UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6428 Parkland Drive, Sarasota, Florida 34243
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(941) 758-0389
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of Class
--------------
Common Stock, $.01 par value
Redeemable Warrants to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
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. [ X ]
The aggregate market value of the voting and non-voting common equity (which
consists solely of shares of Common Stock) held by non-affiliates of the
registrant as of June 9, 1998, computed by reference to the price at which
the registrant's Common Stock, as quoted by the National Market System of
NASDAQ, was sold on such date, was approximately $44,915,000. Shares of Common
Stock held by each officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the registrant's Common Stock outstanding as of
June 9, 1998 was 13,364,850.
<PAGE>
PART I
Item 1. Description of Business
- ------- -----------------------
Overview
The Company designs, develops, manufactures and markets an extensive
line of integrated public communications products and services including
microprocessor-based "intelligent" public access terminals ("payphones" or
"payphone terminals") and related management software systems,
electromechanical payphone terminals, replacement components and
assemblies, customer support services and equipment refurbishment and
upgrade services (see "Products and Services," below). The Company
has also begun to market internet public access terminals under a strategic
alliance (see "Sales and Markets-Strategic Alliances," below). The
Company's payphone terminal equipment and software operate and
provide public access over domestic and international wire and wireless
telephone networks, and support multiple coin and card payment platforms
and multilingual applications. The Company's public access terminals and
systems are designed to provide customized hardware and software
solutions to meet the specific application requirements of customers.
The Company markets its payphone systems, products and services to the
public communications segment of the telecommunications industry and
has operated in this industry segment since its founding in 1985. During
the last fiscal year, the Company completed two strategic acquisitions to
establish a significant market presence with the domestic regulated
telephone companies (see "Acquisitions and Developments During Fiscal
1998," below). As a result of these acquisitions, the Company now offers a
broader range of products and services to both domestic and international
public telecommunications access markets. The Company is now a leader
in sales of microprocessor-based payphone terminals, software,
components and services to domestic regulated telephone companies as
well as to domestic independent payphone operators. The Company also
markets its systems, products and services to telephone companies and
independent payphone operators in many international markets (see
"Sales and Markets," below). The Company is considering opportunities to
enter into joint ventures and strategic alliances to operate payphones in
certain international countries as part of its strategy to expand the breadth
of its operations and international market penetration during the coming
year. Also, in the domestic market, the Company is marketing operator
services cooperatively with a large operator service provider, and through
the arrangement, shares in revenues generated from its marketing efforts
(see "Sales and Markets-Strategic Alliances," below).
The Company's principal offices are located at 6428 Parkland Drive,
Sarasota, Florida 34243, and its telephone number is (941) 758-0389.
Unless the context requires otherwise, Elcotel, Inc. and its subsidiaries,
Technology Service Group, Inc. and Elcotel Direct, Inc., are referred to
herein collectively as the "Company" or "Elcotel". All dollar amounts, other
than per share data, set forth herein are stated in thousands.
<PAGE>
Forward Looking Statements
The statements contained in this Form 10-K which are not historical facts
contain forward looking information with respect to plans, projections or
future performance of the Company, the occurrence of which involve
certain risks and uncertainties that could cause the Company's actual
results to differ materially from those expected by the Company, including
the risk of adverse regulatory action affecting the Company's business or
the business of the Company's customers, the integration of operations
resulting from the fiscal 1998 acquisitions, competition, the risk of
obsolescence of the Company's products, changes in the international
business climate, general economic conditions, seasonality, changes in
industry practices, the outcome of litigation to which the Company is a
party, and uncertainties detailed in this report and the Company's other
filings with the Securities and Exchange Commission.
Acquisitions and Other Developments During Fiscal 1998
On December 18, 1997, the Company 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"). Upon 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 Company issued
an aggregate of 4,944,292 shares of common stock pursuant to the
Merger. The Company also issued 80,769 shares of common stock in
payment of certain acquisition expenses. In addition, options, warrants
and rights to purchase shares of common stock of TSG outstanding
immediately prior to the Merger were converted into options, warrants and
rights to purchase that number of shares of common stock of the Company
equal to 1.05 times the number of shares of common stock of TSG
purchasable pursuant to such outstanding options, warrants and rights
immediately prior to the Merger at a proportionately reduced per share
exercise price. The aggregate merger consideration (or purchase price)
including the fair value of securities issued and transaction costs and
expenses aggregated $35,605. See Item 7-"Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Item 8-
"Consolidated Financial Statements and Supplementary Data".
On September 30, 1997, Elcotel Direct, Inc., a wholly owned subsidiary of
the Company, acquired from Lucent Technologies Inc. ("Lucent") certain
assets related to the public terminal manufacturing and component parts
business conducted by Lucent (the "Lucent Acquisition"). The purchase
price, including acquisition expenses, aggregated $5,821. Assets acquired
from Lucent included inventories, machinery, equipment, tooling and
certain other assets related to the payphone manufacturing and
component parts business conducted by Lucent, as well as a license of
2
<PAGE>
certain patents and other intellectual property rights related thereto. See
Item 7-"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8-"Consolidated Financial Statements and
Supplementary Data".
The Company borrowed an aggregate of $6,850 under the terms of bank
promissory notes to finance the Lucent Acquisition purchase price,
acquisition expenses and other general corporate activities, including
acquisition of equipment. As further described below, the Company repaid
these notes from the proceeds under a $15,000 revolving credit line
entered into on November 25, 1997. See Item 7- "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Item 8-"Consolidated Financial Statements and Supplementary Data".
On November 25, 1997, the Company entered into a restated loan
agreement (the "Loan Agreement") with its bank and refinanced its then
outstanding indebtedness under a $2,000 working capital line of credit and
the bank promissory notes referred to in the preceding paragraph. In
addition, on December 18, 1997, the Company retired TSG's outstanding
bank indebtedness of $3,970 from proceeds under the Loan Agreement.
Under the terms of the Loan Agreement, the Company is able to borrow up
to a maximum of $15,000 based on the value of eligible collateral under a
revolving line of credit that matures on November 25, 2002. Indebtedness
outstanding under the Loan Agreement is secured by substantially all the
assets of the Company. Interest on amounts borrowed under the Loan
Agreement is payable monthly at the bank's floating 30 day Libor rate plus
1.5%. See Item 7-"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8-"Consolidated Financial
Statements and Supplementary Data".
In addition, on November 26, 1997, the Company refinanced its mortgage
note with a then outstanding principal balance of $315 via the issuance of
a new mortgage note in the principal amount of $1,920. See Item 7-
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8-"Consolidated Financial Statements and
Supplemental Data".
The Industry
Domestic Market. Public telecommunication services, including "coin" or
"pay" telephone service, in the United States are provided by regulated
telephone companies, including independent telephone operating
companies such as GTE and telephone companies operated by the
Regional Bell Operating Companies ("RBOCs") created upon the
divestiture of AT&T; long distance carriers ("IXCs") such as AT&T;
independent payphone operators; and competitive local exchange carriers
("CLECs"). Regulated telephone companies, long distance carriers and
CLECs are collectively referred to herein as "telephone companies". The
operations of telephone companies are subject to extensive regulation by
the Federal Communications Commission ("FCC") and state regulatory
3
<PAGE>
agencies (see "Government Regulation and the Telecommunications Act,"
below). Virtually all services offered by telephone companies, including
payphone services, are provided in accordance with tariffs filed with
appropriate regulatory agencies, including the FCC. Independent
payphone operators are subject to regulations of state regulatory agencies.
The Company believes that the RBOCs control approximately 60%
(approximately 1.2 million units) of the payphone terminals in service in the
United States. The remaining installed base of payphone terminals are
owned and operated by other telephone companies and independent
payphone operators. The majority of payphones deployed by the RBOCs
are essentially electromechanical devices that perform the functions of
normal residential telephones, with the additional ability to hold and collect
or refund coins. These payphone terminals require the supply of service
via a "coin line" provided by telephone companies and the services of the
central offices of telephone companies to provide the intelligence required
to process calls. The majority of payphones deployed by independent
payphone operators are microprocessor-based systems that incorporate
the intelligence in the payphone terminal to internally process calls, rate
calls and collect and store data for accounting, coin and route
management functions, and service is supplied via normal "business" lines
provided by telephone companies. Payphone terminals that incorporate
the intelligence to perform the functions of the central office within the
telephone are referred to in the industry as "smart" or "intelligent"
payphones. These intelligent devices were developed to meet the
requirements of independent payphone operators that emerged following
FCC rulings in 1984 that authorized competition in the operation of
payphones and provision of public telecommunications access.
On February 8, 1996, the President of the United States signed into law
the Telecommunications Reform Act of 1996 (the "Telecommunications
Act" or the "Act"), the most comprehensive reform of communications law
since the enactment of the Communications Act of 1934. The
Telecommunications Act eliminated long-standing legal barriers separating
local exchange carriers, long distance carriers, and cable television
companies and preempted conflicting state laws in an effort to foster
greater competition in all telecommunications market sectors, improve the
quality of services, and lower prices. There are specific provisions in the
Act that relate to the payphone operations of telephone companies and
payment of compensation to payphone operators by long distance carriers.
See "Government Regulation and the Telecommunications Act," below.
The Company believes that the public communications industry will
undergo fundamental changes as a result of the Act and regulations
adopted by the FCC to implement its provisions (see "Government
Regulation and the Telecommunications Act," below). The Company
believes the Act and regulations adopted by the FCC may increase the
number of providers of telecommunications services including, perhaps
providers of payphone services. An increase in the number of payphone
service providers may stimulate demand for new payphone terminal
equipment. In that event, the Company believes that existing payphone
operators, including the RBOCs, might seek to enhance their technology
base in order to improve operating efficiencies and compete more
4
<PAGE>
effectively with each other and with new entrants. In addition, as the local
exchange and interstate and intrastate long distance markets are opened
to competition, the Company believes that telephone companies that
presently carry such traffic may deploy greater numbers of payphones to
capture the 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 public communications market generally or on the Company's
business in particular. See "Government Regulation and the
Telecommunications Act," below.
A significant portion of revenues of payphone operators is generated from
commissions on long distance traffic that is routed to inter-exchange
carriers and other operator service providers (OSPs) selected by payphone
operators. Services offered by OSPs, in addition to long distance services,
include live and automated operator assistance, and card validation, billing
and collection services. The number of access code calls and toll free
calls (800 and 888 numbers) ("toll free calls") routed to long distance
providers and OSPs selected by consumers (dial-around calls) has
increased significantly as a result of competition and promotion of toll free
access code and prepaid card services within the telecommunications
industry. Prior to FCC rulings adopting regulations to implement the
Telecommunications Act, payphone operators received per-phone dial-
around compensation from long distance service providers equal to $6.00
per month on toll free calls. The new regulations provide dial-around
compensation to payphone operators based on the number of such toll
free calls (see "Government Regulation and the Telecommunications Act,"
below). As a result, the Company believes that the new regulations will
have a significant favorable impact on revenues of payphone operators
and also stimulate demand for new payphone terminal equipment.
However, there can be no assurance that all or part of these new
regulations will survive court review. See "Government Regulation and the
Telecommunications Act," below.
Over the past several years, in response to the competitive pressures from
independent payphone operators and in anticipation of passage of the
Telecommunications Act, several of the RBOCs began to upgrade their
installed base of payphone terminals with smart technology. The
Company believes that approximately 20% to 30% of the installed base of
payphones operated by the RBOCs have been upgraded with smart
payphone systems, including those provided by the Company. As the
Telecommunications Act prevents the RBOCs from subsidizing and
providing services to their payphone operations in a discriminatory manner
in relation to services provided to private payphone operators, the
Company believes that the RBOCs will continue to upgrade their installed
base of payphones and otherwise look for ways to become more efficient
and competitive.
Over the last two years, a number of mergers and consolidations have
occurred within the telecommunications industry and the public access
segment of the industry. SBC Communications, Inc. and Pacific Telesis,
Inc. (both RBOCs) have merged. Bell Atlantic, Inc. and NYNEX (both
5
<PAGE>
RBOCs) have merged. Recently, a merger between SBC
Communications, Inc. and Ameritech, Inc. (another RBOC) was
announced. In addition, there have been a number of acquisitions and
mergers among private payphone operators. The mergers and
consolidations in the industry have reduced the number of customers and
potential customers of the Company. However, the Company believes that
payphone operators using multiple technologies may move to standardize
their technology and terminal equipment, thereby increasing demand for
new payphone terminal equipment.
The Company believes that it is positioned to continue as a leading
supplier to the domestic public access communications industry as a result
of the broad range of its public terminal, software and service product
offerings.
International Market. The Company believes that there are several million
payphones internationally 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/wireless 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. On February 15, 1997, over 60
countries signed a World Trade Organization pact aimed at opening the
global telecommunications industry to competition. Although the pact must
be ratified by the individual countries, it calls for most of the countries to
end their telephone monopolies by the year 2000.
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 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 both
wire and wireless networks progresses.
Products and Services
The Company designs, develops, manufactures and markets an extensive
line of integrated public communications products and services including
microprocessor-based "intelligent" payphone terminals and related
management software systems, electromechanical payphone terminals,
replacement components and assemblies, customer support services and
equipment refurbishment and upgrade services. The Company's public
access equipment and systems are designed to provide customized
hardware and software solutions to meet the specific application
requirements of both domestic and international customers. The
Company's payphone terminals connect to and operate as integral parts of
domestic and foreign wire and wireless telecommunication networks.
6
<PAGE>
Intelligent Payphone Terminals. The Company's intelligent payphone
terminal product line consists of a wide range of models including domestic
coin payphones, international coin payphones, domestic and international
card payphones that accept smart cards, chip cards, and magnetic stripe
credit and prepay cards, and multi-payment (coin and card) payphones, for
both coin line and business line applications, as well as certain wireless
and cellular applications.
Hardware options available in the Company's payphone product line
include an array of housings/cabinets consisting of the GTE style housing,
the Western Electric or AT&T style housing and various custom designed
housings/cabinets, an array of electronic coin scanners to support
domestic and foreign coins, displays to support multilingual messages in
languages selected by the customer, speed dial buttons, and card readers.
Software options include custom voice prompts, card validation, custom
maintenance alarms, customized call routing and service desk features.
The Company's intelligent payphone terminals operate by means of
microprocessor-based printed circuit board assemblies located within the
payphone housing. The processing of all telephone functions is controlled
by microprocessors which utilize the Company's copyrighted software
operating systems. The terminals communicate with a caller by digitized
human voice messages activated by the microprocessor, and have the
capability to internally process the functions associated with call
processing, call rating and collecting data for accounting, coin and route
management functions. Call timing and rating functions are performed via
proprietary designed "answer detection" and "answer supervision"
modules. The Company's present line of payphone terminals are offered
with features and options that provide, among others, the ability to:
- - Monitor and record coin box status including the coins and the
amount of money in the cash box;
- - Store rate files and rate telephone calls;
- - Record and store call records, including called numbers, types and
length of calls and call revenue;
- - Monitor the service condition of the payphone via maintenance and
diagnostic alarms;
- - Remotely retrieve programming information, call records, cash box
status, and maintenance and diagnostic data;
- - Program and monitor various options, updated rates, alarms and free
phone numbers on-site or remotely;
7
<PAGE>
- - Download voice prompts;
- - Calculate time-of-day discounts and control other timed functions via
clock and calendar features;
- - Download revisions to the phone's software operating system,
eliminating the need to install new program chips in the phone;
- - Operate smart card, chip card, and magnetic stripe credit or prepay
card applications; and
- - Program for business line or coin line applications.
The Company' payphone terminals utilize state-of-the-art hardware and
software technology and, except for wireless and cellular applications and
certain configurations provided with Vacuum Florescent Displays and
backlit Liquid Crystal Displays, are powered by the low electric current
available from the telephone line, thereby eliminating the need for external
power sources and avoiding the expensive cost of electrical installation.
Payphone Software Management Systems. The Company designs,
develops and sells payphone management software systems to manage
and control both small and large networks of installed payphone terminals.
The Company's payphone management software systems operate on
personal computers in a multi-tasking environment, and provide customers
with the ability to manage and control all aspects of their installed
payphone network interactively from a single location. The Company's
management software systems provide customers with the ability to
remotely configure product features, control the download of software
changes, program files and rate files, monitor operating status, and to
download coin box, call record, maintenance and diagnostic data for
accounting, coin and route management functions.
The payphone terminals developed by Elcotel are managed by the
Company's Payphone Network Manager software system. The Company
offers four versions of the Payphone Network Manager: the Microsoft
WindowsTM-based PNM PlusTM system which contains enhanced features
associated with the domestic market; the Microsoft WindowsTM-based
PollQuest system, with enhanced features for the international market; and
the DOS-based PNM and IPNM Payphone Network Management Systems
that support the domestic and international markets, respectively.
PNM Plus and PollQuest have the ability to support over 10,000 terminals
and to communicate simultaneously with many terminals. This software is
currently operating at various locations in North America, South America,
Central America, Asia, Africa, and Europe.
8
<PAGE>
The payphone terminals developed by TSG are managed by the
Company's CoinNetTM software management system. CoinNet is a Unix or
DOS-based software system and has the ability to support installations of
over 100,000 terminals and communicate with large numbers of phones
simultaneously. This software is currently operating at various locations in
the United States, South America, Central America and Asia.
The Company has commenced the design and development of its next
generation Windows-NT compatible software management system that is
expected to be capable of communicating with and managing all of the
Company's payphone terminals (both Elcotel and TSG developed) and
supporting installations of terminals much larger than the present systems.
Electromechanical Payphone Terminals. The Company's
electromechanical payphone terminals consist of coin and coinless
terminals in several configurations. The Company's electromechanical
payphone terminals perform the functions of normal residential telephones,
with the additional ability to hold and collect or refund coins. These
payphone systems require the supply of service via a "coin line" and the
services of the central offices of telephone companies to provide the
intelligence required to process calls. These terminals do not contain the
technology to internally process the functions associated with call
processing, call rating and collecting data for accounting, coin and route
management functions. These products are sold domestically
predominately to telephone companies.
Payphone Components and Assemblies. The Company sells
microprocessor-based printed circuit board assemblies, components,
assemblies and retrofit kits to RBOCs and other telephone companies that
are repairing or upgrading the technology of their installed base of
payphones and to independent payphone operators, distributors and
resellers. Payphone components and assemblies supplied by the
Company include, among others, microprocessor-based printed circuit
board assemblies, electromechanical payphone assemblies, electronic
coin scanners, card readers, cash box switches, touchtone dial
assemblies, handsets, coin relays, volume amplification assemblies, and
retrofit kits.
Customer Support Services. The Company maintains and updates on a
current basis a proprietary data base of all local, intrastate and interstate
rates and sells downloadable rate center files so that its customers are
able to comply with their responsibility to properly rate calls. Rates
download services are also provided by the Company as a service to
customers. The rate center file (or device) contains the then-current
applicable rates for coin calls between the payphone location exchange
and all other exchanges throughout the United States or in international
locations. Each payphone may also be downloaded with various available
options chosen by a customer, such as free calls for emergency numbers,
special charges for certain calls, and speed dial numbers. The Company
also maintains a bulletin board system that allows its customers to obtain
rate center files 24 hours per day, 7 days per week.
9
<PAGE>
The Company maintains a customer support engineering organization that
provides telephone support services to customers twenty four hours a day.
The Company also provides field engineering support services during the
introductory phase of new products and when customers encounter
unusual problems. In addition, the Company provides a service
management program to assist new or dependent payphone owners
handle their routine operations. This program provides software
downloads, including rate center files, and generates reports of alarm
conditions upon which the customer can then act. The service
management program is offered on a monthly subscription basis and
customer choices range from a basic offering to a package of services.
The Company believes that these value-added support services are not
offered by other payphone terminal manufacturers.
Equipment Refurbishment and Upgrade Services. The Company provides
payphone and payphone component repair, refurbishment and upgrade
conversion services for its telephone company customers, and intends to
develop and offer similar service programs to independent payphone
operators during the next year. Refurbishment services involve the
rebuilding of payphone terminals, components and assemblies to "like
new" condition. Upgrade conversion services include the modification of
payphone terminals and assemblies to an updated or enhanced
technology. The Company believes that these services foster stronger
business relations with the customer base and provide the Company with
valuable intelligence to guide product development and equipment
designs.
Sales and Markets
General. The Company markets its payphone systems, products and
services to public telecommunication providers including telephone
companies and independent payphone operators, both domestically and
internationally. The Company's customers range from operators of small
private payphone routes to large telephone companies including the
RBOCs, Teleport and GTE. As a result of the Merger and the Lucent
Acquisition, the Company is a leader in sales of microprocessor-based
payphone terminals, software, components and services to domestic
telephone companies as well as to domestic independent payphone
operators.
