. Pursuant to the Merger Agreement, each issued and outstanding
share of common stock of TSG was converted into the right to receive 1.05 shares
of common stock of Elcotel and in accordance with this formula, the stockholders
of TSG were entitled to receive an aggregate of 4,944,292 shares of common
stock of Elcotel. In addition, as a result of the Merger, holders of options
and rights to purchase shares of common stock of TSG pursuant to TSG's option
and stock purchase plans received options and rights to purchase, at a
proportionately reduced per share exercise price, a number of shares of common
stock of Elcotel equal to 1.05 times the number of shares of common stock of
TSG they were entitled to purchase immediately prior to the Merger under such
options and rights. Similarly, holders of warrants to purchase shares of
common stock of TSG received warrants to purchase, at a proportionately reduced
per share exercise price, a number of shares of common stock of Elcotel equal
to 1.05 times the number of shares of common stock of TSG they were entitled
to purchase immediately prior to the Merger under such warrants.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein consist of the
consolidated balance sheet of TSG as of March 28, 1997, which has been
derived from the audited consolidated financial statements included in TSG's
annual report on Form 10-K for the fiscal year ended March 28, 1997, the
unaudited consolidated balance sheet of TSG at December 18, 1997 (the Merger
date), and the related unaudited consolidated statements of operations and cash
flows for the period March 29, 1997 to December 18, 1997 and for the nine
months ended December 26, 1996, and the unaudited consolidated statement of
changes in stockholders' equity for the period March 29, 1997 to
December 18, 1997.
The accompanying unaudited consolidated balance sheet as of
December 18, 1997 and unaudited consolidated statements of operations and cash
flows for the period March 29, 1997 to December 18, 1997 and nine months ended
December 27, 1996, and statement of changes in stockholders' equity for the
period March 29, 1997 to December 18, 1997 have been derived from TSG's books
and records without audit. In the opinion of management, all adjustments,
consisting only of normal recurring accruals and adjustments, necessary for a
fair presentation of the financial position of TSG at December 18, 1997 and its
operations and its cash flows for the periods presented have been made.
The accompanying consolidated financial information does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer
to the audited consolidated financial statements and footnotes included in TSG's
annual report on Form 10-K for the fiscal year ended March 28, 1997.
8
<PAGE>
3. INVENTORIES
Inventories at December 18, 1997 and March 28, 1997 consisted of the
following:
December 18, March 28,
1997 1997
------------ ------------
Raw materials $ 2,334 $ 6,154
Work-in-process 3,633 2,117
Finished goods 6,408 4,036
-------- --------
12,375 12,307
Reserve for potential losses (1,272) (1,428)
-------- --------
$ 11,103 $ 10,879
======== ========
4. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT
Prior to the Merger date, TSG was able to borrow up to a maximum of
$9,000 under the terms of a Loan and Security Agreement (the "Loan Agreement")
between TSG and its bank. The Loan Agreement provided for revolving credit
indebtedness up to the maximum amount based on specified percentages applied
to the value of collateral consisting of accounts receivable and inventories.
At December 18, 1997 and March 28, 1997, TSG had outstanding indebtedness of
$3,970 and $3,811, respectively, under the Loan Agreement. Indebtedness
outstanding under the Loan Agreement was collateralized by substantially all
assets of TSG including accounts receivable, inventories and property and
equipment. Interest was payable monthly at a variable rate per annum equal
to 1.5% above a base rate quoted by Citibank N.A. (8.5% at December 18, 1997
and March 28, 1997). In connection with the Merger, TSG's indebtedness under
the Loan Agreement was retired by Elcotel, and the Loan Agreement was terminated
in accordance with its terms.
5. INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 requires disclosure of basic earnings per share based on income
(loss) available to common stockholders and the weighted average number of
common shares outstanding during the period, and diluted earnings per share
based on income (loss) available to common stockholders and the weighted
average number of common and dilutive potential common shares outstanding
during the period. In accordance with the requirements of SFAS 128, TSG
adopted the new disclosure requirements during the period ended
December 18, 1997. Accordingly, net income (loss) per common share for the
nine months ended December 27, 1996 has been restated.
9
<PAGE>
The following table represents the computation of basic and diluted
earnings per common share as required by SFAS 128.