The Company's marketing activities principally include advertising in trade
publications, participation at industry trade shows, and hosting seminars
and training programs for its customers. The Company also hosts an
annual Customer Conference for all its customers covering such areas as
current and future product development, regulatory and industry issues,
and customer service. In addition, the Company holds a monthly
conference call with selected customers and representatives of the
Company to discuss product and service issues and other matters of
mutual concern to both the Company and its customers.
10
<PAGE>
The Company generally enters into non-exclusive sales agreements with
its customers, which include, when applicable, non-exclusive licenses to
use the Company's proprietary operating systems and payphone
management software systems. Agreements between the Company and
the RBOCs generally have terms of up to five years, are renewable at the
option of the customers, and contain fixed sales prices with limited
provisions for price increases, but do not generally specify or commit the
customers to purchase a specific volume of products or services. Also,
those agreements generally contain clauses that require the Company to
provide prices and other terms at least as favorable as those extended to
other customers and indemnify customers against expenses, liabilities,
claims and demands resulting from the Company's products, including
those related to patent infringement. Those agreements may generally be
terminated at the option of the customer upon notice to the Company, or if
the Company defaults under any material provision of those agreements.
Agreements between the Company and independent payphone operators
generally set forth product pricing and terms for specified purchase
volumes, and include provisions that enable the Company to change prices
upon 30 days notice. Agreements between the Company and its
international customers generally set forth the pricing and terms for
specified purchase volumes, but sales prices are fixed with respect to
volume stipulated in the agreements. The Company's customers are not
prohibited from using or reselling competing products and are generally not
required to purchase a minimum quantity of products, although the
Company's price lists and agreements offer discounts based on volume.
All purchase orders from customers are subject to acceptance by the
Company. The Company's policy is to grant credit to customers that the
Company deems creditworthy. In addition, the Company provides limited
secured financing with terms generally not exceeding 24 months and
interest charged at competitive rates.
Sales by geographic region for the years ended March 31, 1998, 1997 and
1996 were as follows:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
United States $ 37,051 $ 18,787 $ 19,926
United States sales of
international payphone terminals - 2,796 298
Canada and Latin America 8,180 1,763 521
Europe, Middle East and Africa 195 99 396
Asia, Pacific and Other Areas 824 3,387 321
-------- -------- --------
Total sales $ 46,250 $ 26,832 $ 21,462
======== ======== ========
11
<PAGE>
United States sales of international payphone terminals represent sales to
Lucent under an agreement that was in effect during the fiscal years ended
March 31, 1997 and 1996. The Company believes that international
payphone terminals sold to Lucent during the fiscal years ended March 31,
1997 and 1996 were resold to Lucent's international customers.
Domestic Market. The Company believes that the domestic public
communications market represents a $6 billion market annually and that
hardware, software and services of the type provided by the Company
account for approximately $200 million of that market.
Domestically, the Company sells its products directly through regional
sales personnel and through distributors. The Company presently has six
distributors selling its products to independent payphone operators, each
with limited exclusive selling arrangements in assigned territories. Four of
the Company's executive officers, four full-time sales representatives
employed by the Company and located regionally and three sales
engineers currently market the Company's products to independent
payphone operators. Three of the Company's executive officers, five full-
time sales managers and one sales engineer market the Company's
products to telephone companies and other strategic accounts.
International. The Company continued to expand its presence in
international markets during fiscal 1998. The Company believes that the
international public communications market represents a significant growth
opportunity, and the Company intends to continue its international
development efforts as it addresses international opportunities. The
Company estimates that international markets may represent sales
opportunities approximating $2 billion over the next three years.
There have been many changes in international markets since the
Company's entry into those markets in 1991. Many countries around the
world have moved in the same direction as the United States following the
breakup of its telecommunications monopoly in 1984. Privatization,
competition, open foreign investment and new laws and regulations have
had a major impact on international markets, resulting in new players and
new opportunities for the various segments of the telecommunications
market, including the public access segment. The Company believes that
the experience and resources it has developed with deregulation of the
domestic public access market gives it an advantage in addressing
international markets undergoing similar deregulation. The Company
believes that developing countries have placed a high priority on
expanding telecommunication services and payphones are often a
significant part of the capital expansion.
12
<PAGE>
In order to take advantage of these opportunities, the Company has
continued the following international initiatives:
- - Employ individuals with experience in the international
telecommunications market;
- - Develop a set of products and services capable of handling the
requirements of the international market, such as multi-currency
capability, large coin applications, and credit and prepay card
applications, including intelligent or smart card technology which is
becoming widely used in electronic commerce applications;
- - Develop digital wireless payphone products;
- - Develop software and hardware that allow the Company's products to
be adapted to the varying requirements of different countries;
- - Develop distribution partnerships and strategic alliances; and
- - Enter into joint ventures to operate public access terminals.
The Company has sold its products to customers in Bolivia, Morocco,
Chile, Korea, Mexico, Ecuador, Belize, Bermuda, Guatemala, Guam,
Canada and the Philippines. The Company's products are currently under
evaluation in Poland, Egypt, China, Ukraine, Saudi Arabia, Spain,
England, Ireland, and other countries.
The Company markets its products in international markets directly and
through agent and distributor relationships. One of the Company's
executive officers and a staff of two international sales managers and three
sales engineers market the Company's products directly to international
markets and support the efforts of the Company's agents and distributors.
The Company also employs one independent sales representative
concentrating on the Mexican, Central American and South American
markets.
Dependence on Customers. During fiscal 1998, no single customer
accounted for 10% or more of the Company's sales. During fiscal 1997,
two customers (Lucent and Philippine Telegraph & Telephone, Inc.) each
accounted for approximately 12% of the Company's sales. During fiscal
1996, no single customer accounted for 10% or more of the Company's
sales. The Company's domestic distributors accounted for approximately
5% and 11% of the Company's sales during the fiscal years ended March
31, 1998 and 1997, respectively.
13
<PAGE>
Sales to telephone companies (primarily RBOCs) during the fiscal year
ended March 31, 1998 aggregated $15,999 as compared to $833 during
fiscal 1997 and $465 during fiscal 1996. Sales to independent payphone
operators and other customers during the fiscal year ended March 31,
1998 aggregated $30,251 as compared to $25,999 during fiscal 1997 and
$20,997 during fiscal 1996.
Historically, certain of the RBOCs have accounted for the majority of TSG's
sales, and the Company anticipates that these RBOCs will account for a
significant percentage of the Company's sales in the years ahead.
Accordingly, the loss of one or more of these customers or a significant
decline in purchase volume from one or more of these customers could
have a material adverse effect on the Company's sales.
Strategic Alliances. The Company has entered into a strategic alliance
with King Products, Inc. ("King") to market King's Internet public access
terminals to certain customers in the United States. The terminals are free
standing public access devices offering touch screen, menu-driven access
to the Internet and e-mail, and provide for transmission of data and print-
outs.
The Company is marketing operator services cooperatively with a large
domestic operator service provider. Under the agreement, the Company
markets operator services to domestic payphone operators at agreed upon
unbundled rates. Call revenues, net of agreed upon charges for the
operator services, and the Company's administrative fees, are payable to
the payphone operators utilizing the program. The Company believes that
the program offers revenues to payphone operators from operator assisted
calls competitive with other domestic operator service providers. The
Company's sales revenues from its operator services programs were not
significant during fiscal 1998. However, the Company believes that the
program has the potential to generate meaningful revenues, although there
can be no assurance in that regard.
Competition
The public communications industry is highly competitive. The Company
competes with numerous domestic and foreign firms that manufacture and
market public access terminals, products and services similar to the
Company's products 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.
14
<PAGE>
The Company believes that the primary competitive factors affecting its
business are quality, service, price and delivery performance. The
Company competes aggressively in certain markets with respect to the
pricing of its products and services and attempts to reduce its
manufacturing costs rather than increase its prices. The Company also
attempts to maintain inventory at levels which enable it to provide timely
service and to fulfill the delivery requirements of its customers.
The Company believes that its principal competitors domestically include
Protel Inc. (a subsidiary of Inductotherm Industries, Inc.), Intellicall, Inc.
and Northern Telecom Limited. It is also possible that new competitors
with financial, management and technical resources substantially greater
than those of the Company may emerge and acquire significant market
share. Possible new competitors include large foreign corporations, the
RBOCs and other entities with substantial resources. Some
telecommunications companies, already established in the telephone
industry with substantial engineering, manufacturing and capital resources,
are positioned to enter the public communications market, some of which
are foreign manufacturers. The Telecommunications Act lifted 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 Act, the Company could face new competitors in the
manufacture of payphones and payphone components from one or more of
the RBOCs or their affiliates.
Internationally, the Company competes with numerous foreign competitors,
all of which have financial, management and technical resources
substantially greater than those of the Company and have greater
experience in marketing their products internationally. These foreign
competitors market payphone products predominately to the PTTs and
thereby dominate the international payphone market. In addition, the
Company's international marketing efforts are subject to the risks of doing
business abroad. 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 are becoming 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. These
competing services continue to grow and could adversely affect the public
communications industry. However, the Company believes that the
payphone industry will continue to be a major provider of
telecommunications access. In addition, the Company believes that some
of these competing technologies, such as paging services, may also
benefit the public communication industry by increasing call volume.
15
<PAGE>
Although the Company expects to continue to be subject to intense
competition in the future, the Company believes that its products and
services are currently competitive with those of other manufacturers in
such areas as equipment capability and quality, cost and service. Since
the telecommunications industry is subject to rapid technological change,
the Company will be required to develop enhancements, new products and
services in the future to remain competitive.
Manufacturing, Assembly and Sources of Supply
The Company performs most of its product assembly operations in two
leased facilities, a 16,000 square foot manufacturing facility in Sarasota,
Florida and a 53,400 square foot manufacturing facility in Orange, Virginia.
The Company also performs repair, refurbishment and conversion services
at its Orange, Virginia facility. The Company's manufacturing operations
are designed so that production volumes within certain limits could be
readily increased. See Item 2-"Properties." The Company has also
contracted with a foreign manufacturer to produce payphones and
payphone assemblies.
Components for the Company's electronic and mechanical assemblies are
purchased from external suppliers. These suppliers must be approved by
the Company's design engineering group and manufacturing operations.
Approval is based on quality, delivery, performance and cost. Design
engineering attempts to utilize components available from several
manufacturers, as well as avoiding single source component restraints.
However, occasionally it is necessary to use a single source component
and the Company currently has several items in this category. While the
Company believes that it could find alternative suppliers for its
components, or in the case of single source components, substitute other
components for the ones currently used in its electronic assemblies, the
Company's operations could be adversely affected until alternative sources
or substituted components could be obtained or designed into the
Company's products.
The Company outsources the assembly of its electronic board assemblies
and many other payphone components to subcontractors and established
contract manufacturers. The Company believes it could use alternate
subcontractors, if necessary, with minimal interruption to production, as the
equipment required for these assemblies is industry standard and suitable
subcontractors are available. However, the Company's operations could be
adversely affected until alternative sources could be developed.
The Company's payphones are offered in various configurations based
upon the GTE style housing, the Western Electric style housing and
various custom designed housings. GTE style housings are supplied by
one principal supplier; however, alternative suppliers providing essentially
equivalent housings are available. The Company acquired tooling to
manufacture the Western Electric style housing as part of the Lucent
Acquisition and one of the Company's subcontractors manufactures these
16
<PAGE>
housings under a supply agreement with the Company. The Company
also has established alternative suppliers providing essentially equivalent
housings. Custom designed housings are generally available from sole
sources. While the Company believes that it could find alternative
suppliers for such housings, the Company's operations could be adversely
affected until alternative sources could be obtained.
The Company's payphones are supplied with coin mechanisms that may
be unique to a particular configuration or that may be supplied by a sole
source. The Company acquired tooling to manufacture the AT&T electronic
coin scanning mechanism as part of the Lucent Acquisition and one of the
Company's subcontractors manufactures these assemblies under a supply
agreement with the Company. The other coin mechanisms used by the
Company are available from various sole sources. The Company believes
that it could redesign its products to use other available coin mechanisms,
develop alternative suppliers for such assemblies, or use or develop
essentially equivalent assemblies. However, if a shortage or termination of
the supply of one or more of the electronic coin mechanisms were to occur,
the Company's operations could be materially and adversely affected.
All components and assemblies are identified by total inventory value and
deliveries are scheduled consistent with meeting production schedules.
Material planning and scheduling is accomplished utilizing a basic
computerized Material Requirements Planning (MRP) system.
The Company's electronic assemblies are subjected to various automated
tests and defect-inducing processes to improve their quality and reliability.
After testing, the electronic board assemblies may be installed in and
tested as a full payphone and shipped to the customer or packaged
separately and shipped for customer installation. The Company's
Sarasota, Florida manufacturing and service organizations were ISO 9002
certified in December 1995 and the Company is currently pursuing ISO
9002 certification for its Orange, Virginia manufacturing and service
organizations and ISO 9001 certification for its Sarasota, Florida facility.
Warranty and Service
The Company provides the original purchaser with one to three-year
warranties on payphone products manufactured by the Company. When
the Company resells products from other manufacturers, the Company
passes on the other manufacturer's warranty to its customers. The
Company provides warranties of 90 days with respect to its repair,
refurbishment and conversion services. Under the Company's warranty
program, the Company repairs or replaces defective parts and components
at no charge to its customers. After warranties expire, the Company
provides non-warranty repairs and services for a fee. The Company's
distributors are also authorized to repair products.
17
<PAGE>
The Company's customer service engineering staff at its corporate offices
provides telephone support services without charge to customers who
have installation or operational questions. The Company also provides
field engineering support services during the introductory phase of new
products and when customers encounter unusual problems.
In addition, the Company provides training courses given at the Company's
facility or at the customer's premises on the installation, operation,
maintenance and repair of the payphones and its software management
systems. The Company's distributors also provide training to their
customers.
Product Development
The Company's development efforts during fiscal 1998 were and during
fiscal 1999 are targeted to the development of products that integrate the
microprocessor technology and software systems of TSG and Elcotel,
address digital wireless applications, integrate smart card security
applications, expand hardware and software product features, enhance
service management capabilities and expand its product line to address
the dynamic product requirements of both domestic and international
customers. The Company is also developing expanded card technology
capabilities and its next generation software management system that is
expected to be capable of communicating with and managing all of the
Company's payphone terminals and supporting installations of terminals
much larger than the present systems.
During fiscal 1998, the Company incurred approximately $4,565 in
Company sponsored research and development costs towards the design
and development of payphone terminal equipment, management software
systems and other products. Research and development costs were
$2,623 in fiscal 1997 and $2,257 in fiscal 1996.
During fiscal 1998, the Company completed the development of TSG's
next generation smart circuit board assembly to replace an earlier product
version sold to Telesector Resources Group, Inc., an affiliate of NYNEX
("NYNEX"), under a sales agreement entered into by TSG in fiscal 1997.
The development of TSG's new smart circuit board assembly was targeted
initially to meet the requirements of NYNEX. NYNEX was acquired by Bell
Atlantic, Inc. ("Bell Atlantic") during 1997. The Company recently
completed modifications to the new circuit board assembly to address
certain additional hardware and software requirements of Bell Atlantic. Bell
Atlantic started the field trial of TSG's new circuit board assembly in June
1998, and barring any significant operating problems or the inability to
meet those requirements, the Company believes that it will begin shipment
of such new circuit board assembly during the second quarter of fiscal
1999. The Company believes that the new circuit board assembly will
increase the Company's gross profit margin compared to the earlier
product version it is intended to replace.
18
<PAGE>
Backlog
The amount of the Company's backlog is subject to fluctuation based on
the timing of the receipt and completion of orders. The Company
calculates its backlog by including only items for which there are purchase
orders with firm delivery schedules. At May 31, 1998, the backlog of all
products on order from the Company was approximately $10,284,
compared with a backlog of approximately $2,712 at May 31, 1997. The
Company's backlog at any given date is not necessarily indicative of future
revenues.
Licenses, Patents and Trademarks
The Company has developed, at its expense, certain of the software and
engineering designs incorporated in its products. The Company owns nine
United States patents relating to payphone components, its smart
payphone platforms and other technology which expire between April 2010
and May 2014. The Company also owns several trademarks used in the
operation of its business. 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. While the Company does not believe that it is infringing on
the patents of others, there can be no assurance 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 effect on the Company's
business.
The Company regards certain of 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.
Moreover, the Company's copyrights may not protect it from unauthorized
duplication of its payphones or other products which may be marketed
without the Company's knowledge or consent, although the Company has
vigorously and successfully to date defended its copyrights and has
stopped certain other organizations from continuing the unauthorized
duplication of the Company's payphone software. However, the copyright
registrations would not prevent a competitor from independently creating
payphones or other products which are functionally equivalent to those of
the Company. The Company licenses the use of its proprietary software
and designs through licensing provisions in its standard sales agreement,
and the provisions are designed to prevent duplication and unauthorized
use of the Company's software.
The Company licenses certain technologies, including patents and other
intellectual property rights acquired pursuant to the Lucent Acquisition,
from third parties under agreements providing for the payment of royalties.
Royalty expense during the year ended March 31, 1998 approximated $86.
19
<PAGE>
Other Risk Factors
The Company's business is subject to a number of risks, some of which
are beyond the Company's control. Some of these risks are described
below. Other risks are described in other parts of this Form 10-K.
Integration of Acquired Businesses. As a result of the Lucent Acquisition
and the Merger, the Company has devoted and continues to devote
significant management resources to integrate the operations of the
acquired businesses with those of the Company, thereby detracting from
attention to the day to day business of the Company. Such integration has
included coordinating geographically separated organizations and facilities,
integrating personnel and combining corporate cultures, integrating the
disparate products and services acquired, and eliminating unnecessary
and duplicative facilities, employees, programs and expenses.
Potential Fluctuations in Quarterly Results. The Company's operating
results have in the past been, and may continue to be, subject to quarterly
fluctuations as a result of a number of factors. These factors include the
introduction and market acceptance of new products; the timing of orders;
variations in product costs or mix of products sold; increased competition
in the public communications industry; and changes in general economic
conditions and specific economic conditions in the public communications
industry, any of which could have an adverse impact on operations and
financial results.
Rapid Technological Change. The Company's operating results will
depend to a significant extent on its ability to reduce the costs to produce
existing products and introduce new products to remain competitive in the
public communications market. The success of new products is dependent
on several factors, including proper new product definition, product cost,
timely completion and introduction of new products, differentiation of new
products from those of the Company's competitors and market acceptance
of those products. There can be no assurance that the Company will
successfully identify new product opportunities, develop and bring new
products to market in a timely manner, and achieve market acceptance of
its products or that products and technologies developed by others will not
render the Company's products or technologies obsolete or
noncompetitive.
20
<PAGE>
Changes in Telecommunications Law and Regulations. Changes in
domestic and international telecommunication requirements could affect
sales of the Company's products and the operations of its customers. In
the United States the Company's products must comply with various
Federal Communication Commission requirements and regulations. In
countries outside of the United States the Company's products must meet
various requirements of local telecommunications authorities. Failure by
the Company to obtain timely approval of products or promptly modify
products as necessary to meet new regulatory requirements could have a
material adverse effect on the Company's business, operating results and
financial condition.
International Operations. The Company conducts business internationally.
Accordingly, the Company's future results could be adversely affected by a
variety of uncontrollable and changing factors including foreign currency
exchange rates; regulatory, political or economic conditions in a specific
country or region; trade protection measures and other regulatory
requirements; government spending patterns; and natural disasters,
among other factors. Any or all of these factors could have a material
adverse impact on the Company's international business.
Volatility of Stock Price. The Company's Common Stock has experienced
substantial price volatility, particularly as a result of variations between
the Company's actual or anticipated financial results and the published
expectations of analysts and a result of announcements by the Company
and its competitors. In addition, the stock market has experienced
extreme price and volume fluctuations that have affected the market price
of many technology companies in particular and that have often been
unrelated to the operating performance of these companies. These
factors, as well as general economic and political conditions, may
adversely affect the market price of the Company's Common Stock in the
future.
Employees
As of June 4, 1998, the Company employed 326 individuals of which 324
are full-time employees. The Company is not a party to any collective
bargaining agreement and believes that its relations with its employees are
good.
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.
21
<PAGE>
Government Regulation and the Telecommunications Act
Overview. Products and services offered by the Company and operated
by its customers are subject to varying degrees of regulation at both the
federal and state levels. There can be no assurance that any changes in
such regulation would not have an adverse impact on the operations of the
Company and its customers.
Parts 15 and 68 of the FCC rules govern the technical requirements that
payphone and other telephone products must meet in order to qualify for
FCC registration and interconnection to the telephone network. The
Company has performed those tests necessary to assure compliance with
these technical requirements and obtained FCC registration for its various
model payphones.
The Company's products must be tested and approved by various
regulatory bodies in international markets in which the Company sells its
products, and these approvals must be obtained before the importation of
the products by customers. The products exported by the Company to
specific foreign countries have been approved by the appropriate
regulatory body.
The regulation of telecommunication providers by the FCC and state
regulatory authorities has a direct effect on the Company's product
designs. The Company designs its products to comply with regulations
applicable to provision of public communication services. The Company's
products may require modification to comply with new technical or
regulatory requirements or other factors upon adoption of new regulations
by federal and state authorities.
State regulatory authorities have adopted a variety of regulations which
vary from state to state, governing technical and operational requirements
of privately owned payphones. These requirements include the following:
dialtone-first capability to allow free calls to operator, emergency,
information and toll free numbers without a coin deposit; multi-coin
capability; calculation of time-of-day and weekend discounts; prohibition of
post-call charges; advisement to callers of additional charges for additional
time before disconnecting; provisions of certain information statements
posted on cabinets; provision of local telephone directories; mandatory
acceptance of incoming calls; reduced charges for local calls from certain
locations such as hospitals or rest homes; and restrictions as to the
location and hours of operation of such payphones. The states have also
established tariffs for local and intrastate coin sent-paid calls, and in many
instances for Zero-Plus Calls.
With respect to the use restrictions and requirements, such as restricted
locations for payphones, informational statements on cabinets, or the
provision of access to the carrier of choice, the owner/operators of the
Company's products have the sole responsibility to determine and comply
with all applicable use requirements, including the responsibility to ensure
that the rates charged remain current and do not exceed the maximum
rates permitted by state or federal regulations for the particular location of
the product.
22
<PAGE>
Most states require that owner/operators of private payphones be certified
by the state's public utility commission and file periodic reports. As a
manufacturer and seller of privately-owned payphones, the Company does
not believe that any states currently require the Company to be certified.
The Telecommunications Act. On September 20, 1996, the FCC released
its order (the "Order") adopting regulations to implement the section of the
Telecommunications Act which mandated fair compensation for all
payphone providers and otherwise changed the regulatory regime for the
payphone industry pursuant to the Telecommunications Act. The
Telecommunications Act requires that the FCC establish a per call
compensation plan to ensure that all payphone service providers are fairly
compensated for each and every completed intrastate and interstate call
using their payphone. Among other matters, the Order addressed
compensation for non-coin calls and local coin calling rates, ordered the
discontinuation of payphone subsidies from basic exchange and exchange
access revenues which favored payphones operated by telephone
companies, and authorized RBOCs and other providers to select service
providers.
The Order required payphones operated by regulated telephone
companies to be removed from regulation, separating payphone costs from
regulated accounts by April 15, 1997. This requirement was intended to
eliminate all subsidies that favored payphones operated by the telephone
companies. Telephone companies were also required to reduce interstate
access charges to reflect separation of payphones from regulated
accounts. In order to eliminate discrimination, the telephone companies
were also required to offer coin line services to independent providers if
they 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 authorized 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 preempted
state regulations that require independent providers to route intralata calls
to the telephone companies. 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.
In the Order, the FCC decided that the dial-around compensation rate for
access code calls and toll free calls should be equal to the deregulated
local coin call rate. The FCC also established an interim compensation
plan whereby compensation for access code and toll free calls would be
paid to payphone service providers. Under the first phase of the FCC's
23
<PAGE>
interim compensation plan, payphone service providers would be
compensated at a flat rate of $45.85 per payphone per month, as
compared to the previous compensation of $6.00 per month. This interim
rate was to expire on September 1, 1997, and replace all other dial-around
compensation prescribed at the state or federal level. This compensation
was to be paid by the major inter-exchange carriers based on their share of
toll revenues in the long distance market. By October 1, 1997, under the
second phase of the interim compensation plan, all payphones would
switch to a per-call compensation rate set at $.35 per toll free or access
code call. The carrier that was the primary beneficiary of the call would
pay the per-call compensation. After one year of deregulation of coin rates
(October 1, 1998), the permanent compensation rate would have been
adjusted to equal the local coin rate charge for a particular payphone.
On July 1, 1997, the United States Court of Appeals for the District of
Columbia Circuit issued its decision on appeals of certain portions of the
Order. The Court ruled that the FCC was unjustified in setting the per-call
compensation rate at an amount equal to the deregulated local coin rate.
The Court also held that interim compensation for 0+ calls must be
included in the new interim compensation plan. Finally, the Court upheld
the FCC's authority to regulate the rates charged for local coin calls
(thereby eliminating state limitations on such rates) and the FCC's decision
to require the carrier rather than the calling party to pay the compensation
to payphone service providers for toll free and access code calls. The
Court vacated and remanded to the FCC for further consideration the
issues of compensation for toll free and access code calls both on a
permanent and an interim basis.
On October 9, 1997, the FCC adopted a revised compensation plan on
remand from the Court of Appeals. The revised plan sets compensation at
a rate of $.284 per completed call, during the period October 7, 1997
through October 6, 1999. After October 6, 1999, the per call compensation
rate will vary from payphone to payphone, with compensation equal to the
local coin rate minus $.066. Multiple petitions for reconsideration of the
plan are pending before the FCC, which seek both to increase and
decrease the compensation amount, and to change the compensation
amount from a flat rate per call to a variable rate depending on call
duration. In addition, certain parties have petitioned the U.S. Court of
Appeals for the District of Columbia Circuit to review the FCC order. There
can be no assurance as to the impact on dial around compensation of such
petitions to the FCC and the courts. The ultimate outcome with respect to
dial around compensation will have a significant impact on the business
and operations of payphone service providers and thus the demand for
payphones.
In orders released on September 20, 1996 and November 8, 1996, the
FCC ruled that local exchange carriers must provide payphone-specific
unique coding digits to payphone service providers and that the payphone
service providers must provide those digits from their payphones to inter-
exchange carriers in order to identify the payphone. The provision of
coding digits is a prerequisite to per-call compensation payments by the
24
<PAGE>
inter-exchange carriers to the payphone service providers for toll free and
access code calls. However, in an order issued on October 7, 1997, the
FCC waived the requirement that payphone service providers provide
unique coding digits in order to receive compensation until March 9, 1998
when the waiver expired. Comments have been made to the FCC that
include proposals to determine per call compensation on a per phone basis
rather than a per call basis for any payphone not transmitting coding digits.
On January 29, 1998, the FCC adopted a rule that all operator service
providers must orally disclose to away-from-home callers how to obtain the
total cost of the call, before the call is connected, by pressing up to two
keys on the phone or by staying on the line. Operator service providers
need not provide an exact rate quote unless the caller specifically requests
it. Operator service providers must comply with the new rule by July 1,
1998. This rule will not apply to smart payphones (such as the Company's
intelligent payphones) until October 1, 1999 by which time those
payphones must be modified to comply or be replaced. The Company's
intelligent payphone terminal products must be modified to comply with the
new rule. The Company believes that software required to comply with the
new rule can be developed and incorporated into its current products within
the required time frame. The Company also believes that the installed
base of its older intelligent payphone terminal products that will not be
modified to comply with this new rule can be replaced with payphone
terminals that do comply, which will be developed by the Company within
the required time frame.
The Company cannot predict the outcome of future FCC actions with
respect to compensation to payphone service providers or away-from-
home callers, the outcome of additional rulings, if any, by the courts, nor
the impact that such additional actions might have on the Company, its
customers or the public communications industry in general.
Environmental Matters
In April 1997, the TSG received a formal "no further action status"
notification from the Florida Department of Environmental Protection (the
"FDEP") after several years of evaluation, assessment and monitoring of
soil and groundwater contamination at one of its former facilities in Florida.
It is always possible 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.
TSG is 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, as a small generator "De
Minimis" party, TSG was permitted to execute a buy-out agreement with
25
<PAGE>
respect to the remediation activities at the site. The Company believes,
based on presently available information, that it has no further obligations
with respect to the site. However, if additional waste is attributed to TSG,
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 since such costs would be dependent upon the amount of additional
waste, if any, that could be attributed to TSG.
TSG is also a PRP with respect to response actions at the
Galaxy/Spectron Superfund Site in Elkton, Maryland. TSG is also a De
Minimis party with respect to this site, and believes its proportionate share
of costs to undertake response actions 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 $3 with respect to TSG's contribution. The Company has
not incurred any costs with respect to this site and believes that its
ultimate costs will not be material.
Item 2. Properties
- ------- ----------
The Company owns two 24,000 square foot buildings located at
6428 Parkland Drive, Sarasota, Florida. These buildings were constructed
in 1987 and 1989, respectively. The two buildings are owned subject to
mortgage indebtedness pursuant to a promissory note with a bank. During
the year ended March 31, 1998, the Company utilized one of the
24,000 square foot buildings for its own operations. The other
24,000 square foot facility was leased to an electronics manufacturer until
May 1998. The Company intends to use that second building for its
operations beginning in July 1998.
The Company leases the following properties:
- - A 16,000 square foot facility manufacturing facility located at 6448
Parkland Drive, Sarasota, Florida under a three year lease which
commenced in December 1997;
- - A 53,400 square foot manufacturing facility located at 315 Waugh
Boulevard, Orange, Virginia under a one year lease agreement that
commenced on July 31, 1997 and that is renewable by the Company for
four additional terms of one year each;
- - 11,200 square feet of engineering space located in a building at 1060
Windward Ridge Parkway, Alpharetta, Georgia under a five-year lease
that commenced on January 9, 1998.
The Company believes that the combination of owned and leased space is
adequate for its current business.
26
<PAGE>
Item 3. Legal Proceedings
- ------- -----------------
Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants.
- ---------------------------------------------------------------------------
San Diego Superior Court Case No. 691635.
As previously reported, this putative class action was filed in the Superior
Court of the State of California for the County of San Diego alleging that
Amtel Communications, Inc. ("Amtel"), a former customer of the Company
that filed for bankruptcy, conspired with its own officers and professionals,
and with various telephone suppliers (including the Company) to defraud
investors in Amtel by operating a Ponzi scheme. See Item 3, Legal
Proceedings of Part I of the Company's Form 10-KSB for the fiscal year
ended March 31, 1996 and Item I, Legal Proceedings of Part II of the
Company's Form 10-Q for the quarter ended September 30, 1996.
On September 30, 1997, the Company's motion to dismiss the plaintiffs'
third amended complaint was granted, in part, and those portions of the
complaint were dismissed with prejudice. On October 3, 1997, the
Company filed its answer to the remaining causes of action in the plaintiffs'
third amended complaint. Plaintiffs' motion for class certification was
granted on December 9, 1997. The Company disputes liability and intends
to defend this matter vigorously, although the Company cannot predict the
ultimate outcome of this litigation.
While the Company is subject to various other legal proceedings arising in
the conduct of its business, there are no pending legal proceedings which
are material to the business of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
27
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and
- ------- Related Stockholder Matters.
-----------------------------------------
The Company's Common Stock is reported by the NASDAQ National Market
System under the symbol "ECTL". The Company's Redeemable Warrants to
Purchase Common Stock ("Warrants") began publicly trading on February 3,
1998 following the Merger. The Warrants are reported by the NASDAQ
National Market System under the symbol "ECTLW". The following table sets
forth the range of high and low sales prices for the Company's Common
Stock and Warrants for each of the periods indicated during which they traded
as reported by the NASDAQ National Market System.
Common Stock Warrants
------------- -------------
Period High Low High Low
- ------ ---- --- ---- ---
Quarter Ended:
June 30, 1996 8 5 - -
September 30, 1996 9-1/4 5-1/4 - -
December 31, 1996 7-3/4 5-7/8 - -
March 31, 1997 8-5/8 6 - -
June 30, 1997 6-5/8 5-1/4 - -
September 30, 1997 7-1/4 5-5/8 - -
December 31, 1997 8-1/8 5-5/8 - -
March 31, 1998 6-1/4 4-3/4 1/4 1/16
_______________________________
As of June 9, 1998, there were 414 holders of record of the Common Stock
of the Company and 3 holders of record of the Warrants.
The Company has not declared or paid any cash dividends on its Common
Stock. The Company is not restricted from paying dividends provided it
is not in default of its loan agreement with its bank.
28
<PAGE>
Item 6. Selected Financial Data.
- ------- ------------------------
The following selected financial data is qualified in its entirety by reference
to the more detailed consolidated financial statements and notes thereto
included elsewhere in this report. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Year ended March 31,
-----------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands, except per share data)
Net Sales $ 46,250 $ 26,832 $ 21,462 $ 25,090 $ 20,216
Cost of Sales $ 28,645 $ 15,883 $ 13,238 $ 14,776 $ 12,232
Income (Loss) before
Extraordinary Items $ 1,757 $ 1,628 ($ 1,291) $ 3,524 $ 2,041
Basic Income (Loss) before
Extraordinary Items per
Common Share (1) $ .18 $ .20 ($ .16) $ .48 $ .32
Diluted Income (Loss) before
Extraordinary Items per
Common and Common
Equivalent Share (1) $ .18 $ .20 ($ .16) $ .45 $ .30
Net Income (Loss) $ 1,757 $ 1,628 ($ 1,291) $ 3,524 $ 4,002
Basic Net Income (Loss)
per Common Share (1) $ .18 $ .20 ($ .16) $ .48 $ .64
Diluted Net Income (Loss)
per Common and Common
Equivalent Shares (1) $ .18 $ .20 ($ .16) $ .45 $ .59
Working Capital $ 20,237 $ 7,897 $ 6,288 $ 5,575 $ 4,224
Total Assets $ 67,438 $ 15,944 $ 14,929 $ 16,225 $ 10,234
Long-term Obligations $ 9,891 $ 232 $ 432 $ 782 $ 950
Stockholders' Equity $ 49,660 $ 12,627 $ 10,558 $ 11,091 $ 6,638
(1) Earnings per share have been restated for the years ended March 31, 1994
to March 31, 1997 to comply with SFAS 128, Earnings per Share.
29
<PAGE>
Item 7. Management's Discussion and Analysis of
- ------- Financial Condition and Results of Operations.
----------------------------------------------
All dollar amounts, except per share data, set forth herein, are stated in
thousands.
Technology Service Group, Inc. Merger
- -------------------------------------
On December 18, 1997, the Company 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 ("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 Company issued an
aggregate of 4,944,292 shares of common stock pursuant to the Merger. In
addition, the Company issued 80,769 shares of common stock in payment of
certain acquisition expenses. 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.
A summary of the merger consideration (or purchase price) is set forth below.
Issuance of 4,944,292 shares of common stock
at a market price of $6.50 per share $32,138
Fair value of outstanding common stock warrants,
options and purchase rights issued 2,595
Costs and expenses of the merger 872
-------
Total merger consideration $35,605
=======
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price of $35,605 was
allocated to the assets and liabilities of TSG as of the acquisition date based
upon their estimated fair values. The excess of the purchase price over the
fair value of the net assets acquired of $24,096 was recorded as goodwill.
30
<PAGE>
A summary of the book value of the assets and liabilities of TSG at
December 18, 1997 as compared to their estimated fair values is set
forth below.
Estimated
Book Fair
Value Value
------- -------
Cash and temporary investments $ 239 $ 239
Accounts receivable 3,703 3,703
Inventories 11,103 6,490
Refundable income taxes 604 604
Deferred tax asset, current 748 3,719
Prepaid expenses and other current assets 12 12
Property, plant and equipment 662 782
Identified intangible assets 1,022 7,530
Other assets 29 29
Accounts payable and accrued expenses (5,153) (6,353)
Borrowings under lines of credit (3,970) (3,970)
Deferred tax liability, non-current ( 4) (1,276)
------- -------
Net assets acquired $ 8,995 11,509
Excess of purchase price over =======
net assets acquired 24,096
-------
Total $35,605
=======
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 discontinued by the
Company.
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.
At December 18, 1997, TSG had net operating loss carryforwards of $11,160
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, future tax benefits related to 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
and to relocate TSG employees and relocate TSG property in accordance
with the Company's 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 $470.
The costs of relocating employees and property of TSG have been estimated
at $730.
31
<PAGE>
The fair value of the intangible assets included in the allocation of the
purchase price are 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 consolidated statement of operations for the year ended March 31, 1998
(see "Item 8. Consolidated Financial Statements and Supplementary Data")
reflect the operations of TSG from the merger date.
Lucent Technologies Acquisition
- -------------------------------
On September 30, 1997, the Company acquired from Lucent Technologies
Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing and
component parts business. The purchase price, including estimated
acquisition expenses of $231, was $5,821, net of an inventory adjustment of
$1,183, determined pursuant to the acquisition agreement. Assets acquired
from Lucent included inventories, machinery, equipment, tooling and certain
other assets related to the payphone manufacturing and component parts
business conducted by Lucent, as well as a license of certain patent and
other intellectual property rights related thereto.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
the terms of bank promissory notes to finance the Lucent acquisition,
including acquisition expenses, debt issuance expenses and other general
corporate activities, including acquisition of equipment. These notes
consisted of an installment note in the principal amount of $3,050 payable in
eighty four equal monthly installments of $36, a term note in the principal
amount of $2,850 due March 31, 1998 and a term note in the principal
amount of $950 due March 31, 1998. The notes were collateralized by the
assets of the Company and bore interest at the bank's floating 30 day Libor
rate plus 2.25% (7.9% per annum upon issuance). On November 25, 1997,
the Company repaid all of the aforementioned notes from the proceeds drawn
under a $15,000 revolving credit line entered into on November 25, 1997.
A summary of the allocation of the purchase price to the assets acquired as
of September 30, 1997, based on the Company's estimates of their fair values
is set forth below.
Inventories $3,780
Equipment and tooling 500
Intangible Assets 1,541
------
Total purchase price $5,821
======
32
<PAGE>
The consolidated statement of operations for the year ended March 31, 1998
(see "Item 8. Consolidated Financial Statements and Supplementary Data")
reflect the effects of the Lucent acquisition from the acquisition date.
Results of Operations.
- ----------------------
Year ended March 31, 1998, compared to year ended March 31, 1997:
Net sales for the year ended March 31, 1998 ("fiscal 1998"), increased from
$26,832 for the year ended March 31, 1997 ("fiscal 1997") to $46,250, an
increase of $19,418, or approximately 72%, principally as a result of: (i) an
increase in sales to domestic independent payphone operators of $2,334, or
approximately 14%, from $16,992 for fiscal 1997 to $19,326 for fiscal 1998,
(ii) an increase in sales to domestic telephone companies of $15,166 from
$833 for fiscal 1997 to $15,999 for fiscal 1998 due to the TSG and Lucent
acquisitions described above, (iii) an increase in sales to international
customers of $1,154, or approximately 14%, from $8,045 for fiscal 1997 to
$9,199 for fiscal 1998, and (iv) an increase in component sales and
miscellaneous other sources of revenue of $764, or approximately 79%, from
$962 for fiscal 1997 to $1,726 for fiscal 1998. Sales to international
customers accounted for approximately 20% of net sales for fiscal 1998 as
compared to approximately 30% for fiscal 1997. Fiscal 1998 sales include
sales of $580 by the Company to TSG prior to the acquisition date.
Cost of sales as a percentage of net sales increased to approximately 62%
for fiscal 1998 from approximately 59% for fiscal 1997 principally as a result
of the increase in sales of lower margin products to domestic telephone
companies. As a result of the acquisitions described above, the Company
believes that its sales to domestic telephone companies will increase
compared to such sales on a historical basis. However, as a result of higher
volumes, sales to domestic telephone companies are generally made at
margins lower than those to domestic independent payphone operators.
Accordingly, the Company believes that its cost of sales as a percentage of
net sales will be higher in the future than the Company experienced on a
historical basis.
Research and development costs increased by $1,942, or approximately
74%, from $2,623 in fiscal 1997 to $4,565 in fiscal 1998 due to the acquisition
of TSG and the expansion of resources to support development and
engineering activities related to technology and products acquired from
Lucent. Selling, general and administrative expenses increased by $3,604,
or approximately 57%, from $6,326 in fiscal 1997 to $9,930 in fiscal 1998
principally as a result of an increase in the Company's allowance for doubtful
accounts specifically related to foreign receivables, an expansion of marketing
resources to support domestic and international initiatives, and an increase
in expenses resulting from the acquisition of TSG. Amortization expense
increased to $603 in fiscal 1998 from $32 for fiscal 1997 due to the
amortization of intangibles resulting from the Merger and the Lucent
acquisition. Net interest income decreased by $102, or approximately 50%,
from $205 in fiscal 1997 to $103 in fiscal 1998 due to the increase in
outstanding debt related to the Merger and the Lucent acquisition.