March 29, Nine
1997 Months
to Ended
December 18, December 27,
(In thousands, except per share data) 1997 1996
------------ ------------
Basic earnings per share:
Net income (loss) applicable to common shares $ (562) $ 998
Weighted average common shares outstanding 4,706 4,498
Basic income (loss) per share $ (0.12) $ .22
Diluted earnings per share
Net income (loss) applicable to common shares $ (562) $ 998
Weighted average common shares outstanding 4,706 4,498
Common stock equivalents -- 365
Total weighted average shares 4,706 4,863
Diluted income (loss) per share $ (.12) $ .21
6. INCOME TAXES
Income tax expense (benefit) charged (credited) to operations for the
period March 29, 1997 to December 18, 1997 and for the nine months ended
December 27, 1996 is summarized as follows:
March 29, Nine
1997 Months
to Ended
December 18, December 27,
1997 1996
------------ ------------
Current tax expense (benefit):
Federal $ (403) $ 492
State (52) 10
------- -------
(455) 502
------- -------
Deferred tax expense (benefit):
Federal 168 (65)
State 3 2
------- -------
171 (63)
------- -------
$ (284) $ 439
======= =======
10
<PAGE>
A reconciliation of income tax expense (benefit) determined by
applying the U.S. statutory federal income tax rate to income (loss) before
income taxes and income tax expense (benefit) charged (credited) to operations
for the period March 29, 1997 to December 18, 1997 and for the nine months
ended December 27, 1996 is as follows:
March 29, Nine
1997 Months
to Ended
December 18, December 27,
1997 1996
------------ ------------
Income tax expense at U.S. statutory
rate $ (288) $ 488
State taxes, net of federal benefit (34) 46
Non-deductible expenses 24 43
Utilization of loss carryforwards (72) (72)
Other 86 (66)
------- -------
Income tax expense (benefit)
charged (credited) to operations $ (284) $ 439
======= =======
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the period March 29, 1997 to
December 18, 1997 and for the nine months ended December 27, 1996 consists of
the following:
March 29, Nine
1997 Months
to Ended
December 18, December 27,
1997 1996
------------ ------------
Interest paid $ 224 $ 422
Income taxes paid 140 504
Deferred offering expenses charged
against proceeds of initial public
offering -- 338
Retirement of capital lease obligation
and write-off of property and equipment -- 934
Write-off of property and equipment
against accrued restructuring charges -- 41
Realization of deferred tax assets
applied to goodwill 171 503
11
<PAGE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
In June 1997, TSG entered into an agreement with Southwestern Bell
Telephone Company ("SWB") that superseded and terminated a December 1994
agreement. Under the later agreement, TSG agreed to reduce SWB's remaining
purchase commitment to approximately $3,000 from approximately $8,000 under
the former agreement. In addition, TSG provided an upgraded electronic key
product and, among other things, agreed to provide equipment and software to
upgrade SWB's payphone management system. SWB made a $250 cash payment to
TSG upon execution of the later agreement, terminated TSG's obligation to pay
royalties on sales of a certain product to other customers, terminated a
contingent obligation of TSG to repay revenue of $375 from the sale of product
software under the former agreement, and agreed to make additional cash
payments to TSG of $250 on July 2, 1997, $100 on September 1, 1997, $150 on
December 31, 1997 and $250 on March 31, 1998 subject to TSG's compliance with
its obligations, including conditions with respect to performance, service
and repair. SWB has the right to cancel the agreement upon default by TSG.
Therefore, there is no assurance that TSG will receive all of the scheduled
payments or ship the products set forth in the agreement. However, as of
January 31, 1998, TSG has met its obligations and has received all scheduled
payments set forth in the agreement. In connection with this agreement, TSG
recorded an additional warranty provision of $115 during the period ended
December 18, 1997.
TSG is committed to purchase approximately $5.5 million of product
assemblies under the terms of a purchase order issued during the year ended
March 28, 1997 pursuant to a manufacturing agreement entered into in
October 1994. Upon a termination of the manufacturing agreement by TSG, TSG
is obligated to purchase inventories held by the manufacturer and pay vendor
cancellation and restocking charges, and a reasonable profit thereon. In
addition, TSG was obligated to pay a cancellation penalty of up to $500 if it
canceled its purchase obligation or a substantial portion thereof. As a result
of TSG's delay in commencing production of the assemblies ordered during the
year ended March 28, 1997, TSG was required to pay a penalty of $500, which
was charged to operations during the period ended December 18, 1997.