33
<PAGE>
The fiscal 1998 tax expense is comprised of $644 of current tax expense and
a deferred tax expense of $209 as compared to a current tax expense of $253
and a deferred tax expense of $623 in fiscal 1997.
Year ended March 31, 1997, compared to year ended March 31, 1996:
Net sales for the year ended March 31, 1997 ("fiscal 1997"), increased from
$21,462 for the year ended March 31, 1996 ("fiscal 1996") to $26,832, an
increase of $5,370, or approximately 25%, principally as a result of: (i) a
decrease in sales to domestic independent payphone operators of $962, or
approximately 5%, from $17,954 for fiscal 1996 to $16,992 for fiscal 1997, (ii)
an increase in sales to domestic telephone companies of $368 from $465 for
fiscal 1996 to $833 for fiscal 1997, (iii) an increase in sales to international
customers of $6,509 from $1,536 for fiscal 1996 to $8,045 for fiscal 1997, and
(iv) a decrease in component sales and miscellaneous other sources of
revenue of $545, or approximately 36%, from $1,507 for fiscal 1996 to $962
for fiscal 1997. Sales to international customers accounted for approximately
30% of net sales for fiscal 1997 as compared to approximately 7% for
fiscal 1996.
Cost of sales as a percentage of net sales decreased from 62% to 59% for
the comparative fiscal years principally as a result of increased production
and favorable manufacturing cost absorption and other favorable variances.
Research and development costs increased by $366, or approximately 16%,
from $2,257 in fiscal 1996 to $2,623 in fiscal 1997 principally due to an
increase in the number of employees engaged in research and development
activities partially offset by a decrease in the use of consultants on certain
development projects. Selling, general and administrative expenses
decreased by $139, or approximately 2%, to $6,326 in fiscal 1997 from
$6,465 in fiscal 1996 principally as a result of a reduction in the Company's
allowance for doubtful accounts due to cash collection or product return of
previously reserved amounts as well as reduced reserves with respect to
current accounts receivable during fiscal 1997, partially offset by an increase
in sales and marketing salaries and commission expense, management
incentive bonuses and legal fees. Net interest income decreased $10, or
approximately 5%, from $215 in fiscal 1996 to $205 in fiscal 1997 due
principally to a decrease in the Company's note receivable portfolio.
The fiscal 1997 tax expense is comprised of $253 of current tax benefit and
a deferred tax expense of $623. The fiscal 1996 tax benefit is comprised of
$186 of current tax benefit and a deferred tax benefit of $675. The fiscal 1996
tax benefit was generated as a result of the current year loss.
During fiscal 1996, one of the Company's customers, to whom the Company
had sold approximately 3,500 payphone terminals during fiscal 1995, filed for
protection under Chapter 11 of the Bankruptcy Code. On the date of the
bankruptcy filing, the Company was owed approximately $3,200. In July
1996, the Company and the debtor reached an agreement in principle with
respect to the treatment of the Company's claims under the debtors' plan of
reorganization. The agreement in principle resulted in an allowance of
approximately $1,602 against the Company's receivable from the debtor. In
34
<PAGE>
addition, the Company had incurred approximately $242 in legal and related
expenses in connection with its claim against the debtor. The total charge to
the Company's financial statements relating to this matter was $1,844 during
fiscal 1996. During fiscal 1997, the Company sold the payphone terminals
and related equipment which was in the Company's possession and being
warehoused by the Company pursuant to a prior Bankruptcy Court order.
The amount realized by the Company from this transaction resulted in a $413
recovery in excess of the amount anticipated during fiscal 1996. In addition,
the Company incurred approximately $82 in legal and related expenses in
connection with this matter during fiscal 1997. The total credit to the
Company's financial statements for this matter was $331 during fiscal 1997.
Effects of Inflation.
- ---------------------
In general, inflation and changing prices have not had a material impact on
the Company's operations.
Effects of New Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS 130 requires that an enterprise (i)
classify items of other comprehensive income by their nature and (ii) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. Management does not believe that the
adoption of SFAS 130 will have a significant impact on the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosure about
Segments of an Enterprise and Related Information, which requires public
companies to report selected segment information in their complete financial
statements and in condensed interim financial statements issued to
stockholders. SFAS 131 is effective for fiscal years beginning after December
31, 1997. It also requires entity-wide disclosure about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. SFAS 131 also requires
disclosure as to how management makes decisions about allocating
resources to segments and measuring their performance. Management does
not believe that the requirements of SFAS 131 will have a significant impact
on the Company's consolidated financial statements.
35
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's current assets increased by $17,142, or approximately 156%,
from $10,982 at March 31, 1997 to $28,124 at March 31, 1998, predominantly
from an increase in accounts receivable of $4,411 (due to the acquisition of
TSG and the higher level of sales by the Company, including sales of
products related to the Lucent acquisition) and an increase of $1,000 in notes
receivable (related to the conversion of an international account receivable
into a secured note), an increase of $6,355 in inventory (related to the Merger
and the Lucent acquisition), and an increase in the deferred tax asset of
$3,449 as a result of the Merger. Included in notes receivable are notes from
two specific international customers totalling $1,454, net of specific
allowances. Current liabilities increased by $4,802, or approximately 156%,
from $3,085 at March 31, 1997 to $7,887 at March 31, 1998, as a result of the
acquisition of TSG and an increase in accounts payable and accrued
expenses resulting from the Company's increased sales activity. Long-term
liabilities increased by $9,659, from $232 at March 31, 1997 to $9,891 at
March 31, 1998, predominantly due to refinancing of the Company's debt with
a new revolving credit line and mortgage note as described below.
Stockholders' equity increased by $37,033, from $12,627 at March 31, 1997
to $49,660 at March 31, 1998, due to the acquisition of TSG and associated
stock registration costs ($34,919), issuance of stock to employees and
directors under stock option or purchase plans ($357), and net income for the
year of $1,757.
From August 31, 1995 until November 25, 1997, the Company had a $2,000
working capital line of credit secured by the Company's accounts receivable,
notes receivable and inventories. Interest on amounts borrowed on the line
of credit was at the bank's floating 30 day Libor rate plus 2.75%. The
Company borrowed against and repaid the line of credit throughout the year
depending upon its working capital needs and cash generated from
operations, with the outstanding amount under the line of credit during fiscal
1998 ranging from $0 to $1,500.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
bank promissory notes to finance the Lucent acquisition and other general
corporate activities. These notes consisted of an installment note in the
principal amount of $3,050 payable in 84 equal monthly installments ending
October 2, 2004 and two term notes with an aggregate principal amount of
$3,800 that were due on March 31, 1998. See "Acquisitions-Lucent
Technologies" for a more complete description of these bank promissory
notes.
On November 25, 1997, the Company refinanced the $2,000 working capital
line of credit, the $3,050 installment note due on October 2, 2004 and the
term notes of $3,800 that were due on March 31, 1998, with a new $15,000
revolving line of credit which matures on November 25, 2002. Interest on
amounts borrowed on the line of credit is at the bank's floating 30 day Libor
rate plus 1.5%. In addition, on November 26, 1997, the Company refinanced
its mortgage note, which had a principal balance of $315 and a maturity date
of May 23, 1999, with a new mortgage note in the amount of $1,920, at the
same fixed interest rate of 8.5%. The note is payable in 59 monthly
installments of $19 and a final payment of $1,533 on November 26, 2002.
36
<PAGE>
In connection with such refinancings, the Company entered into a Restated
Loan Agreement ( the Agreement") dated November 25, 1997, which contains
covenants that prohibit or restrict the Company from engaging in certain
transactions without the consent of the bank, including merger or
consolidations, payment of subordinated stockholder debt obligations, and
disposition of assets, among others. Additionally, the 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 covenants or the occurrence of an event of default, if not waived
or corrected, could accelerate the maturity of the indebtedness outstanding
under the Agreement.
The Company believes that its anticipated cash flow from operations and
borrowings against its bank line of credit will be sufficient to fund its
working capital needs, its capital expenditures and its short and long term
note obligations through March 31, 1999.
Year 2000 Discussion
- --------------------
The Company has completed a preliminary review of Year 2000 issues
related to the Company's internal systems and its products. The Company
believes that its internal systems are Year 2000 compliant since it has
recently installed a new accounting system which integrates its accounting,
billing and manufacturing operations. The Company has evaluated the
products that it continues to support and has identified those products whose
software will have to be modified in order to become Year 2000 compliant.
The Company's plan is to address the modifications required for the software
in those products during Fiscal 1999. The Company does not believe that the
cost of such modifications will be material to its business, operations or
financial condition. The Company intends to contact during Fiscal 1999 those
suppliers who provide critical products and services to the Company to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant or to monitor their progress toward Year
2000 compliance.
37
<PAGE>
Selected Quarterly Data
- -----------------------
The following sets forth a summary of selected statements of operations data
(unaudited) for the quarters ended June 30, 1996, September 30, 1996,
December 31, 1996 and March 31, 1997:
Quarter Ended
------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
------ ------ ------ ------
Net Sales $5,551 $6,101 $7,206 $7,974
Net Income $ 197 $ 326 $ 548 $ 557
The following sets forth a summary of selected statements of operations data
(unaudited) for the quarters ended June 30, 1997, September 30, 1997,
December 31, 1997 and March 31, 1998:
Quarter Ended
------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
------ ------ ------ ------
Net Sales $6,743 $7,630 $13,592 $18,275
Net Income $ 375 $ 418 $ 709 $ 255
38
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data.
- ------- ---------------------------------------------------------
Independent Auditors' Report, page F-2.
Consolidated Balance Sheets as of March 31, 1998 and 1997,
pages F-3 and F-4.
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997, and 1996, page F-5.
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1998, 1997, and 1996, page F-6.
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997, and 1996, pages F-7 and F-8.
Notes to Consolidated Financial Statements, pages F-9 through F-34.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- and Financial Disclosure.
-----------------------------------------------------------
None.
39
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The following table sets forth the names and ages of all directors and
executive officers of the Company, as well as positions and offices within
the Company.
Name Age Position
------------------- --- ----------------------------------
C. Shelton James 58 Chairman of the Board
Tracey L. Gray 66 President, Chief Executive Officer
and Director
Joseph M. Jacobs 45 Director
Dwight Jasmann 62 Director
Charles H. Moore 68 Director
Thomas E. Patton 57 Director
Mark L. Plaumann 43 Director
David R. A. Steadman 61 Director
Eduardo Gandarilla 48 Executive Vice President,
Sales and Marketing
David F. Hemmings 51 Senior Vice President,
Business Development
and Technology/System
Development
William H. Thompson 45 Senior Vice President,
Administration/Finance
and Secretary
Ronald M. Tobin 55 Vice President, Finance,
Chief Financial Officer, Assistant
Secretary and Treasurer
Darold R. Bartusek 52 Vice President and General Manager,
Telco Sales
40
<PAGE>
Hugh H. Durden 50 Vice President and General Manager,
IPP Sales
Kenneth W. Noack 60 Vice President, Operations
Henry W. Swanson 61 Vice President, Engineering
and Development
__________________________
Mr. James, currently Chairman of the Board, served as Chief Executive
Officer of the Company from May 1991 until the Merger in December 1997
and has been a director of the Company since December 1990. Mr. James
is currently an investor in and business advisor to a number of companies.
While he has devoted a substantial amount of time to the Company since May
1991, he has also served as Executive Vice President of Fundamental
Management Corporation, an investment management company, since April
1990, and was appointed President of that company in April 1993. He is a
member of the boards of Cyberguard Corporation, Concurrent Computer
Corporation, NAI Technologies, Fundamental Management Corporation, CSPI
and SK Technologies, Inc. From 1980 to 1989, Mr. James was Executive
Vice President of Gould, Inc., a diversified electronics company, and
President of Gould's Computer Systems Division.
Mr. Gray has served as President of the Company since July 1991 and Chief
Operating Officer of the Company from July 1991 until the Merger in
December 1997, at which time he became Chief Executive Officer, and has
been a director of the Company since August 1991. From June 1986 until
joining the Company, Mr. Gray had been a Vice President of the Government
Systems Division, Network Systems Division and Federal Systems Division,
respectively, of Sprint in Washington, DC. Prior to that, Mr. Gray served in
numerous assignments with AT&T in corporate staff functions and retired as
Vice President, Government Systems in 1985. He served as Chief Executive
Officer and a member of the board of Access Engineering Corporation from
1985 to 1986. Mr. Gray has served in various positions with industry
professional associations.
Mr. Jacobs was appointed a director of the Company in February 1998. Mr.
Jacobs has been President of Wexford Management LLP, a manager of
several private investment partnerships, since its formation in January 1996.
From May 1994 to January 1996, he was President and sole shareholder of
Concurrency Management Corporation, the predecessor to Wexford
Management LLC. From 1982 to May 1994, Mr. Jacobs was employed by,
and since 1988 was the President of, Bear Stearns Real Estate Group, Inc.
Mr. Jacobs is currently a director and the Chief Executive Officer of
Resurgence Properties, Inc., an owner-operator of real estate, and is a
director of BCAM International, Inc., an ergonomic technology and medical
footwear company.
41
<PAGE>
Mr. Jasmann has been a director of the Company since December 1993 and
is currently an international telecommunications advisor. From August 1996
to February 1998 Mr. Jasmann was President and General Manager for
COMSAT International Ventures in Bethesda, Maryland, a business unit of
COMSAT Corporation that managed telecommunications companies in
thirteen overseas markets serving the needs of national and multinational
operators for digital network solutions. From January 1995 to July 1996, Mr.
Jasmann was Vice President of Human Resources for AirTouch
Communications in San Francisco, a domestic and international operator of
wireless services. From August 1992 to December 1994, he was an
international telecommunications advisor for various U.S. and foreign
telecommunications operators. From February 1959 to May 1992, Mr.
Jasmann held various positions with AT&T, most recently as President and
Managing Director of AT&T Communications Pacific based in Hong Kong. He
previously served on the boards of the Pacific Telecommunications Council
in Hawaii, the Information Communication Institute of Singapore, Philcom, a
Philippines telephone company, COMSAT Max in India and COMSAT Brazil
and also was chairman of the board of COMSAT Argentina.
Mr. Moore has been a director of the Company since December 1993. Mr.
Moore has been Director of Athletics for Cornell University since November
1994. From November 1992 to October 1994 Mr. Moore was Vice Chairman
of Advisory Capital Partners, Inc., an investment advisory firm. From July
1988 to October 1992, Mr. Moore served as President and Chief Executive
Officer of Ransburg Corporation, a producer of industrial coating systems and
equipment, and from August 1991 to October 1992 as Executive Vice
President of Illinois Tool Works, Inc., a multinational manufacturer of highly
engineered components and systems. Mr. Moore is currently a director of The
Turner Corporation and is Chairman of the Audit Committee of the United
States Olympic Committee.
Mr. Patton has been a director of the Company since July 1989. Mr. Patton
has been a partner in the Washington, D.C. law firm of Tighe, Patton,
Tabackman & Babbin, engaged in civil and criminal business litigation,
securities law enforcement matters, corporate finance and corporate
compliance, since August 1994. From 1979 until July 1994, Mr. Patton was
a partner in the Washington, D.C. law office of Schnader, Harrison, Segal &
Lewis, LLP, engaged in civil and criminal securities litigation and general
business litigation. Mr. Patton also serves on the board of directors of
Information Exchange, Inc., a financial services marketing database
company.
Mr. Plaumann became a director of the Company in December 1997 after the
Merger. Mr. Plaumann has been a consultant to Wexford Management LLC
since March 1998. From January 1996 to March 1998, Mr. Plaumann was
Senior Vice President of Wexford Management LLP, a manager of several
private investment partnerships. From February 1995 to January 1996, Mr.
Plaumann was a Vice President or director of the predecessor entities of
Wexford Management LLC. From 1990 to January 1995, Mr. Plaumann was
a managing director of Alvarez & Marsal, Inc., a crisis management consulting
firm. From 1985 to 1990 he served in several capacities with American
Healthcare Management, Inc., an owner and operator of hospitals, most
recently as its President. From 1974 to 1985, Mr. Plaumann was with Ernst
& Young LLP in several capacities in its auditing and consulting divisions.
42
<PAGE>
Mr. Plaumann is a director of Wahlco Environmental Systems, Inc., a
manufacturer of environmental conditioning systems, BCAM International,
Inc., an ergonomic technology and medical footwear company, and Vivax
Medical Corporation, a manufacturer of specialty beds and wound care
products. Mr. Plaumann was a director of TSG prior to the Merger in
December 1997.
Mr. Steadman became a director of the Company in December 1997 after the
Merger. Mr. Steadman has been President of Atlantic Management
Associates, Inc., a management services firm, since 1988. Mr. Steadman
was an employee of the Company providing management and business
advice from immediately after the Merger in December 1997 until March 1998,
after having previously served in a similar position with TSG. 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 and Tech/Ops Sevcon, Inc.,
a manufacturer of electronic control systems for vehicles. Mr. Steadman was
Chairman of the Board of Directors of TSG from 1994 until the Merger in
December 1997.
Mr. Gandarilla was appointed Executive Vice President of Sales and
Marketing in May 1998, having previously served as Vice President of
International Sales and Marketing since October 1996 after joining the
Company in April 1996. From June 1995 until April 1996, he was an
international marketing consultant for Compression Laboratories, Inc., a
company which manufactures video conferencing equipment. From July 1993
until June 1995, Mr. Gandarilla was managing director of the business
communication systems division of AT&T, based in Mexico. From 1990 until
July 1993, he was a managing director for Gestetner, a distributor of office
equipment, also located in Mexico. His previous employment included
managerial positions with various computer system companies located in
Latin America and Paris.
Mr. Hemmings joined the Company in June 1998 as Senior Vice President,
Business Development and Technology/System Development. From June
1997 until May 1998, he was President of Net Invest, LLC, a company developing
satellite and cellular network operations in developing countries worldwide.
From July 1993 until May 1997, Mr. Hemmings was Executive Vice President of
the worldwide network and business systems groups for
Brite Voice Systems, Inc., a publicly held voice processing supplier.
From 1991 to June 1993, he was Senior Vice President of
Boston Technology, Inc., a publicly held voice mail supplier. His previous
employment included management positions with such organizations as
Sprint and Harris Corporation.
43
<PAGE>
Mr. Thompson joined the Company as Senior Vice President of
Administration/Finance in December 1997 after the Merger and was elected
Secretary in February 1998. From February 1994 to December 1997, Mr.
Thompson served as Vice President of Finance, Chief Financial Officer and
Secretary of TSG, and from 1990 to 1994, he served as Vice President of
Finance of TSG. Prior to joining TSG, Mr. Thompson held various financial
executive positions with Cardiac Control Systems, Inc., a publicly-held
medical device manufacturer, from 1983 to 1990. From 1974 to 1983, Mr.
Thompson, who is a certified public accountant, held various positions, most
recently as Audit Manager, with Price Waterhouse LLP, certified public
accountants.
Mr. Tobin has served as Vice President of Finance, Chief Financial Officer
and Treasurer of the Company since July 1992 and was appointed Assistant
Secretary in February 1998, having previously served as Secretary since July
1992. Prior to joining the Company he held various financial positions with
SmithKline Beecham Corporation in Philadelphia since September 1970, and
most recently had been Corporate Controller of SmithKline Beecham Clinical
Laboratories in King of Prussia, Pennsylvania since February 1982.
Mr. Bartusek joined the Company as Vice President and General Manager of
Telco Sales in December 1997 after the Merger. Mr. Bartusek served as
Senior Vice President of Sales and Marketing of TSG from May 1996 to
December 1997. From February 1994 to April 1996 he was Vice President
of Sales and Marketing of TSG. From January 1991 to February 1994, Mr.
Bartusek served TSG in various capacities including Vice President of
Worldwide Sales and Vice President and General Manager of TSG's Smart
Product Business. From 1989 to 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, he served GTE Communication Systems Corporation in
various capacities including Director of Public Communications and Director
of Advertising and Sales Promotion.
Mr. Durden has served as Vice President and General Manager of IPP Sales
since May 1995. From June 1991, when he rejoined the Company, to May
1995 he was Vice President of Domestic Sales after having previously served
as district sales manager for the Company from March 1987 until
August 1989. From August 1989 until rejoining the Company, Mr. Durden
founded and served as Chief Executive Officer and President of two
privately-held telecommunications companies. From November 1984 until
February 1987, Mr. Durden was President of Communications Central, Inc., a
privately-held operator of payphones.