TSG provides warranties on its products for periods ranging from one
to three years. During the period ended December 18, 1997, warranty
obligations exceeded TSG's estimates. Accordingly, during the period ended
December 18, 1997, TSG recorded an additional warranty provision of $135.
12
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On December 18, 1997, Elcotel, Inc. (the "Company"), a Delaware
corporation, acquired Technology Service Group, Inc. ("TSG"), a Delaware
corporation, via the merger (the "Merger") of Elcotel Hospitality Services,
Inc. ("EHS"), a wholly owned subsidiary of the Company, into TSG, pursuant to
an Agreement and Plan of Merger dated as of August 13, 1997 (as amended) among
the Company, TSG and EHS (the "Merger Agreement"). Immediately following the
consummation of the Merger, TSG became a wholly owned subsidiary of the
Company. Pursuant to the Merger Agreement, each issued and outstanding share
of common stock of TSG was converted into the right to receive 1.05 shares of
common stock of the Company and in accordance with this formula, the
stockholders of TSG were entitled to receive an aggregate of 4,944,292 shares
of common stock of the Company. In addition, the Company agreed to issue
80,769 shares of common stock in payment of certain acquisition expenses.
Further, as a result of the Merger, holders of options and rights to purchase
shares of common stock of TSG pursuant to TSG's option and stock purchase
plans received options and rights to purchase, at a proportionately reduced
per share exercise price, a number of shares of common stock of the Company
equal to 1.05 times the number of shares of common stock of TSG they were
entitled to purchase immediately prior to the Merger under such options and
rights. Similarly, holders of warrants to purchase shares of common stock of
TSG received warrants to purchase, at a proportionately reduced per share
exercise price, a number of shares of common stock of the Company equal to
1.05 times the number of shares of common stock of TSG they were entitled to
purchase immediately prior to the Merger under such warrants.
The Merger has been accounted for using the purchase method of
accounting. Accordingly, the Merger consideration consisting of (i) the fair
value of securities issued by the Company to effect the Merger, (ii) the fair
value of outstanding common stock options and warrants of TSG converted into
options and warrants of the Company, and (iii) the direct costs and expenses
incurred by the Company in connection with the transaction has been allocated
to the assets and liabilities of TSG at December 18, 1997 based on their
estimated fair values. The condensed consolidated balance sheet of the
Company at December 31, 1997 which reflects the acquisition of TSG is set
forth on pages 1 through 11 of the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997, which balance sheet is incorporated
herein by reference.
The accompanying unaudited proforma consolidated statement of operations
for the nine months ended December 31, 1997 sets forth the results of
operations of the Company (which includes the results of operations of TSG
from December 18, 1997, the date of acquisition) for the nine months ended
December 31, 1997, the results of operations of TSG for the period
March 29, 1997 to December 18, 1997, and the pro forma adjustments that are
directly attributable to the Merger and the use of the purchase method of
accounting and the pro forma results of operations of the Company as if the
Merger had been consummated on April 1, 1996. The accompanying unaudited
proforma consolidated statement of operations for the year ended
March 31, 1997 sets forth the results of operations of the Company for the
year ended March 31, 1997, the results of operations of TSG for the year
ended March 28, 1997, and the pro forma adjustments that are directly
attributable to the Merger and the use of the purchase method of accounting
and the pro forma results of operations of the Company as if the Merger had
been consummated on April 1, 1996.
13
<PAGE>
The historical consolidated financial information of the Company set
forth in the accompanying unaudited pro forma consolidated statements of
operations has been derived from the condensed consolidated financial
statements of the Company included in the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and the consolidated
financial statements of the Company set forth in the Company's Annual Report
on Form 10-K for the year ended March 31, 1997. The historical consolidated
financial information of TSG set forth in the accompanying pro forma
consolidated statements of operations has been derived from the unaudited
interim consolidated financial statements of TSG included elsewhere herein
and the consolidated financial statements of TSG included in the Company's
Registration Statement on Form S-4, Registration No. 333-38439, dated
October 22, 1997.
The unaudited pro forma consolidated statements of operations do not
reflect anticipated cost reductions or revenue enhancements expected to be
realized from the Merger. Accordingly, the unaudited pro forma consolidated
statements of operations for the nine months ended December 31, 1997 and year
ended March 31, 1997 are not necessarily indicative of the consolidated
results of operations as they might have been had the Merger actually
occurred on the dates indicated, nor are they necessarily indicative of
future results.