Mr. Noack has served as Vice President of Operations since January 1993,
having joined the Company in July 1992 as Director of Operations. Prior to
joining the Company he was with AT&T Paradyne Corporation in Largo,
Florida since 1973, and most recently was Vice President and Director of
Operations Planning and Materials.
Mr. Swanson has served as Vice President of Engineering and Development
since December 1996. Prior to joining the Company, he was a consultant for
Texas Microsystems, Inc., a computer hardware manufacturer, since March
1996. From April 1994 until November 1995, Mr. Swanson was Vice
President of Engineering for Arrowsmith Technologies, a computer systems
44
<PAGE>
developer. From 1989 until April 1994 he was Director of PC Systems
Development for Dell Computer Corporation. His previous employment
included engineering management positions with several computer hardware
and software companies.
Pursuant to a stockholders' agreement among the Company, Fundamental
Management Corporation, the beneficial owner of approximately 10.8% of the
outstanding common stock of the Company, and Wexford Partners Fund,
L.P., the beneficial owner of approximately 19.4% of the outstanding
common stock of the Company, during the period ending after the second
annual meeting of stockholders of the Company which occurs after the 1997
annual meeting, each of Fundamental and Wexford has agreed to vote its
shares of common stock of the Company in favor of any nominees for director
nominated by the incumbent Board of Directors of the Company.
45
<PAGE>
Item 11. Executive Compensation
- -------- ----------------------
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth certain information covering the compensation
paid or accrued by the Company during the fiscal years indicated to all
individuals serving as its Chief Executive Officer during the fiscal year ended
March 31, 1998, and to each of its four most highly compensated executive
officers, other than the Chief Executive Officers, whose salary and bonus
exceeded $100,000 during the fiscal year ended March 31, 1998 and who
were serving as executive officers as of March 31, 1998 ("named executive
officers"):
<TABLE> Long Term
<CAPTION> Compensation
Annual Compensation Awards
----------------------------------------- ------
(a) (b) (c) (d) (e) (g) (i)
Fiscal Other Number
Year Annual of Securities
Ended Compensation Underlying All Other
Name and Principal Position March 31, Salary ($) Bonus ($) ($) Options <F1> Compensation ($)
- --------------------------- --------- ---------- --------- ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
C. Shelton James <F3> 1998 $90,313 $35,295 34,000 $2,066 <F2>
Chairman of the Board and 1997 83,338 33,930 0 2,030 <F2>
Chief Executive Officer 1996 78,654 0 25,000 1,838 <F2>
Tracey L. Gray <F3> 1998 162,096 66,010 41,000 4,621 <F2>
President and 1997 148,928 60,450 0 3,656 <F2>
Chief Executive Officer 1996 138,039 0 25,000 3,463 <F2>
Eduardo Gandarilla <F4> 1998 184,453 17,965 10,000 4,338 <F2>
Executive Vice President 1997 162,123 12,000 $44,617 <F5> 50,000 1,762 <F2>
1996 0 0 0 0 <F2>
Ronald M. Tobin 1998 107,838 17,594 10,000 2,497 <F2>
Vice President, 1997 100,063 17,640 0 2,182 <F2>
Chief Financial Officer 1996 92,846 0 9,000 2,146 <F2>
Ass't Secretary and Treasurer
Hugh H. Durden 1998 186,952 8,589 8,000 4,256 <F2>
Vice President 1997 148,452 9,525 0 2,869 <F2>
1996 184,876 0 7,500 3,173 <F2>
Henry W. Swanson <F4> 1998 112,677 16,787 8,000 3,019 <F2>
Vice President 1997 56,538 0 35,000 <F5> 40,000 640 <F2>
1996 0 0 0 0 <F2>
- ----------------------------
46
<PAGE>
<FN>
<F1> Represents options granted under the Company's 1991 Stock Option
Plan. No options were granted during the fiscal year ended
March 31, 1997, except for Mr. Gandarilla and Mr Swanson who received
options upon joining the Company.
<F2> Includes taxable portion of Company paid Group Term Life Insurance
and the Company's matching contribution to the 401(k) savings plan
(see Note O to the Company's financial statements). Such Group Term
Life Insurance for Messrs. James, Gray, Gandarilla, Tobin, Durden and
Swanson, respectively, for Fiscal 1998 is $450, $1,260, $174, $288,
$174 and $702, for Fiscal 1997 is $450, $702, $174, $288, $174 and $48
and for Fiscal 1996 is $450, $702, $0, $288, $174 and $0. 401(k)
savings plan matching contributions for Messrs. James, Gray, Gandarilla,
Tobin, Durden and Swanson, respectively, for Fiscal 1998 are
$1,616, $3,361, $4,164, $2,209, $4,082 and $2,317, for Fiscal 1997 are
$1,580, $2,954, $1,588, $1,894, $2,695 and $592 and for Fiscal 1996 are
$1,388, $2,761, $0, $1,858, $2,999 and $0.
<F3> Mr. James was Chairman of the Board and Chief Executive Officer until
December 18, 1997, the date of the Merger, at which time he relinquished
the title of Chief Executive Officer. Mr. Gray was President and Chief
Operating Officer through December 18, 1997, at which time he became
President and Chief Executive Officer.
<F4> Mr. Gandarilla joined the Company on April 1, 1996 and was appointed
Vice President on October 15, 1996. Mr. Swanson joined the Company and
was appointed Vice President on December 2, 1996.
<F5> $39,217 of this amount represents reimbursement of relocation expenses
to Mr. Gandarilla during the fiscal year ended March 31, 1997.
<F6> Represents reimbursement of relocation expenses to Mr. Swanson during the
fiscal year ended March 31, 1997.
47
</FN>
</TABLE>
<PAGE>
Stock Option Grants
- -------------------
The following table sets forth certain information with respect to stock
option grants to named executive officers who received options during the
fiscal year ended March 31, 1998.
Option Grants in Last Fiscal Year
---------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (2)
- -------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number % of
of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (#) (1) Year ($/Sh) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------
C. Shelton James 34,000 7.2% $6.0000 5/22/02 $56,361 $124,544
Tracey L. Gray 41,000 8.7% $6.0000 5/22/02 $67,965 $150,185
Eduardo Gandarilla 10,000 2.1% $6.0000 5/22/02 $16,577 $36,631
Ronald M. Tobin 10,000 2.1% $6.0000 5/22/02 $72,524 $36,631
Hugh H. Durden 8,000 1.7% $6.0000 5/22/02 $72,524 $29,304
Henry W. Swanson 8,000 1.7% $6.0000 5/22/02 $72,524 $29,304
(1) Options become exercisable twenty-five percent each year
beginning on May 22, 1998, and the option expire on
May 22, 2002.
(2) The potential realizable value is calculated based upon the
indicated rates of appreciation, compounded annually, from the
date of grant to the end of the option term. Actual gains, if
any, on stock option exercises and common stock holdings are
dependent on the actual performance of the common stock. There
can be no assurance that the amount reflected in this table will
be achieved.
48
<PAGE>
Stock Option Exercises and Year-End Holdings
- --------------------------------------------
The following table sets forth certain information with respect to stock
options exercised by the named executive officers during the fiscal year
ended March 31, 1998 and the number and value of exercisable and unexercisable
options held by the named executive officers as of March 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUE TABLE
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------
C. Shelton James 15,000 $74,544 12,500/56,500 $0/$20,625
Tracey L. Gray - - 27,500/63,500 $39,388/$20,625
Eduardo Gandarilla - - 12,500/47,500 $3,906/$11,719
Ronald M. Tobin 13,300 $65,870 4,500/17,500 $0/$6,188
Hugh H. Durden 4,700 $25,239 6,875/13,125 $11,438/$5,156
Henry W. Swanson - - 0/50,000 $0/$0
Employment Contracts
- --------------------
Mr. C. Shelton James. The Company and Mr. James entered into an
employment agreement which became effective as of the closing of the
Merger and expires on December 31, 1998, subject to certain earlier
termination and automatic renewal provisions. Pursuant to the agreement,
Mr. James serves as the Chairman of the Board of Directors and an
employee of the Company, and is paid an annual salary of at least $94,000.
His base salary is subject to annual review for merit and other increases at
the discretion of the Board. Mr. James is reimbursed (in accordance with
Company policy from time to time in effect) for all reasonable business
expenses incurred by him in the performance of his duties.
49
<PAGE>
Pursuant to the terms of the agreement, Mr. James is entitled to the same
benefits made available to the other senior executives of the Company and
on the same terms and conditions as such executives. Mr. James is also
entitled to receive an annual incentive bonus equal to 50% of base salary if
the Company achieves its after tax profit plan for the year. If the Company
is profitable and earns less than its plan, then such bonus will be equal to
the percentage achievement of the annual plan times 50% of base salary. If
the Company achieves profits in excess of its annual plan, then, at the
discretion of the Board, an additional bonus in excess of 50% of base salary
may be paid. Pursuant to the terms of the agreement, Mr. James will be
granted such options to purchase shares of the Company's common stock as
approved by the Compensation and Stock Option Committee.
If the agreement is terminated by the Company without cause, Mr. James is
entitled to receive the amount of compensation, bonus and benefits he would
otherwise have received for the remaining term of the agreement or for twelve
months from the date of notice of termination, whichever period is longer.
The agreement is automatically renewed for additional one-year periods
unless the Company provides Mr. James 180 days' notice of non-renewal
prior to the end of any such period (in which event Mr. James will be entitled
to six months of salary, bonus and benefits). Mr. James can terminate the
agreement by giving the Company 120 days' notice of termination effective
on December 31, 1998, or on any date thereafter.
Pursuant to the agreement, Mr. James 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 Bylaws and Delaware
corporation law.
Mr. Tracey L. Gray. The Company and Mr. Gray entered into an agreement
which is identical to the employment agreement with Mr. James described
above, except that Mr. Gray serves as President and Chief Executive Officer
of the Company and is paid an annual salary of at least $170,000.
Severance Arrangements
- ----------------------
In connection with hiring Mr. Gandarilla, the Company agreed to provide Mr.
Gandarilla with one year of salary and benefits in the event of early discharge
due to performance reasons.
The Company has agreed with Mr. Tobin, Chief Financial Officer, that if, on
or before December 18, 1998, Mr. Tobin's employment is terminated or he
resigns for any reason, he will receive severance pay consisting of one year
of salary continuation and benefits and his outstanding stock options will vest
and remain exercisable for one year after termination. In addition, Mr. Tobin
will receive severance pay consisting of one year of salary continuation and
benefits and his outstanding stock options will vest and remain exercisable
for one year after termination if Mr. Tobin's employment is terminated for any
reason other than cause after December 18, 1998.
50
<PAGE>
Directors' Compensation
- -----------------------
Directors who are not employees of the Company receive an annual retainer
fee of $5,000 per year plus $1,500 for each Board meeting attended, and
$500 for each committee meeting attended. Directors are also reimbursed for
expenses in attending Board and Board committee meetings.
During the fiscal year ended March 31, 1998, options to purchase 4,000
shares were granted to each of the new non-employee directors (Messrs.
Plaumann, Jacobs and Steadman), pursuant to the Company's Directors'
Stock Option Plan. In the case of Mr. Plaumann, his option was granted at
$5.875 per share and becomes fully exercisable on December 18, 1998 and
will expire on December 18, 2002. With respect to Messrs. Jacobs and
Steadman, their options were granted at $5.5625 per share and become fully
exercisable on February 6, 1999 and expire on February 6, 2003. In addition,
options were granted to the Company's non-employee directors on March 31,
1998 (Messrs. Jacobs, Jasmann, Moore, Patton, Plaumann and Steadman),
pursuant to the Company's Directors' Stock Option Plan, in the amount of
1,000 shares, 2,000 shares, 2,000 shares, 3,000 shares, 1,000 shares and
3,000 shares, respectively, at $5.5625 per share. These options are fully
exercisable on March 31, 1998 and expire on March 31, 2002.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
From April 1, 1997 to December 18, 1997, Dwight Jasmann, Charles H.
Moore, Thomas R. Wiltse and T. Raymond Suplee were the members of the
Stock Option and Compensation Committee. Messrs. Wiltse and Suplee
resigned as directors of the Company on December 18, 1997 in connection
with the Merger. In February 1998, the Committee was restructured and
thereafter consisted of Dwight Jasmann, Mark L. Plaumann and David R. A.
Steadman. Mr. Steadman was an employee of the Company from December
18, 1997 until March 31, 1998 and was paid $16 in compensation and was
reimbursed $2 for out-of-pocket expenses incurred in rendering services to
the Company pursuant to an agreement entered into in connection with the
Merger. Prior to the Merger, Mr. Steadman was an employee and the
Chairman of the Board of Directors of TSG.
51
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The following table sets forth, at June 9, 1998, the number and percentage
of shares of Common Stock which, according to information supplied to the
Company, are beneficially owned by: (i) each person who is the beneficial
owner of more than 5% of the Common Stock; (ii) each of the directors, and
named executive officers of the Company individually; and (iii) all current
directors and executive officers of the Company as a group. Under rules
adopted by the Securities and Exchange Commission, a person is deemed
to be a beneficial owner of Common Stock with respect to which he has or
shares voting power (which includes the power to vote or to direct the voting
of the security), or investment power (which includes the power to dispose of,
or to direct the disposition of, the security). A person is also deemed to be
the beneficial owner of shares with respect to which he could obtain voting or
investment power within 60 days of June 9, 1998, such as upon the exercise
of options or warrants.
Number of
Name and Address Shares (1) Percentage
- ------------------------------------ --------- ---- ----------
Wexford Management LLC. . . . 2,597,269 19.4%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Joseph M. Jacobs. . . . . . . 2,597,269 (2) 19.4%
6428 Parkland Drive
Sarasota, Florida 34243
C. Shelton James. . . . . . . 1,585,843 (3) 11.8%
6428 Parkland Drive
Sarasota, Florida 34243
Fundamental Management Corporation 1,439,223 10.8%
4000 Hollywood Boulevard
Suite 610N
Hollywood, Florida 33021
Tracey L. Gray. . . . . . . . 176,784 (4) 1.3%
6428 Parkland Drive
Sarasota, Florida 34243
David R. A. Steadman. . . . . 70,202 (5) 0.5%
6428 Parkland Drive
Sarasota, Florida 34243
Thomas E. Patton. . . . . . 13,000 (6) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
52
<PAGE>
Dwight Jasmann. . . . . . . 11,890 (7) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Charles H. Moore. . . . . . 17,100 (8) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Mark L. Plaumann. . . . . . 3,150 (9) *
6428 Parkland Drive
Sarasota, Florida 34243
Ronald M. Tobin . . . . . . 55,482 (10) 0.4%
6428 Parkland Drive
Sarasota, Florida 34243
Eduardo Gandarilla. . . . . 27,500 (11) 0.2%
6428 Parkland Drive
Sarasota, Florida 34243
Hugh H. Durden. . . . . . . 13,550 (12) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Henry W. Swanson. . . . . . 12,000 (13) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
All directors and executive officers as
a group (16 persons) . . . 4,639,448 (14) 34.1%
* Less than .1%
_______________________________________
(1) Unless otherwise indicated, each shareholder has sole voting and
investment power with respect to all listed shares.
(2) Includes 2,597,269 shares held by Wexford Management LLC, as to
which shares Mr. Jacobs disclaims beneficial ownership.
(3) Includes 1,439,223 shares held by Fundamental Management
Corporation, as to which shares Mr. James disclaims beneficial
ownership, and 31,000 shares which may be issued upon exercise of
stock options within 60 days.
53
<PAGE>
(4) Includes 42,750 shares which may be issued upon the exercise of
stock options within 60 days.
(5) Includes 68,250 shares which may be issued upon the exercise of
stock options within 60 days.
(6) Includes 500 shares held jointly with Mr. Patton's wife. Includes
12,000 shares which may be issued upon the exercise of stock
options within 60 days.
(7) Includes 9,000 shares which may be issued upon the exercise of
stock options within 60 days.
(8) Includes 75 shares held by Mr. Moore's wife and 25 shares held by
Mr. Moore's daughter. Includes 16,000 shares which may be issued
upon the exercise of stock options within 60 days.
(9) Includes 3,150 shares which may be issued upon exercise of stock
options within 60 days.
(10) Includes 150 shares held by Mr. Tobin's son. Includes 10,000 shares
which may be issued upon the exercise of stock options within 60
days.
(11) Includes 27,500 shares which may be issued upon the exercise of
stock options within 60 days.
(12) Includes 12,550 shares which may be issued upon the exercise of
stock options within 60 days.
(13) Includes 12,000 shares which may be issued upon the exercise of
stock options within 60 days.
(14) Includes a total of 1,439,223 shares held by Fundamental
Management Corporation, 2,597,269 shares held by Wexford
Management LLC and shares held by family members as to which
shares the respective officers and directors disclaim beneficial
ownership. Also includes 257,446 shares which may be issued upon
exercise of stock options within 60 days.
54
<PAGE>
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
For services rendered in connection with the Merger, TSG was obligated to pay
a $200,000 investment banking fee to Wexford Management LLC. Following
consummation of the Merger, the Company exercised its option to pay that fee
to Wexford by the issuance of 30,769 shares of the Company's common stock,
which had a fair market value at the date of issuance of $181. Wexford is the
beneficial owner of approximately 19.4% of the Company's outstanding common
stock.
In connection with the Merger, the Company entered into a stockholders'
agreement with Fundamental Management Corporation, the beneficial owner
of approximately 10.8% of the Company's outstanding common stock, and
Wexford Partners Fund, L.P., the beneficial owner of approximately 19.4% of
the Company's outstanding common stock and an affiliate of Wexford
Management LLC. Pursuant to the stockholders' agreement, the Company has
agreed to file a registration statement with respect to the Company's common
stock owned by Wexford or Fundamental within 45 days after any request by
both Fundamental and Wexford. The Company would generally bear the
expenses of such registration.
55
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a) (1) Financial Statements:
The Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1.
(2) Financial Statement Schedules:
All supporting schedules have been omitted because they are not
required or the information required to be set forth therein is
included in the financial statements or the notes thereto.
(3) Exhibits:
The Exhibits are listed in the Index to Exhibits on pages E-1
through E-2.
(b) Reports on Form 8-K.
--------------------
An amendment to the Current Report on Form 8-K dated
December 18, 1997 was filed in connection with the Registrant's
acquisition of Technology Service Group, Inc. ("TSG"). The
amendment, on Form 8-K/A dated February 27, 1998, was filed for
the purpose of including financial statements and pro forma
financial information in connection with the Form 8-K.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ELCOTEL, INC.
Dated: June 29, 1998 By: /s/ Ronald M. Tobin
-----------------------
Ronald M. Tobin
Chief Financial Officer
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
/s/ C. Shelton James Chairman of the Board
- ------------------------
C. Shelton James
Date: June 29, 1998
/s/ Tracey L. Gray President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer and Director)
Tracey L. Gray
Date: June 29, 1998
/s/ Joseph M. Jacobs Director
- ------------------------
Joseph M. Jacobs
Date: June 29, 1998
/s/ Dwight Jasmann Director
- ------------------------
Dwight Jasmann
Date: June 29, 1998
/s/ Charles H. Moore Director
- ------------------------
Charles H. Moore
Date: June 29, 1998
/s/ Thomas E. Patton Director
- ------------------------
Thomas E. Patton
Date: June 29, 1998
/s/ Mark L. Plaumann Director
- ------------------------
Mark L. Plaumann
Date: June 29, 1998
/s/ David R. A. Steadman Director
- ------------------------
David R. A. Steadman
Date: June 29, 1998
/s/ Ronald M. Tobin Vice President and Chief Financial Officer
- ------------------------ (Principal Financial and Accounting Officer)
Ronald M. Tobin
Date: June 29, 1998
57
<PAGE>
ELCOTEL, INC.
-------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Independent Auditors' Report..............................................F-2
Consolidated Financial Statement
Consolidated Balance Sheets.......................................F-3
Consolidated Statements of Operations.............................F-5
Consolidated Statements of Stockholders' Equity...................F-6
Consolidated Statements of Cash Flows.............................F-7
Notes to Consolidated Financial Statements........................F-9
F-1
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Elcotel, Inc.