14
<PAGE>
ELCOTEL AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1997
(In thousands, except per share data)
TSG
Merger
Pro Forma Pro
Elcotel TSG Adjustments Forma
--------- --------- ------------- ---------
Net sales $ 27,975 $ 20,304 $ (580) (a) $ 47,699
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 16,578 17,347 (808) (b) 33,117
Selling, general and
administrative exp. 6,345 2,325 914 (c) 9,584
Engineering, research
and development exp. 2,795 1,286 - 4,081
Interest (income) exp. (62) 192 - 130
--------- --------- --------- ---------
25,656 21,150 106 46,912
--------- --------- --------- ---------
Income before income
tax (expense) benefit 2,319 (846) (686) 787
Income tax (expense)
benefit (817) 284 181 (d) (352)
--------- --------- --------- ---------
Net income $ 1,502 $ (562) $ (505) $ 435
========= ========= ========= =========
Income per common and
common equivalent
share:
Basic $ 0.18 $ .03
========= =========
Diluted $ 0.17 $ .03
========= =========
Weighted average number
of common and common
equivalent shares
outstanding:
Basic 8,433 13,219
========= =========
Diluted 8,693 13,688
========= =========
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial information.
15
<PAGE>
ELCOTEL AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
(In thousands, except per share data)
TSG
Merger
Pro Forma Pro
Elcotel TSG Adjustments Forma
--------- --------- ------------- ---------
Net sales $ 26,832 $ 33,472 $ - $ 60,304
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 15,883 26,639 (557) (b) 41,965
Selling, general and
administrative exp. 6,358 3,272 1,211 (c) 10,841
Engineering, research
and development exp. 2,623 1,777 - 4,400
Interest (income) exp. (205) 400 - 195
Other (income) expense (331) (159) - (490)
--------- --------- --------- ---------
24,328 31,929 654 56,911
--------- --------- --------- ---------
Income before income
tax (expense) benefit 2,504 1,542 (654) 3,393
Income tax (expense)
benefit (876) (533) 256 (d) (1,153)
--------- --------- --------- ---------
Net income $ 1,628 $ 1,010 $ (398) $ 2,240
========= ========= ========= =========
Income per common and
common equivalent
share:
Basic $ 0.20 $ .17
========= =========
Diluted $ 0.20 $ .16
========= =========
Weighted average number
of common and common
equivalent shares
outstanding:
Basic 8,096 13,121
========= =========
Diluted 8,310 13,670
========= =========
The accompanying notes are an integral part of this unaudited pro forma
consolidated financial information.
16
<PAGE>
ELCOTEL AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands except per share data)
Basis of Presentation
The Merger has been accounted for using the purchase method of
accounting. Accordingly, the Merger consideration consisting of (i) the
fair value of securities issued by the Company to effect the Merger, (ii)
the fair value of outstanding common stock options and warrants of TSG
converted into options and warrants of the Company, and (iii) the direct
costs and expenses incurred by the Company in connection with the transaction
has been allocated to the assets and liabilities of TSG at December 18, 1997
based on their estimated fair values. The condensed consolidated balance
sheet of the Company at December 31, 1997 which reflects the acquisition of
TSG is set forth on pages 1 through 11 of the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 which balance sheet is
incorporated herein by reference.
The accompanying unaudited proforma consolidated statement of
operations for the nine months ended December 31, 1997 sets forth the results
of operations of the Company (which includes the results of operations of TSG
from December 18, 1997, the date of acquisition) for the nine months ended
December 31, 1997, the results of operations of TSG for the period
March 29, 1997 to December 18, 1997, and the pro forma adjustments that
are directly attributable to the Merger and the use of the purchase method of
accounting and the pro forma results of operations of the Company as if the
Merger had been consummated on April 1, 1996. The accompanying unaudited
proforma consolidated statement of operations for the year ended
March 31, 1997 sets forth the results of operations of the Company for
the year ended March 31, 1997, the results of operations of TSG for the year
ended March 28, 1997, and the pro forma adjustments that are directly
attributable to the Merger and the use of the purchase method of accounting
and the pro forma results of operations of the Company as if the Merger had
been consummated on April 1, 1996.
The historical consolidated financial information of the Company set
forth in the accompanying pro forma consolidated statements of operations has
been derived from the condensed consolidated financial statements of the
Company included in the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 and the consolidated financial statements of
the Company set forth in the Company's Annual Report on Form 10-K for the
year ended March 31, 1997. The historical financial information of TSG set
forth in the accompanying pro forma consolidated statements of operations has
been derived from the unaudited interim consolidated financial statements of
TSG included elsewhere herein and the consolidated financial statements of
TSG included in the Company's Registration Statement on Form S-4, Registration
No. 333-38439, dated October 22, 1997.
The unaudited pro forma consolidated statements of operations do not
reflect anticipated cost reductions or revenue enhancements expected to be
realized from the Merger. Accordingly, the unaudited pro forma consolidated
statements of operations for the nine months ended December 31, 1997 and the
year ended March 31, 1997 are not necessarily indicative of the consolidated
results of operations as they might have been had the Merger actually occurred
on the dates indicated, nor are they necessarily indicative of future results.
17
<PAGE>
Merger Consideration
The estimated merger consideration (or purchase price) is summarized
as follows:
Issuance of 4,944,292 shares of Elcotel common
stock at a market price of $6.50 per share
in exchange for 4,708,851 issued and outstanding
shares of TSG common stock (based on an exchange
ratio of 1.05 to 1) $ 32,138
Fair value of outstanding common stock warrants,
options and purchase rights of TSG 2,595
Estimated costs and expenses of the Merger 872
---------
Total merger consideration $ 35,605
=========
The average closing market price of Elcotel's common stock for a
period of four days before and after the terms of the Merger were announced
to the public of $6.50 per share has been used to determine the fair value of
the shares of common stock issued in connection with the Merger.
At December 18, 1997, there were outstanding warrants to purchase
575,000 shares of TSG's common stock at an exercise price of $11 per share
(the "Public Warrants"), warrants to purchase 100,000 shares of TSG's common
stock at a price of $10.80 per share (the "Underwriter Warrants") and options
and rights to purchase an aggregate of 569,859 shares of TSG's common stock
at exercise prices ranging from $1.00 per share to $10.812 per share under
TSG's 1994 Omnibus Stock Plan (the "Stock Plan"), 1995 Non-Employee Director
Stock Option Plan (the "Director Plan") and 1995 Employee Stock Purchase Plan
(the "Employee Plan"). Under the terms of the Merger Agreement, TSG's
warrants, options and purchase rights were converted into warrants, options
and rights to purchase, at a proportionately reduced per share exercise price,
a number of shares of common stock of the Company equal to 1.05 times the
number of shares of common stock of TSG they were entitled to purchase
immediately prior to the Merger under such warrants, options and rights.
Accordingly, the estimated fair value of outstanding common stock warrants,
options and rights to purchase common stock of TSG is included as a component
of the merger consideration.
18
<PAGE>
The following table summarizes the number and exercise prices of
stock options and purchase rights outstanding under the Stock Plan, Director
Plan and Employee Plan at December 18, 1997, and as adjusted after giving
effect to the Merger, and their estimated fair values:
Number of
Number of Options Exercise
Options Outstanding Exercise Price Fair
Outstanding (As Adjusted) Price (As Adjusted) Value
----------- ------------- -------- ------------- --------
335,250 352,013 $ 1.00 $ .95 $ 1,803
83,000 87,150 5.00 4.76 252
3,000 3,150 5.25 5.00 9
20,000 21,000 8.50 8.10 36
110,250 115,763 9.50 9.05 52
3,875 4,069 10.781 10.27 4
6,000 6,300 10.812 10.30 8
8,484 8,908 4.25 4.05 8
------- ------- --------
569,859 598,353 $ 2,172
======= ======= ========
The following table summarizes the number and exercise prices of
common stock purchase warrants outstanding at December 18, 1997, and as
adjusted after giving effect to the Merger, and their estimated fair values:
Number of
Number of Warrants Exercise
Warrants Outstanding Exercise Price Fair
Outstanding (As Adjusted) Price (As Adjusted) Value
----------- ------------- -------- ------------- --------
575,000 603,750 $ 11.00 $ 10.48 $ 252
100,000 105,000 10.80 10.29 171
------- ------- --------
675,000 708,750 $ 423
======= ======= ========
19
<PAGE>
The estimated fair value of the Public Warrants has been determined
based on the closing market price of the securities on December 18, 1997.