Sarasota, Florida
We have audited the accompanying consolidated balance sheets of Elcotel, Inc.
and subsidiaries (the "Company") as of March 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 Elcotel, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
June 24, 1998
F-2
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in thousands)
<CAPTION>
March 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary investments $ 1,655 $ 1,009
Accounts receivable, less allowance
for doubtful accounts of $934
and $817, respectively 9,089 4,678
Notes receivable, less allowance
for doubtful accounts of $989
and $387, respectively 2,318 1,318
Inventories 9,088 2,733
Refundable income taxes 809 95
Deferred tax asset 4,141 692
Prepaid expenses and other current assets 1,024 457
---------- ----------
TOTAL CURRENT ASSETS 28,124 10,982
PROPERTY, PLANT AND EQUIPMENT 4,779 3,184
NOTES RECEIVABLE, less allowance
for doubtful accounts of $487
and $97, respectively 346 711
DEFERRED TAX ASSET - 799
GOODWILL, net of accumulated amortization
of $190 23,906 -
IDENTIFIED INTANGIBLE ASSETS 10,203 196
OTHER ASSETS 80 72
---------- ----------
$ 67,438 $ 15,944
========== ==========
</TABLE>
F-3
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
March 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,210 $ 1,271
Accrued expenses and other current
liabilities 4,609 1,615
Current portion of long-term debt 68 199
---------- ----------
TOTAL CURRENT LIABILITIES 7,887 3,085
DEFERRED TAX LIABILITY 415 -
BORROWINGS UNDER REVOLVING CREDIT LINE 7,645 -
LONG-TERM DEBT, less current portion 1,831 232
---------- ----------
TOTAL LIABILITIES 17,778 3,317
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note Q)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value:
Authorized 30,000,000 and 20,000,000
shares, respectively
Issued 13,416,850 and 8,234,216
shares, respectively 134 82
Additional paid-in capital 46,384 11,160
Retained earnings 3,319 1,562
Less - cost of 52,000 shares of common
stock in treasury (177) (177)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 49,660 12,627
---------- ----------
$ 67,438 $ 15,944
========== ==========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Year ended March 31,
---------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 46,250 $ 26,832 $ 21,462
COSTS AND EXPENSES:
Cost of sales 28,645 15,883 13,238
Research and development 4,565 2,623 2,257
Selling, general and administrative 9,930 6,326 6,465
Amortization 603 32 25
Interest income, net (103) (205) (215)
Other charges (credits) (331) 1,844
---------- ---------- ---------
TOTAL COSTS AND EXPENSES 43,640 24,328 23,614
---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 2,610 2,504 (2,152)
INCOME TAX EXPENSE (BENEFIT) 853 876 (861)
---------- ---------- ---------
NET INCOME (LOSS) $ 1,757 $ 1,628 $ (1,291)
========== ========== =========
BASIC EARNINGS PER SHARE
- ------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.18 $ 0.20 $ (0.16)
========== ========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,641 8,095 7,830
========== ========== =========
DILUTED EARNINGS PER SHARE
- --------------------------
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.18 $ 0.20 $ (0.16)
========== ========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,842 8,311 8,234
========== ========== =========
<FN>
See Notes to Consolidated Financial Statements
F-5
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
------------------------------------------------
(Amounts in thousands)
<CAPTION>
Common Stock
-------------- Additional Retained
Shares Paid-in Earnings Treasury
Issued Amount Capital (Deficit) Stock Total
------ ------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1995 7,735 $ 77 $ 9,966 $ 1,225 $ (177) $ 11,091
EXERCISE OF OPTIONS 326 4 290 - - 294
TAX BENEFIT FROM
EXERCISE OF OPTIONS - - 464 - - 464
NET LOSS - - - (1,291) - (1,291)
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1996 8,061 81 10,720 (66) (177) 10,558
EXERCISE OF OPTIONS 173 1 265 - - 266
TAX BENEFIT FROM
EXERCISE OF OPTIONS - - 175 - - 175
NET PROFIT - - - 1,628 - 1,628
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1997 8,234 82 11,160 1,562 (177) 12,627
EXERCISE OF OPTIONS 158 2 293 - - 295
TAX BENEFIT FROM
EXERCISE OF OPTIONS - - 62 - - 62
ACQUISITION OF TECHNOLOGY
SERVICE GROUP, INC. 5,025 50 35,208 - - 35,258
REGISTRATION EXPENSES -
ACQUISITION OF
TECHNOLOGY SERVICE
GROUP, INC. - - (339) - - (339)
NET INCOME - - - 1,757 - 1,757
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1998 13,417 $ 134 $ 46,384 $ 3,319 $ (177) $ 49,660
====== ===== ======== ========= ======== =========
<FN> See Notes to Consolidated Financial Statements
F-6
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
<CAPTION>
Year ended March 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,757 $ 1,628 $ (1,291)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,248 437 363
Provision for doubtful accounts 1,352 (520) 2,392
(Gain)/Loss on disposal of equipment 2 (1) -
Deferred tax benefit (expense) 270 798 (675)
Change in operating assets and liabilities:
(net of acquisition of Technology Service
Group, Inc. in 1998):
Accounts receivable (998) (1,519) (956)
Notes receivable (1,697) 1,159 1,530
Inventories 135 67 (446)
Refundable income taxes (714) 412 (330)
Prepaid expenses and other
current assets (555) (282) 121
Identified intangible assets (2,890) 58 (98)
Other assets 21 (195) (22)
Accounts payable (5,665) 241 (718)
Accrued expenses and other
current liabilities 879 481 22
------------ ------------ ------------
Net cash flow provided by (used in)
operating activities (6,855) 2,764 (108)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used for acquisition of
Technology Service Group, Inc. (447) - -
Additions to property, plant and
equipment (1,460) (478) (255)
Proceeds from disposal of equipment - 1 2
------------ ------------ ------------
Net cash flow used in investing
activities (477) (253)
------------ ------------ ------------
F-7
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(continued)
<CAPTION>
Year ended March 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock $ 295 $ 266 $ 294
Net proceeds under revolving credit
line and refinanced debt obligations 7,645 (965) (460)
Proceeds from long-term borrowings 1,899 - 1,000
Payments on long-term debt (431) (811) (607)
------------ ------------ ------------
Net cash flow provided by
(used in) financing activities 9,408 (1,510) 227
------------ ------------ ------------
Net increase (decrease) in cash
and temporary investments 646 777 (134)
Cash and temporary investments
at beginning of year 1,009 232 366
------------ ------------ ------------
Cash and temporary investments
at end of year $ 1,655 $ 1,009 $ 232
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid (Received) During the Year for:
Interest $ 427 $ 122 $ 218
Income taxes 694 (383) 144
NON-CASH INVESTING AND FINANCING
ACTIVITIES (Also see Note B):
Tax benefit from exercise of options $ 62 $ 175 $ 464
Acquisition for stock of Technology
Service Group, Inc. 35,258 - -
<FN>
See Notes to Consolidated Financial Statements.
F-8
</TABLE>
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(Dollars in thousands, except for share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
- ------------------
The Company designs, develops and markets public communication
products, systems and services for sale to domestic and international
public telecommunications access providers.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts
of Elcotel, Inc. and its wholly owned subsidiaries (the "Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
- -------------------
Sales and related costs are recorded by the Company at the point at which
title to such goods sold passes to the customer.
Temporary Investments
- ---------------------
Temporary investments consist of short-term, highly liquid investments
which are readily convertible into cash.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined
based on the first-in, first-out ("FIFO") method or standard cost, which
approximates cost on a FIFO basis.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed by the straight-line method based
upon the estimated useful lives of the related assets, generally three years
for computers, 5 years for equipment, furniture and fixtures and 35 years
for buildings.
F-9
<PAGE>
Goodwill
- --------
The excess of the purchase price over the fair value of assets and
liabilities of acquired businesses is being amortized to operations on a
straight-line basis over a period of 35 years.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amount of cash and short-term investments approximates fair
value because of the short maturity of those instruments.
The fair value of the Company's long term debt is estimated based on the
borrowing rates available to the Company for bank loans with similar terms
and average maturities. The carrying value at March 31, 1998 and 1997
approximates fair value.
Credit Policy
- -------------
Credit is granted under various terms to customers that the Company
deems creditworthy. In addition, the Company provides limited
collateralized financing with terms generally not exceeding 24 months and
interest charged at competitive rates.
Warranty Reserves
- -----------------
The Company provides reserves for warranty expense based on historical
experience and statistical analysis. The Company provides warranties
ranging from one to three years and passes on warranties on products
manufactured by others.
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
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
estimated.
Advertising
- -----------
Advertising expenses are charged to operations during the period incurred.
The Company incurred advertising expense of approximately $139, $91
and $90 for the years ended March 31, 1998, 1997 and 1996, respectively.
F-10
<PAGE>
Stock Based Compensation Plans
- ------------------------------
The Company has elected to apply Accounting Principles Board Opinion
25 ("APB 25") and related interpretations to measure compensation cost
related to stock options and other forms of stock-based compensation
plans. 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. Additionally, the Company has adopted the pro
forma disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (see Note J).
Impairment of Long-Lived Assets
- -------------------------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), property plant and equipment,
goodwill and other intangible assets are reviewed annually, or whenever
events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable, by comparing the carrying values to the
estimated future undiscounted cash flows. A deficiency in the cash flows
relative to the carrying amount is an indication of the need for a write down
due to impairment. The impairment write down would be the difference
between the carrying amounts and the fair value of those assets. Any loss
due to impairment is recognized by a charge to earnings. No impairment
losses have been recorded during the years ended March 31, 1998, 1997
and 1996.
Earnings Per Common Share
- -------------------------
Earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which requires disclosure of basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share is computed by
dividing net income by the weighted average number of shares of common
stock outstanding and dilutive potential common shares outstanding during
the year. Earnings per share for the years ended March 31, 1997 and
1996 have been restated to conform with SFAS 128. The adoption of
SFAS 128 did not have a significant effect on the Company's financial
statements.
F-11
<PAGE>
Disclosure of Information about Capital Structure
- -------------------------------------------------
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. The Company adopted the financial statement
disclosures of SFAS 129 as of March 31, 1998. The adoption of SFAS 129
did not have a material effect on the accompanying financial statements.
Engineering, Research and Development Costs
- -------------------------------------------
Costs and expenses incurred for the purpose of developing new products
are charged to research and development expense as incurred. Also, the
Company capitalizes as intangible assets certain product software
development costs once technological feasibility has been achieved. Once
the product is released, the costs are amortized based on the straight-line
method over the estimated useful life of the product. Capitalized software
development costs are reported net of accumulated amortization.
Income Taxes
- ------------
The liability method is used in accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and are
measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. The deferred tax
asset is reduced by a valuation allowance when, on the basis of available
evidence, it is more likely than not that all or a portion of the deferred tax
asset will not be realized.
F-12
<PAGE>
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS
130 requires that an enterprise classify items of other comprehensive
income by their nature and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Management does not believe that the adoption of SFAS 130 will have a
significant impact on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which requires
companies to report selected segment information in complete financial
statements and in condensed interim financial statements. SFAS 131 is
effective for fiscal years beginning after December 31, 1997. SFAS 131
also requires a company to provide entity-wide disclosure about the
products and services it provides, the material countries in which it holds
assets and reports revenues and its major customers. SFAS 131 also
requires disclosure as to how management makes decisions about
allocating resources to segments and measuring their performance.
Management does not believe that the requirements of SFAS 131 will have
a significant impact on the Company's consolidated financial statements.
Reclassification of Prior Years
- -------------------------------
Prior year financial statements have been reclassified to conform to the
current year presentation.
F-13
<PAGE>
NOTE B - ACQUISITIONS:
Technology Service Group, Inc.
- ------------------------------
On December 18, 1997, the Company 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 ("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
Company issued an aggregate of 4,944,292 shares of common stock
pursuant to the Merger. In addition, the Company issued 80,769 shares of
common stock in payment of certain acquisition expenses. 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. (See Note J).
A summary of the merger consideration (or purchase price) is set forth
below.
Issuance of 4,944,292 shares of common stock
at a market price of $6.50 per share $32,138
Fair value of outstanding common stock warrants,
options and purchase rights issued 2,595
Costs and expenses of the merger 872
-------
Total merger consideration $35,605
=======
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price of $35,605 was
allocated to the assets and liabilities of TSG as of the acquisition date
based upon their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired of $24,096 was recorded as
goodwill.
F-14
<PAGE>
A summary of the book value of the assets and liabilities of TSG at
December 18, 1997 as compared to their estimated fair values is set forth
below.
Estimated
Book Fair
Value Value
------- -------
Cash and temporary investments $ 239 $ 239
Accounts receivable 3,703 3,703
Inventories 11,103 6,490
Refundable income taxes 604 604
Deferred tax asset, current 748 3,719
Prepaid expenses and other current assets 12 12
Property, plant and equipment 662 782
Identified intangible assets 1,022 7,530
Other assets 29 29
Accounts payable and accrued expenses (5,153) (6,353)
Borrowings under lines of credit (3,970) (3,970)
Deferred tax liability, non-current ( 4) (1,276)
------- -------
Net assets acquired $ 8,995 11,509
Excess of purchase price over =======
net assets acquired 24,096
-------
Total $35,605
=======
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 discontinued by the
Company.
Identifiable intangible assets are comprised of TSG's trade names,
assembled workforce, product software, patented technology and
customer contracts (see Note F).
At December 18, 1997, TSG had net operating loss carryforwards of
$11,610 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, future tax benefits
related to 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 (see Note K).
The fair value of accrued liabilities includes the estimated costs to
terminate and relocate TSG employees and to relocate TSG property in
accordance with the Company's 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 $470. The costs of relocating employees and property
of TSG have been estimated at $730.
F-15
<PAGE>
The fair value of the intangible assets included in the allocation of the
purchase price are 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 Company's results of operations for the year ended March 31, 1998
reflect the operations of TSG from the merger date.
The Company registered the shares of common stock issued pursuant to
the Merger and incurred registration expenses of $339. These expenses
were charged to paid-in capital during the year ended March 31, 1998.
Lucent Technologies
- -------------------
On September 30, 1997, the Company acquired from Lucent Technologies
Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing
and component parts business. The purchase price, including acquisition
expenses of $231, was $5,821, net of an inventory adjustment of $1,183
determined pursuant to the acquisition agreement. Assets acquired from
Lucent included inventories, machinery, equipment, tooling and certain
other assets related to the payphone manufacturing and component parts
business conducted by Lucent, as well as a license of certain patent and
other intellectual property rights related thereto.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
the terms of bank promissory notes to finance the Lucent acquisition,
acquisition expenses, debt issuance expenses and other general corporate
activities, including acquisition of equipment. These notes consisted of an
installment note in the principal amount of $3,050 payable in eighty-four
equal monthly installments of $36, a term note in the principal amount of
$2,850 due March 31, 1998 and a term note in the principal amount of
$950 due March 31, 1998. The notes were collateralized by the assets of
the Company and bore interest at the bank's floating 30 day Libor rate plus
2.25% (7.9% per annum upon issuance). On November 25, 1997, the
Company repaid all of the aforementioned notes from the proceeds drawn
under a $15,000 revolving credit line entered into on that date (see Note
G).
F-16
<PAGE>
A summary of the allocation of the purchase price to the assets acquired,
based on the Company's estimates of their fair values is set forth below.
Inventories $3,780
Equipment and tooling 500
Intangible Assets 1,541
------
Total purchase price $5,821
======
Identifiable intangible assets are comprised of license agreements, non-
compete agreement and customer relationships and other intangible
assets (see Note F).
The Company's results of operations for the year ended March 31, 1998
reflect the effects of the Lucent acquisition from the acquisition date.
Pro Forma Results of Operations (Unaudited)
- -------------------------------------------
The accompanying consolidated statements of operations for the fiscal
year ended March 31, 1998 includes the operating results of TSG and the
effects of purchase of the assets from Lucent from the respective
acquisition dates. Assuming these transactions had occurred on April 1,
1997 and 1996, respectively, the Company's pro forma results of
operations for the fiscal years ended March 31, 1998 and 1997 would have
been as follows:
March 31,
-------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
Net Sales $ 66,554 $ 60,304
======== ========
Net income $ 14 $ 1,662
======== ========
Basic earnings per share $0.00 $0.21
====== ======
Diluted earnings per share $0.00 $0.20
====== ======
F-17
<PAGE>
The pro forma results of operations for the fiscal year ended March 31,
1998 include the operating results of TSG from April 1, 1997 to December
18, 1997 and pro forma adjustments consisting of an increase in
amortization of goodwill and other intangible assets of $932 due to the
increase in the basis of intangible assets and their estimated useful lives,
a decrease in depreciation of $228 due to an increase in the basis of
property and equipment and their estimated useful lives, a decrease in
deferred tax expense of $104 resulting from the allocation to deferred tax
assets and liabilities and a decrease in income tax expense of $179 to
reflect the pro forma effect on income tax expense resulting from the
acquisition. The pro forma adjustments related to the acquisition of
Lucent's assets for the fiscal year ended March 31, 1998 include an
increase in amortization of intangible assets of $130, an increase in
depreciation of $50, an increase in interest expense of $245 and a
decrease in income tax expense of $149.
The pro forma results of operations for the fiscal year ended March 31,
1997 include the operating results of TSG from April 1, 1996 to March 31,
1997 and pro forma adjustments consisting of an increase in amortization
of goodwill and other intangible assets of $1,235 due to the increase in the
basis of intangible assets and their estimated useful lives, a decrease in
depreciation of $557 due to an increase in the basis of property and
equipment and their estimated useful lives, a decrease in deferred tax
expense of $7 resulting from the allocation to deferred tax assets and
liabilities and a decrease in income tax expense of $246 to reflect the pro
forma effect on income tax expense resulting from the acquisition. The pro
forma adjustments related to the acquisition of Lucent's assets for the
fiscal year ended March 31, 1997 include an increase in amortization of
intangible assets of $260, an increase in depreciation of $100, an increase
in interest expense of $490 and a decrease in income tax expense of
$298.
NOTE C - ACCOUNTS AND NOTES RECEIVABLE:
Notes receivable are principally comprised of interest-bearing trade notes
receivable from customers with remaining maturities of twenty-four months
or less. Notes receivable are collateralized by the payphone equipment
sold and giving rise to the asset.
F-18
<PAGE>
Changes in the allowance for doubtful accounts receivable consist of
the following:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Balance at beginning of period ($ 817) ($ 1,115) ($ 345)
Recovery (Provision) for
doubtful accounts ( 290) 216 ( 822)
Charge-off of uncollectible
accounts, net of recoveries 173 82 52
--------- --------- ---------
($ 934) ($ 817) ($ 1,115)
========= ========= =========
Changes in the allowance for doubtful notes receivable consist of the
following:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Balance at beginning of period ($ 484) ($ 1,991) ($ 430)
Recovery (Provision) for
doubtful notes ( 1,062) 304 ( 1,570)
Charge-off of uncollectible
notes, net of recoveries 70 1,203 9
--------- --------- ---------
($ 1,476) ($ 484) ($ 1,991)
========= ========= =========
NOTE D - INVENTORIES:
Inventories by stage of completion are as follows:
March 31,
--------------------
1998 1997
-------- --------
Finished products $ 1,383 $ 490
Work-in-process 1,545 257
Purchased components 6,160 1,986
-------- --------
$ 9,088 $ 2,733
======== ========
Substantially all inventories are pledged to secure bank indebtedness (See
Note G).
F-19
<PAGE>
NOTE E - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of the following:
March 31,
--------------------
1998 1997
-------- --------
Land and improvements $ 372 $ 372
Buildings 2,812 2,697
Engineering and manufacturing
equipment 3,237 1,583
Furniture, fixtures and office
equipment 1,502 1,077
-------- --------
7,923 5,729
Less accumulated depreciation ( 3,144) ( 2,545)
-------- --------
$ 4,779 $ 3,184
======== ========
Depreciation expense for the fiscal years ended March 31, 1998, 1997 and
1996 was $645, $397, and $255, respectively. Substantially all property,
plant and equipment are pledged to secure bank indebtedness (see Notes
G and H).
NOTE F - IDENTIFIED INTANGIBLE ASSETS:
Identified intangible assets at March 31, 1998 and 1997, net of
accumulated amortization of $498 and $57, respectively, consisted of the
following:
March 31,
--------------------
1998 1997
-------- --------
Trade names, net of accumulated
amortization of $23 $ 2,846 $ -
Customer contracts, net of accumulated
amortization of $168 1,856 -
Work force, net of accumulated
amortization of $11 1,361 -
Product software, net of accumulated
amortization of $3 1 078 -
License agreements, net of accumulated
amortization of $101 837 -
Patents, net of accumulated amortization
of $39 and $7 406 19
Deferred borrowing costs, net of accumulated
amortization of $63 and $50 203 20
Non-compete agreement, net of accumulated
amortization of $19 58 -
Customer relationships and other, net of
accumulated amortization of $71 1,558 157
------- -------
$10,203 $ 196
======= =======
F-20
<PAGE>
The estimated fair value of identified intangible assets recorded in
connection with the Merger and the Lucent acquisition consisted of trade
names of $2,869, customer contracts of $2,024, workforce of $1,372,
product software of $946, license agreements of $938, patents of $419,
non-compete agreement of $77 and customer relationships and other
intangible assets of $1,576. These assets are being amortized over
estimated useful lives ranging from less than 4 to 35 years.