The estimated fair value of the Underwriter Warrants and outstanding common
stock options and purchase rights of TSG has been determined using the
Black-Scholes option pricing model. The significant weighted-average
assumptions used to estimate the fair value of the Underwriter Warrants and
common stock options and purchase rights of TSG outstanding at
December 18, 1997 are summarized below:
Underwriter Warrants:
Expected volatility 54.4%
Expected life 3 years
Risk-free interest rate 6.25%
Expected dividend yield None
Stock Plan:
Expected volatility 54.4%
Expected life 2.5 years
Risk-free interest rate 6.25%
Expected dividend yield None
Employee Plan:
Expected volatility 54.4%
Expected life 1/2 year
Risk-free interest rate 5.34%
Expected dividend yield None
Director Plan:
Expected volatility 54.4%
Expected life 2 years
Risk-free interest rate 6.08%
Expected dividend yield None
The estimated direct costs and expenses incurred by Elcotel in
connection with the Merger and included as a component of the merger
consideration are estimated as follows:
Investment banking fees $ 525
Fairness opinion 107
Legal fees 82
Accounting and valuation fees 44
Other 88
--------
Total $ 872
========
Under the terms of an agreement dated April 1, 1997, Elcotel retained
Cameron Associates ("Cameron") to provide investment banking services and
render financial and business advice to Elcotel with respect to a strategic
business combination. Elcotel agreed to pay Cameron an aggregate fee of
$325, including expenses, upon consummation of a transaction, such as the
Merger. The fee is payable either in cash or in shares of Elcotel's common
stock. Elcotel intends to issue 50,000 shares of its common stock in
satisfaction of the obligation in accordance with the terms of the agreement
and has accrued this liability in its financial statements for the nine months
ended December 31, 1997.
20
<PAGE>
Under the terms of an agreement dated July 17, 1997, TSG retained
Wexford Management, an affiliate of TSG's majority stockholder, Wexford
Partners Fund LP, to provide assistance and render financial and business
advice to TSG in connection with the Merger. TSG agreed to pay Wexford
Management an aggregate fee of $200, including expenses, upon consummation of
the Merger or other transaction involving the sale or exchange of all or
substantially all of TSG's common stock. The fee is payable in cash or, at
the option of Elcotel, in shares of Elcotel's common stock. Elcotel issued
30,769 shares of common stock upon consummation of the Merger in satisfaction
of the obligation.
Unaudited Pro Forma Consolidated Balance Sheet Adjustments Related to
the Merger
Elcotel has estimated the adjustments required to allocate the Merger
consideration to the assets and liabilities of TSG at December 18, 1997 based
on their estimated fair values. The allocations are subject to final
determinations based on independent appraisals and other evaluations of fair
value as of the date of the Merger. Therefore, the allocations reflected in
the condensed consolidated balance sheet of Elcotel at December 31, 1997
included in the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, which balance sheet is incorporated herein by reference,
may differ from the amounts ultimately determined. Unless otherwise indicated,
differences between the amounts included in Elcotel's condensed consolidated
balance sheet at December 31, 1997 and the final allocations are not expected
to have a material effect on the unaudited pro forma consolidated financial
information.
A summary of the allocation of the Merger consideration to the assets
and liabilities of TSG as of December 18, 1997 based on Elcotel's estimates of
their fair value is set forth below.
Cash and temporary investments $ 239
Accounts and notes receivable 3,703
Inventories 6,490
Refundable income taxes 469
Deferred tax asset, current 3,446
Prepaid expenses and other current assets 12
Property, plant and equipment 782
Intangible assets 7,530
Other assets 29
Accounts payable and accrued expenses (4,992)
Borrowings under lines of credit (3,970)
Deferred tax liability, non-current (1,358)
---------
Net assets acquired 12,380
Excess of purchase price over net assets acquired 23,225
---------
Total merger consideration $ 35,605
=========
Elcotel intends to discontinue certain products manufactured and
marketed by TSG and outsource the assembly of printed circuit boards
previously assembled by TSG. The allocation of merger consideration to the
estimated fair value of inventories has been decreased by $4,810 to reflect
the estimated net realizable value of inventories related to products to be
discontinued and inventories of components related to printed circuit board
assembly operations.
Identifiable intangible assets are comprised of TSG's trade names at
an estimated fair value of $2,869, assembled workforce at an estimated fair
value of $1,372, product software at an estimated fair value of $847, patented
technology at an estimated fair value of $419 and customer contracts at an
estimated fair value of $2,023.
21
<PAGE>
At December 18, 1997, TSG had net operating loss carryforwards of
$11,098 available to reduce future taxable income, which expire from 1998 to
2010. However, the utilization of these net operating loss carryforwards is
subject to an annual limitation of approximately $200 as a result of a
previous change in ownership of TSG. Accordingly, it is more likely than not
that the future tax benefits of net operating loss carryforwards of
approximately $2,909 will not be realized, and a corresponding valuation
allowance has been provided in the purchase price allocation.
The fair value of accrued liabilities includes the estimated costs to
terminate the employment of certain employees of TSG and to relocate certain
employees and property of TSG. These costs have been estimated based on
Elcotel's preliminary integration and consolidation plan. Employee
termination costs reflecting the estimated cost of severance and salary
continuation arrangements and related employee benefits have been estimated
at $319. The costs of relocating employees and property of TSG have been
estimated at $405.
22
<PAGE>
Unaudited Pro Forma Consolidated Statements of Operations Adjustments Related
to the Merger
Adjustments to the Unaudited Pro Forma Consolidated Statements of
Operations related to the Merger are as follows:
Nine
Months Year
Ended Ended
December 31, March 31,
1997 1997
------------ ------------
(a) Sales
Elimination of Elcotel's sales to TSG $ (580) $ --
============ ============
(b) Cost of Goods Sold
Elimination of TSG's cost of goods sold
related to Elcotel's sales to TSG $ (580) $ --
Decrease in depreciation expense resulting
from an increase in the basis of
property, plant and equipment and their
estimated useful lives (228) (557)
------------ ------------
$ (808) $ (557)
============ ============
(c) General and administrative expenses
Amortization of the excess of the purchase
price over net assets acquired (goodwill)
resulting from the Merger $ 474 $ 664
Amortization of identifiable intangible
assets resulting from the Merger 589 824
Elimination of amortization of intangible
assets recorded in the historical financial
statements of TSG (110) (168)
Elimination of amortization of goodwill recorded
in the historical financial statements of TSG (39) (109)
------------ ------------
$ 914 $ 1,211
============ ============
(d) Income tax (expense) benefit
(Increase) decrease in income tax expense
resulting from allocation to deferred tax
assets $ (1) $ 7
(Increase) decrease in income tax expense to
reflect the pro forma effect on income tax
expense resulting from the Merger 182 249
------------ ------------
$ 181 $ 256
============ ============
23
<PAGE>
The fair value of intangible assets included in the allocation of the
Merger consideration is being amortized over their estimated useful lives as
follows:
Goodwill 35 years
Trade names 35 years
Assembled workforce 35 years
Product software 5 years
Patented technology 4 years
Customer contracts 3.45 years
The pro forma effective tax rate exceeds federal and state statutory
tax rates primarily as a result of non-deductible goodwill amortization
expense arising from the Merger.
Unaudited Pro Forma Income per Common and Common Equivalent Share
Pro forma unaudited basic income per common and common equivalent
share for the nine months ended December 31, 1997 and year ended
March 31, 1997 is computed on the basis of the weighted average number of
common shares outstanding during the period and assuming that the shares of
common stock issued to TSG's stockholders, Wexford Management and Cameron
were issued on April 1, 1996. Pro forma unaudited diluted income per common
and common equivalent share for the nine months ended December 31, 1997 and
year ended March 31, 1997 is computed on the basis of the weighted average
number of common shares and common equivalent shares outstanding during the
period and assuming that the shares of common stock issued to TSG's
stockholders, Wexford Management and Cameron were issued and that TSG's
outstanding common stock warrants, options and purchase rights were converted
on April 1, 1996.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: February 27, 1998
ELCOTEL, INC.
By: /s/ Ronald M. Tobin
----------------------
Ronald M. Tobin
Vice President and
Chief Financial Officer
25
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Current Report of
Elcotel, Inc. on Form 8-K/A of our report dated May 23, 1997 (June 9, 1997
as to the last paragraph of Note 14) on the consolidated financial statements
of Technology Service Group, Inc. and subsidiary, appearing in Registration
Statement No. 333-38439 of Elcotel, Inc. on Form S-4 filed on October 22, 1997.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 27, 1998