Amortization expense for the years ended March 31, 1998, 1997 and 1996
was $603, $32 and $25, respectively.
During the year ended March 31, 1998, the Company capitalized software
development costs of $100 in connection with the development of new
products. Software development costs during the years ended March 31,
1997 and 1996 were not significant.
NOTE G - BORROWINGS UNDER REVOLVING CREDIT LINE:
On November 25, 1997 the Company entered into a restated loan
agreement (the "Loan Agreement") with its bank. Under the terms of the
Loan Agreement, the Company is able to borrow a maximum of $15,000
based on the value of eligible collateral under a revolving line of credit that
matures on November 25, 2002. Indebtedness outstanding under the
Loan Agreement is collateralized by substantially all the assets of the
Company. Interest on amounts borrowed under the line of credit is
payable monthly at the bank's floating 30 day Libor rate plus 1.5% (7.19%
at March 31, 1998). Financing available under the Loan Agreement was
used to refinance and retire the Company's then outstanding debt under a
$2,000 working capital line of credit, a $3,050 installment note due on
October 2, 2004 and term notes of $3,800 that were due on March 31,
1998 (see Note B). In addition, on December 18, 1997, the Company
retired TSG's outstanding bank indebtedness of $3,970 from proceeds
drawn under the Loan Agreement.
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, and disposition of assets,
among others. Additionally, the Loan Agreement requires the Company to
maintain a working capital ratio of 1.5 to 1, a debt service coverage ratio of
1.3 to 1, a ratio of total liabilities to net worth of 1.25 to 1 and an interest
coverage ratio of 3 to 1. 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. The Company is in compliance with the
conditions and covenants of the Loan Agreement at March 31, 1998.
At March 31, 1998, outstanding indebtedness under the revolving credit
line was $7,645. Based on the loan value of collateral less outstanding
letters of credit at March 31, 1998, the Company would have been able to
borrow up to a total of $10,592 under the revolving line of credit.
F-21
<PAGE>
NOTE H - LONG-TERM DEBT:
Long-term debt consists of the following:
March 31,
--------------------
1998 1997
-------- --------
Secured mortgage promissory note, payable to bank
in fifty nine equal monthly installments
of $19 including interest at 8.5% per
annum, with remaining balance of $1,533
due on November 26, 2002 $ 1,899 $ -
Secured mortgage promissory note payable to bank
in sixty monthly installments of $17 plus interest
at 8.5% per annum, with final payment due
on May 23, 1999 - 431
-------- --------
1,899 431
Less current portion 68 199
-------- --------
$ 1,831 $ 232
======== ========
On November 26, 1997, the Company refinanced its mortgage promissory
note, which had a principal balance of $315 and maturity date of May 23,1999,
with the new mortgage promissory note in amount of $1,920. The note is secured
by a mortgage on the Company's facilities. Payments due on the note in each
of the succeeding five years are as follows:
Fiscal 1999 $ 68
Fiscal 2000 74
Fiscal 2001 81
Fiscal 2002 87
Fiscal 2003 1,589
-------
$ 1,899
=======
F-22
<PAGE>
NOTE I - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
March 31,
--------------------
1998 1997
-------- --------
Payroll, payroll taxes and severance $ 2,491 $ 773
Professional fees 145 157
Commissions to international representatives 235 188
Warranty reserve 1,170 295
Income and other taxes 187 45
Customer advances 254 144
Other 127 13
-------- --------
$ 4,609 $ 1,615
======== ========
A summary of the Company's warranty reserves is as follows:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Balance at beginning of period ($ 295) ($ 311) ($ 307)
Provision for warranty expense ( 240) ( 295) ( 356)
Charges for warranty
obligations 440 311 352
Obligations assumed through
acquisition ( 1,075) - -
--------- --------- ---------
($ 1,170) ($ 295) ($ 311)
========= ========= =========
NOTE J - STOCKHOLDERS' EQUITY:
Common Stock
- ------------
The Company is authorized, under its Certificate of Incorporation as
amended on January 9, 1998, to issue up to 30,000,000 shares of
common stock, $0.01 par value. Holders of voting common stock are
entitled to one vote per share on all matters to be voted on by the
stockholders. No dividends have been declared or paid on the Company's
common stock.
F-23
<PAGE>
Common Stock Warrants
- ---------------------
As of the consummation of the Merger, TSG had issued and outstanding
1,150,000 redeemable warrants to purchase 575,000 shares of common
stock of TSG at an exercise price of $11.00 per share (the "Redeemable
Warrants") and warrants to purchase 100,000 shares of common stock of
TSG at an exercise price of $10.80 per share (the "Underwriter Warrants").
In connection with the Merger, the Redeemable Warrants were converted
into warrants to purchase 603,750 shares of common stock at a per share
exercise price of $10.48, and the Underwriter Warrants were converted
into warrants to purchase 105,000 shares of common stock at a per share
exercise price of $10.29 (see Note B). As of March 31, 1998, none of
these warrants has been exercised.
Unless the Redeemable Warrants are redeemed, the Redeemable
Warrants may be exercised at any time until May 9, 1999, at which time
the Redeemable Warrants will expire. The Redeemable Warrants are
redeemable by the Company at its option, as a whole and not in part, at
$.05 per Redeemable Warrant on 30 days' prior written notice, provided
that the average closing bid price of common stock of the Company equals
or exceeds $11.43 per share for 20 consecutive trading days ending within
five days prior to the date of the notice of redemption. The Redeemable
Warrants are 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 stock
dividends, stock splits or similar reorganizations.
The Underwriter Warrants may be exercised at any time until May 9, 2001,
at which time the Underwriter Warrants will expire. 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.
Accounting for 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 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 APB 25. If the former standard
for measurement is elected, SFAS 123 requires supplemental disclosure to
show the effects of using the new measurement criteria. Since the
Company has elected to continue to apply the former standards contained
in APB 25, it has adopted the pro forma disclosure requirements of SFAS
123. A comparison of the Company's net income (loss) and net income
(loss) per share as reported and on a pro forma basis for the years ended
F-24
<PAGE>
March 31, 1998, 1997 and 1996 had compensation cost for the Company's
stock option plans been determined based on the fair market value at the
grant dates for awards under the plan consistent with the requirements of
SFAS 123 is set forth below:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Net income (loss) As reported $ 1,757 $ 1,628 $ (1,291)
Pro forma $ 1,258 $ 1,456 $ (1,714)
Basic income As reported $ 0.18 $ 0.20 $ (0.16)
(loss) per share Pro forma $ 0.13 $ 0.18 $ (0.22)
Diluted income As reported $ 0.18 $ 0.20 $ (0.16)
(loss) per share Pro forma $ 0.13 $ 0.18 $ (0.22)
The fair value of each grant is estimated on the date of grant using the
Black-Scholes Option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 1998, 1997
and 1996:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Dividend yield - - -
Expected Volatility 45.32% 54.90% 67.31%
Risk free interest rate 6.20% 6.20% 6.20%
Option Term 3.8 years 3.4 years 3.4 years
The weighted average fair value per option for all options granted in 1998,
1997 and 1996 was $2.45, $2.78 and $3.30, respectively.
Stock Option Plans
- ------------------
On July 2, 1991, the Company adopted a stock option plan (the "1991
Plan") which provides for the grant of incentive and non-qualified stock
options to key employees, including officers and directors, of the
Company. The option price per share may not be less than 100% of the
fair market value of such shares on the date such option is granted, or $ .75.
In May 1994, the Board approved, and in October 1994 the shareholders approved,
a 350,000 share increase in the number of shares reserved under the Plan.
In August 1996, the Board approved, and in October 1996 the shareholders
approved a 500,000 share increase in the number of shares reserved under the
Plan. In September 1997, the Board approved, and in December 1997 the
shareholders approved a 500,000 share increase in the number of shares
reserved under the Plan. At March 31, 1998, options to acquire up to
2,100,000 shares of common stock may be granted pursuant to the 1991 Plan.
F-25
<PAGE>
Information with respect to options under the above plan is as follows:
Number of Option Price
Shares Per Share
----------- -----------------
Outstanding at March 31, 1995 743,842 $ .75 - $3.625
Granted 193,950 $6.1875 - $9.1875
Exercised ( 333,607 ) $ .75 - $3.625
Cancelled ( 45,483 ) $1.36 - $3.50
-----------
Outstanding at March 31, 1996 558,702 $ .75 - $9.1875
Granted 97,000 $5.25 - $7.375
Exercised ( 178,729 ) $ .75 - $3.50
Cancelled ( 85,525 ) $1.81 - $9.1875
-----------
Outstanding at March 31, 1997 391,448 $1.3125 - $7.50
Granted 285,400 $5.5625 - $6.00
Exercised ( 69,385 ) $1.3125 - $6.1875
Cancelled ( 62,188 ) $3.50 - $7.50
-----------
Outstanding at March 31, 1998 545,275 $1.81 - $7.375
===========
Outstanding options under the 1991 Plan are exercisable cumulatively in
four installments of one-fourth each year beginning one year from the date
of grant and expire five years from the date of grant. As of March 31,
1998, options to purchase 137,800 shares under the 1991 Plan are
exercisable. As of March 31, 1998, options to acquire 815,284 shares
were available for future grant under the 1991 Plan. The weighted average
exercise price of options outstanding under the 1991 Plan is $4.7224 and
the weighted average remaining contractual life is 3.2 years.
On July 2, 1991, the Company adopted a Directors' Stock Option Plan
which provides for the automatic annual grant of non-qualified stock
options to outside directors of the Company. The option price per share
may not be less than 100% of the fair market value of such shares on the
date such option is granted, or $2.00. In May 1994, the Board approved,
and in October 1994 the shareholders approved, a 75,000 share increase
in the number of shares reserved under the Plan. In September 1997, the
Board approved, and in December 1997 the shareholders approved, a
50,000 share increase in the number of shares reserved under the Plan.
At March 31, 1998, options to acquire up to 225,000 shares of common
stock may be granted pursuant to the Plan. For the fiscal year ended
March 31, 1998, options to purchase 24,000 shares at an exercise price
between $5.5625 and $5.875 were granted under the Directors Stock
Option Plan, and for the fiscal years ended March 31, 1997 and 1996,
options to purchase 17,000 shares and 16,000 shares, at an exercise price
of $6.3125 and $5.25, per share, respectively, were granted under the
Plan. The options are exercisable commencing one year from the date of
grant and expire five years from the date of grant. During fiscal 1998,
there were 31,000 shares exercised at an option price between $2.00 and
$3.9375. During fiscal 1997 and 1996, there were 15,000 and 5,000
shares exercised, respectively, all at an option price of $2.00. As of March
31, 1998, options to purchase 69,000 shares under the Directors Stock
Option Plan are exercisable. As of March 31, 1998, options to acquire
F-26
<PAGE>
64,000 shares were available for future grant under the Directors Stock
Option Plan. The weighted average exercise price of options outstanding
under the Directors Stock Option Plan is $4.7789 and the weighted average
remaining contractual life is 2.3 years.
Pursuant to the Merger Agreement, each outstanding TSG option pursuant
to TSG's 1994 Omnibus Stock Plan (the "Omnibus Plan"), whether vested
or unvested, was converted at the effective time of the Merger into an
option to acquire, on the same terms and conditions as were applicable
under the Omnibus Plan, a number of shares of the Company's common
stock equal to 1.05 times the number of shares of TSG common stock
which the option holder was entitled to purchase under such TSG option
immediately prior to the consummation of the Merger, at a price per share
of the Company's common stock equal to (i) the aggregate exercise price
for the shares of TSG common stock otherwise purchasable pursuant to
the TSG option immediately prior to the consummation of the Merger
divided by (ii) the aggregate number of shares of the Company's common
stock purchasable pursuant to the option immediately after the merger,
with any fractional share of the Company's common stock resulting from
such calculation for such holder being rounded up to the nearest whole
share. As of the effective time of the Merger, there were outstanding TSG
options to purchase 531,125 shares of common stock of TSG.
Accordingly, pursuant to the Merger Agreement, those TSG options were
converted into options to acquire 557,682 shares of common stock of the
Company. No additional options will be granted under the plan. The
options are exercisable one-fourth each year beginning on the date of
grant and expire ten years from the date of grant. As of March 31, 1998,
options to purchase 448,906 shares are outstanding at an exercise price
between $0.9524 and $10.2637 and options to purchase 402,614 shares
are exercisable. The weighted average exercise price of options
outstanding is $3.0919 and the weighted average remaining contractual life
is 6.5 years.
Pursuant to the Merger Agreement, each outstanding TSG option pursuant
to TSG's 1995 Non-Employee Director Stock Plan (the "Director's Plan"),
whether vested or unvested, was converted at the effective time of the
Merger into an option to acquire, on the same terms and conditions as
were applicable under the Director's Plan, a number of shares of the
Company's common stock equal to 1.05 times the number of shares of
TSG common stock which the option holder was entitled to purchase under
such TSG option immediately prior to the consummation of the Merger, at
a price per share of the Company's common stock equal to (i) the
aggregate exercise price for the shares of TSG common stock otherwise
purchasable pursuant to the TSG option immediately prior to the
consummation of the Merger divided by (ii) the aggregate number of
shares of the Company's common stock purchasable pursuant to the
option immediately after the merger, with any fractional share of the
Company's common stock resulting from such calculation for such holder
being rounded up to the nearest whole share. As of the effective time of
the Merger, there were outstanding Director's Options to purchase 41,000
shares of common stock of TSG. Accordingly, pursuant to the Merger
Agreement, those Directors' Options were converted into options to
acquire 43,050 shares of common stock of the Company. No additional
F-27
<PAGE>
options will be granted under the plan. The options expire on
December 18, 1998. As of March 31, 1998, options to purchase 43,050 shares
are outstanding at an exercise price between $4.7619 and $10.2971 which are
all exercisable. The weighted average exercise price of options outstanding
is $7.8273 and the weighted average remaining contractual life is .7 years.
Earnings Per Share
- ------------------
The Company adopted the provisions of Statement of Financial Standards
No. 128 "Earnings Per Share" ("SFAS 128"), during fiscal year 1998. The
new standard specifies the computation, presentation, and disclosure
requirements for earnings per share. The following table represents the
computation of basic and diluted earnings per common share as required
by SFAS 128.
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Basic earnings per share computation:
Net income (loss) applicable
to common shares $ 1,757 $ 1,628 $ (1,291)
-------- -------- ---------
Weighted average common shares
Outstanding (in thousands) 9,641 8,095 7,830
----- ----- -----
Basic income (loss) per
common share $0.18 $0.20 $(0.16)
===== ===== =======
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Diluted earnings per share computation:
Net income (loss) applicable
to common shares $ 1,757 $ 1,628 $ (1,291)
-------- -------- ---------
Weighted average common shares
Outstanding (in thousands) 9,641 8,095 7,830
Common stock equivalents
(in thousands) 201 216 404
----- ----- -----
Total weighted average shares
(in thousands) 9,842 8,311 8,234
----- ----- -----
Diluted income (loss) per
common share $0.18 $0.20 $(0.16)
===== ===== =======
Common Stock Reserved
- ---------------------
The number of shares of common stock reserved for issuance pursuant to
the Company's stock option plans and outstanding common stock warrants
as of March 31, 1998 is summarized as follows:
Stock Option Plans 2,009,515
Redeemable Warrants 603,750
Underwriter Warrants 105,000
F-28
<PAGE>
NOTE K - INCOME TAXES:
- ----------------------
The Company's income tax expense (benefit) for the years ended March
31, 1998, 1997 and 1996 is comprised of the following:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Current tax expense (benefit):
Federal $ 624 $ 253 $ (186)
State 21 - -
-------- -------- --------
645 253 (186)
-------- -------- --------
Deferred tax expense (benefit):
Federal 124 593 ( 627)
State 84 30 ( 48)
-------- -------- --------
208 623 ( 675)
-------- -------- --------
Net tax expense (benefit) $ 853 $ 876 $ ( 861)
======== ======== ========
The significant components of the deferred tax assets and liabilities as of
March 31, 1998 and March 31, 1997 are as follows:
March 31, March 31,
1998 1997
--------- ---------
Deferred tax assets:
Accounts and notes receivable reserves $ 893 $ 468
Inventory and inventory reserves 2,279 58
Warranty and other accruals 680 201
Other assets and liabilities 432 -
Tax credit carryforwards 473 647
Net operating loss carryforwards 4,181 219
--------- --------
8,938 1,593
Deferred tax liabilities: --------- --------
Property, plant and equipment 125 95
Intangible and other assets 2,100 7
State taxes 78 -
--------- --------
2,303 102
Excess of deferred tax assets over --------- --------
deferred tax liabilities 6,635 1,491
Less valuation allowance 2,909 -
--------- --------
Net deferred tax asset 3,726 1,491
Less current deferred tax asset 4,141 692
--------- --------
Non-current deferred tax asset (liability) $ (415) $ 799
========= ========
F-29
<PAGE>
As of March 31, 1998, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $11,800
and $2,400, respectively, which expire from 1999 through 2011. In
addition, the Company has available approximately $317 in research and
other tax credit carryforwards which expire from 2001 through 2009.
The utilization of net operating loss carryforwards for federal income tax
purposes is subject to an annual limitation of approximately $200 as a
result of a previous change in ownership of TSG. This limitation does not
reduce the total amount of net operating losses which may be taken for
federal income tax purposes, but rather substantially limits the amount
which may be used during a particular year. As a result, it is more likely
than not that the Company will be unable to use a significant portion of
these net operating loss carryforwards. Accordingly, the deferred tax asset
related to these carryforwards has been reduced by a valuation allowance
of $2,909.
The effective tax rate on income before taxes differs from the United
States statutory rate. The following summary reconciles taxes at the
United States statutory rate with the effective rate.
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
U.S. statutory rate 34.0 % 34.0 % 34.0 %
Increases (decreases) resulting from:
State taxes, net 2.7 - -
Business credits earned (7.4) (2.9) 1.3
Business credits restored - - 7.5
Amortization of goodwill 2.5 - -
Other 1.0 3.9 (2.8)
------ ------ ------
Effective rate 32.8 % 35.0 % 40.0 %
====== ====== ======
F-30
<PAGE>
NOTE L - SALES BY GEOGRAPHIC LOCATION:
The Company sells its payphone products both in the United States and
internationally. All sales contracts are denominated in U.S. dollars. United
States sales of international payphones includes products sold to United
States customers for resale in international markets. In fiscal 1998, 1997,
and 1996, the Company's revenues by geographic regions were as
follows:
Years ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
United States $ 37,051 $ 18,787 $ 19,926
United States sales of
international payphone terminals - 2,796 298
Canada and Latin America 8,180 1,763 521
Europe, Middle East and Africa 195 99 396
Asia, Pacific and Other Areas 824 3,387 321
-------- -------- --------
Total sales $ 46,250 $ 26,832 $ 21,462
======== ======== ========
NOTE M - MAJOR CUSTOMERS:
For the year ended March 31, 1998, there were no customers which
individually accounted for more than 10% of net sales. For the year ended
March 31, 1997, the Company had two customers that each accounted for
approximately 12% of net sales. For the year ended March 31, 1996, there
were no customers which individually accounted for more than 10% of net
sales.
NOTE N - CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts and notes
receivable. In order to minimize this risk, the Company performs ongoing
credit evaluations of its customers' financial condition. With respect to
notes receivable, the Company generally requires collateral, which
primarily consists of the payphone terminals and related equipment.
Ten domestic customers and five international customers account for
$4,606 (51%) and $1,560 (17%), respectively, of the Company's accounts
receivable at March 31, 1998. The domestic customers include telephone
companies and distributors. The international customers include cellular
carriers and private operators in Chile, Ecuador and Canada.
Five domestic customers and three international customers account for
(net of specific allowances of $866) $809 (30%) and $1,621 (61%)
respectively, of the Company's notes receivable at March 31, 1998. The
domestic customers include private operators and the international
customers include a telephone company and private operators in Mexico
and the Philippines.
F-31
<PAGE>
NOTE O - SAVINGS PLANS:
During fiscal 1994, the Company began a 401(k) savings plan whereby
eligible employees may voluntarily contribute a percentage of their pre-tax
earnings. The Company matches 50% of the employees' contribution, up
to an additional 2% of the eligible employees' compensation. An employee
begins vesting after having completed two years of employment with the
Company, at the rate of 25% per year, and is 100% vested after having
completed five years of employment with the Company. Total plan
expense was approximately $107, $104 and $79, respectively, for the
fiscal years ended March 31, 1998, 1997 and 1996.
On January 1, 1995, TSG adopted a 401(k) retirement and profit sharing
plan. The Company has assumed the administration of this plan as of the
acquisition date. Participants in this plan will have no break in service
length or no reduction of benefits as a result of the acquisition. 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. 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.
Total plan expense was approximately $7 for the fiscal year ended March
31, 1998.
NOTE P - OTHER CHARGES (CREDITS):
During the year ended March 31, 1996, the Company provided a specific
allowance of $1,602 against certain notes receivable as a result of a
customer bankruptcy proceeding. This charge of $1,602, in addition to
approximately $242 in other costs associated with the bankruptcy
proceeding, was included as Other Charges (Credits) in the Consolidated
Statement of Operations for the year ended March 31, 1996. During fiscal
1997, the Company sold the equipment which was in the Company's
possession and being warehoused by the Company pursuant to a prior
Bankruptcy Court order. The amount realized by the Company from this
transaction resulted in a $413 recovery in excess of the amount
anticipated. In addition, the Company incurred approximately $82 in legal
and related expenses in connection with this matter during fiscal 1997.
The net credit related to this matter was $331 during fiscal 1997 which has
been included as Other Charges (Credits) in the Consolidated Statement
of Operations for the year ended March 31, 1997.
F-32
<PAGE>
NOTE Q - COMMITMENTS AND CONTINGENCIES:
Litigation
- ----------
The Company is a defendant in a putative class action filed in the
Superior Court of the State of California for the County of San Diego
alleging that Amtel Communications, Inc. ("Amtel"), a former customer
of the Company that filed for bankruptcy, conspired with its own
officers and professionals, and with various telephone suppliers
(including the Company) to defraud investors in Amtel by operating a
Ponzi scheme. Allegations include unlawful business practices,
fraudulent and unfair business practices, false and misleading
advertising, fraud and deceit, conspiracy to defraud, negligence and
negligent misrepresentation, violations of California law, professional
negligence and legal malpractice and spoliation of evidence.
On September 30, 1997, the Company's motion to dismiss the
plaintiffs' third amended complaint was granted, in part, and those
portions of the complaint were dismissed with prejudice. On October 3, 1997,
the Company filed its answer to the remaining causes of action in the
plaintiffs' third amended complaint. Plaintiffs' motion for class
certification was granted on December 9, 1997. The Company disputes
liability and intends to defend this matter vigorously. However, the Company
cannot predict the ultimate outcome of this litigation.
While the Company is subject to various other legal proceedings
arising in the conduct of its business, there are no other pending legal
proceedings which are material to the business of the Company.
Operating Leases
- ----------------
Minimum future rental payments at March 31, 1998 under non-cancelable
operating leases with an initial term of more than one year are summarized
as follows:
Fiscal 1999 $ 244
Fiscal 2000 222
Fiscal 2001 187
Fiscal 2002 109
Fiscal 2003 84
---------
$ 846
=========
F-33
<PAGE>
Purchase Commitments
- --------------------
At March 31, 1998, the Company has an outstanding purchase order
commitment to purchase a minimum of $500 of upper housing assemblies
under the terms of the manufacturing agreement entered into in December
1997. The Company agreed to pay development, tooling and out-of-pocket
expenses approximating $64. Upon termination of the agreement
by the Company, the Company is obligated to purchase inventory acquired
pursuant to the agreement and pay additional design expenses up to $58.
Royalty and Technology Transfer Fee Agreements
- ----------------------------------------------
In connection with an asset purchase agreement dated September 30, 1997
with Lucent Technologies Inc. ("Lucent"), the Company agreed to pay
royalties in accordance with a patent license agreement. In addition, the
Company agreed to pay a technology transfer fee in accordance with a
technology transfer agreement. Royalty and technology transfer fee
expenses under the terms of the agreements totaled $86 for the year
ended March 31, 1998.
F-34
<PAGE>
INDEX TO EXHIBITS
Exhibit Method of
Number Description Filing
- ------- ---------------------------- ------------------------
3.1 Certificate of Incorporation
(as amended). Included in this report.
3.2 By-Laws (as amended). Exhibit 3.2 to Annual
Report on Form 10-K for
year ended March 31,
1992.
10.1 1991 Stock Option Plan
(as amended). Included in this report.
10.2 Directors Stock Option Plan
(as amended). Included in this report.
10.3 TSG 1994 Omnibus Stock Plan Included in this report.
10.4 TSG 1995 Non-Employee Director
Stock Option Plan Included in this report.
10.5 Restated Loan Agreement between Exhibit 10.1 to Quarterly
Registrant and NationsBank, N.A. Report on Form 10-Q for the
dated November 25, 1997. quarter ended
December 31, 1997.
10.6 Consolidated Promissory Note between Exhibit 10.2 to Quarterly
Registrant and NationsBank, N.A. Report on Form 10-Q for the
dated November 25, 1997. quarter ended
December 31, 1997.
10.7 Mortgage Modification and Future Exhibit 10.3 to Quarterly
Advance Agreement between Report on Form 10-Q for the
Registrant and NationsBank, N.A. quarter ended
dated November 26, 1997. December 31, 1997.
10.8 Consolidated Promissory Note between Exhibit 10.4 to Quarterly
Registrant and NationsBank, N.A. Report on Form 10-Q for the
dated November 26, 1997. quarter ended
December 31, 1997.
E-1
<PAGE>
10.9 Employment Agreement between Exhibit 10.18 to Registration
Registrant and C. Shelton James Statement on Form S-4,
dated October 1, 1997. Registration No. 333-38439.
10.10 Employment Agreement between Exhibit 10.19 to Registration
Registrant and Tracey L. Gray Statement on Form S-4,
dated October 1, 1997. Registration No. 333-38439.
10.11 Technology Transfer Agreement Exhibit 2.2 to Current Report
between Registrant and Lucent on Form 8-K dated
Technologies Inc. dated September 30, 1997.
September 30, 1997.
10.12 Patent License Agreement Exhibit 2.3 to Current Report
between Registrant and Lucent on Form 8-K dated
Technologies Inc. dated September 30, 1997.
September 30, 1997.
10.13 Stockholders' Agreement Exhibit 2.3 to Registration
Statement on Form S-4,
Registration No. 333-38439.
21.1 Subsidiaries of the Registrant. Included in this report.
23.1 Independent Auditors' Consent. Included in this report.
27 Financial Data Schedule. Included in this report.
(Edgar filing only)
E-2
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
ELCOTEL, INC.
(As amended thru June 23, 1998)
FIRST - The name of this Corporation is Elcotel, Inc.
SECOND - Its registered office in the State of Delaware
is to be located at Corporation Trust Center, 1209 Orange Street,
in the City of Wilmington, County of New Castle. The Registered
Agent in charge thereof is Corporation Trust Company.
THIRD - The nature of business and, the objects and
purposes proposed to be transacted, promoted and carried on, are to
do any or all the things therein mentioned, as fully and to the
same extent as natural persons might or could do, and in any part
of the world, viz:
"The purpose of the corporation is to
engage in any lawful act or activity for
which corporations may be organized under
the General Corporation Law of Delaware."
FOURTH - The amount of total authorized capital stock
of this Corporation is Thirty Million (30,000,000) shares of Common
Stock, $.01 par value per share.
FIFTH - The name and mailing address of the
incorporation is as follows:
Name Mailing Address
---- ---------------
Mary Loughlin Suite 3600
1600 Market Street
Philadelphia, PA 19103
SIXTH - The Directors shall have power to adopt, amend
or repeal the Bylaws; to fix the amount to be reserved as working
capital, and to authorize and cause to be executed, mortgages and
liens without limit as to the amount, upon the property and
franchise of this Corporation.
<PAGE>
With the consent in writing, and pursuant to a vote of
the holders of a majority of the capital stock issued and
outstanding, the Directors shall have authority to dispose, in any
manner, of the whole property of this Corporation.
The stockholders and Directors of this Corporation shall
have the right to inspect the books and records of this Corporation
in accordance with the Delaware General Corporation Law.
The stockholders and Directors shall have power to hold
their meetings and keep the books, documents and papers of this
Corporation outside the State of Delaware, at such places as may be
from time to time designated by the Bylaws or by resolution of the
stockholders or Directors, except as otherwise required by the laws
of Delaware.
SEVENTH - A Director of this Corporation shall not be
personally liable to this Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a Director, except
for liability to the extent provided by applicable law (i) for any
breach of the Director's duty of loyalty to this Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is
hereafter amended to authorize the further limitation or
elimination of the liability of a Director, then the liability of
a Directors of this Corporation shall be limited or eliminated to
the fullest extent permitted by the amended Delaware General
Corporation Law.
Any modification or repeal of the foregoing paragraph by
the stockholders of this Corporation shall not adversely affect any
right or protection of a Director of this Corporation existing at
the time of such repeal or modification.
EXHIBIT 10.1
ELCOTEL, INC.
1991 STOCK OPTION PLAN
(as amended through December 5, 1997)
1. Definitions
-----------
As used in this Plan, the following definitions apply to
the terms indicated below:
A. "Board" means the Board of Directors of the Company.
B. "Committee" means the Compensation and Stock Option
Committee appointed by the Board from time to time to administer
the Plan. The Committee shall consist of at least two persons, who
shall be directors of the Company and who shall not be or have been
granted or awarded, while serving on the Committee or within one
year prior thereto, stock, stock options, or stock appreciation
rights pursuant to any plan of the Company or any of its affiliates
except a plan that provides for formula grants or awards.
C. "Company" means Elcotel, Inc., a Delaware corporation.
D. "Fair Market Value" of a Share on a given day means,
if the Shares are traded in a public market, the mean between the
highest and lowest quoted selling prices of a Share as reported on
the principal securities exchange on which the Shares are then
listed or admitted to trading, or if not so reported, the mean
between the highest and lowest quoted selling prices of a Share, or
the mean between the highest asked price and the lowest bid price
as the case may be, as reported on the National Association of
Securities Dealers Automated Quotation System. If the Shares shall
not be so traded, the Fair Market Value shall be determined by the
Committee taking into account all relevant facts and circumstances.
E. "Grantee" means a person who is either an Optionee
or an Optionee-Shareholder.
F. "Incentive Stock Option" means an option, whether
granted under this Plan or otherwise, that qualifies as an
incentive stock option within the meaning of Section 422 of the
Internal Revenue Code.
G. "Option" means a right to purchase Shares under the
terms and conditions of this Plan as evidenced by an option
certificate or agreement for Shares in such form, not inconsistent
with this Plan, as the Committee may adopt for general use or for
specific cases from time to time.
<PAGE>
H. "Optionee" means a person other than an Optionee-Shareholder
to whom an option is granted under this Plan.
I. "Optionee-Shareholder" means a person to whom an
option is granted under this Plan and who at the time such option
is granted owns, actually or constructively, stock of the Company
or of a Parent or Subsidiary possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the
Company or of such Parent or Subsidiary.
J. "Nonqualified Option" means an Option that is not an
Incentive Stock Option.
K. "Parent" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if, at the time of granting an Option, each of the
corporations in the unbroken chain (other than the Company) owns
stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other
corporations in the chain.
L. "Plan" means this Elcotel, Inc. 1991 Stock Option
Plan, including any amendments to the Plan.
M. "Share" means a share of the Company's common stock,
par value $.01 per share, either now or hereafter owned by the
Company as treasury stock or authorized but unissued.
N. "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the
Company if, at the time of granting an Option, each of the
corporations in the unbroken chain (other than the last corporation
in the chain) owns stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of
the other corporations in the chain.
O. Options shall be deemed "granted" under this Plan on
the date on which the Committee, by appropriate action, approves
the grant of an Option hereunder or on such subsequent date as the
Committee may designate.
P. As used herein, the masculine includes the feminine,
the plural includes the singular, and the singular includes the
plural.
2. Purpose
-------
The purposes of the Plan are as follows.
A. To secure for the Company and its shareholders the
benefits arising from share ownership by those officers and key
employees of the Company and its Subsidiaries who will be
responsible for the Company's future growth and continued success.
2
<PAGE>
The Plan is intended to provide an incentive to officers and key
employees by providing them with an opportunity to acquire an
equity interest or increase an existing equity interest in the
Company, thereby increasing their personal stake in its continued
success and progress.
B. To enable the Company and its Subsidiaries to obtain
and retain the services of key employees, by providing such key
employees with an opportunity to acquire Shares under the terms and
conditions and in the manner contemplated by this Plan.
3. Plan Adoption and Term
----------------------
A. This Plan shall become effective upon its adoption
by the Board, and Options may be issued upon such adoption and from
time to time thereafter; provided, however, that the Plan shall be
submitted to the Company's shareholders for their approval at the
next annual meeting of shareholders, or prior thereto at a special
meeting of shareholders expressly called for such purpose; and
provided further, that the approval of the Company's shareholders
shall be obtained within 12 months of the date of adoption of the
Plan. If the Plan is not approved by the affirmative vote of the
holders of a majority of all shares present in person or by proxy,
at a duly called shareholders' meeting at which a quorum
representing a majority of all voting stock is present in person or
by proxy and voting on this Plan, then this Plan and all Options
then outstanding under it shall forthwith automatically terminate
and be of no force and effect.
B. Subject to the provisions hereinafter contained
relating to amendment or discontinuance, this Plan shall continue
to be in effect for ten (10) years from the date of adoption of
this Plan by the Board. No Options may be granted hereunder except
within such period of ten (10) years.
4. Administration of Plan
----------------------
A. This Plan shall be administered by the Committee.
Except as otherwise expressly provided in this Plan, the Committee
shall have authority to interpret the provisions of the Plan, to
construe the terms of any Option, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the terms
and provisions of Options granted hereunder, and to make all other
determinations in the judgment of the Committee necessary or
desirable for the administration of the Plan. Without limiting the
foregoing, the Committee shall, to the extent and in the manner
contemplated herein, exercise the discretion granted to it to
determine to whom Incentive Stock Options and Non-qualified Options
shall be granted, how many Shares shall be subject to each such
Option, whether a Grantee shall be required to surrender for
cancellation an outstanding Option as a condition to the grant of
a new Option, and the prices at which Shares shall be sold to
Grantees. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any
Option in the manner and to the extent it shall deem expedient to
carry the Plan into effect and shall be the sole and final judge of
such expediency.
3
<PAGE>
B. No member of the Committee shall be liable for any
action taken or omitted or any determination made by him in good
faith relating to the Plan, and the Company shall indemnify and
hold harmless each member of the Committee and each other director
or employee of the Company to whom any duty or power relating to
the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability
(including any sum paid in settlement of a claim with the approval
of the Committee) arising out of any act or omission in connection
with the Plan, unless arising out of such person's own fault or bad
faith.
C. Any power granted to the Committee either in this
Plan or by the Board, may at any time be exercised by the Board,
and any determination by the Committee shall be subject to review
and approval or reversal or modification by the Board.
5. Eligibility
-----------
Officers and key employees of the Company and its
Subsidiaries shall be eligible for selection by the Committee to be
granted Options. An employee who has been granted an Option may,
if he or she is otherwise eligible, be granted an additional Option
or Options if the Committee shall so determine.
6. Options
-------
A. Subject to adjustment as provided in Paragraph 13
hereof, Options may be granted pursuant to the Plan for the
purchase of not more than 2,100,000 Shares; provided, however, that
if prior to the termination of the Plan, an Option shall expire or
terminate for any reason without having been exercised in full, the
unpurchased Shares subject thereto shall again be available for the
purposes of the Plan.
B. The aggregate fair market value (determined as of
the time Options are granted) of the stock with respect to which
Incentive Stock Options may be or become exercisable for the first
time by a Grantee during any calendar year (whether granted under
this Plan or any other plan of the Company or any Parent or
Subsidiary corporation) shall not exceed $100,000. To the extent
an Incentive Stock Option may be or become exercisable in violation
of this limitation, it shall be deemed to be a Nonqualified Option.
7. Option Price
------------
The purchase price per Share deliverable upon the
exercise of an Option shall be determined by the Committee, but
shall not be less than the greater of:
(1) 100% of the Fair Market Value of such Share on
the date the Option is granted (110% of the Fair Market Value of
such Share on the date an Incentive Stock Option is granted to an
Optionee-Shareholder), and
(2) $0.75.
4
<PAGE>
8. Duration of Options
-------------------
Each Option and all rights thereunder shall expire and
the Option shall no longer be exercisable on a date not later than
five (5) years from the date on which the Option was granted.
Options may expire and cease to be exercisable on such earlier date
as the Committee may determine at the time of grant. Options shall
be subject to termination before their expiration date as provided
herein.
9. Conditions Relating to Exercise of Options
------------------------------------------
A. The Shares subject to any Option may be purchased at
any time during the term of the Option, unless, at the time an
Option is granted, the Committee shall have fixed a specific period
or periods in which exercise must take place. To the extent an
Option is not exercised when it becomes initially exercisable, or
is exercised only in part, the Option or remaining part thereof
shall not expire but shall be carried forward and shall be
exercisable until the expiration or termination of the Option.
Partial exercise as to whole Shares is permitted from time to time,
provided that no partial exercise of an Option shall be for a
number of Shares having a purchase price of less than $100.
B. No Option shall be transferable by the Grantee
thereof other than by will or by the laws of descent and
distribution, and Options shall be exercisable during the lifetime
of a Grantee only by such Grantee or, to the extent that such
exercise would not prevent an Option from qualifying as an
Incentive Stock Option under the Internal Revenue Code, by his or
her guardian or legal representative.
C. Certificates for Shares purchased upon exercise of
Options shall be issued either in the name of the Grantee or in the
name of the Grantee and another person jointly with the right of
survivorship. Such certificates shall be delivered as soon as
practical following the date the Option is exercised.
D. An Option shall be exercised by the delivery to the
Company at its principal office, to the attention of its Secretary,
of written notice of the number of Shares with respect to which the
Option is being exercised, and of the name or names in which the
certificate for the Shares is to be issued, and by paying the
purchase price for the Shares. The purchase price shall be paid in
cash or by certified check or bank cashier's check. Alternatively,
to the extent permitted by the Committee and in its sole
discretion, the purchase price may be paid by delivering to the
Company:
(1) Shares (in proper form for transfer and
accompanied by all requisite stock transfer tax stamps or cash in
lieu thereof) owned by the Grantee having a Fair Market Value equal
to the purchase price; or
5
<PAGE>
(2) a notarized statement attesting to ownership of
the number of Shares which are intended to be used at Fair Market
Value to pay the purchase price, with the certificate number(s)
thereof, and requesting that only the incremental number of Shares
as to which the Option is being exercised be issued by the Company.
E. Notwithstanding any other provision in this Plan, no
Option may be exercised unless and until (i) this Plan has been
approved by the shareholders of the Company, and (ii) the Shares to
be issued upon the exercise thereof have been registered under the
Securities Act of 1933 and applicable state securities laws, or
are, in the opinion of counsel to the Company, exempt from such
registration. The Company shall not be under any obligation to
register under applicable Federal or state securities laws any
Shares to be issued upon the exercise of an Option granted
hereunder, or to comply with an appropriate exemption from
registration under such laws in order to permit the exercise of an
Option or the issuance and sale of Shares subject to such Option.
If the Company chooses to comply with such an exemption from
registration, the certificates for Shares issued under the Plan,
may, at the direction of the Committee, bear an appropriate
restrictive legend restricting the transfer or pledge of the Shares
represented thereby, and the Committee may also give appropriate
stop-transfer instructions to the transfer agent of the Company.
F. Any person exercising an Option or transferring or
receiving Shares shall comply with all regulations and requirements
of any governmental authority having jurisdiction over the
issuance, transfer or sale of securities of the Company or over the
extension of credit for the purposes of purchasing or carrying any
margin securities, or the requirements of any stock exchange on
which the Shares may be listed, and as a condition to receiving any
Shares, shall execute all such instruments as the Committee in its
sole discretion may deem necessary or advisable.
G. Each Option shall be subject to the requirement that
if the Committee shall determine that the listing, registration or
qualification of the Shares subject to such Option upon any
securities exchange or under any state or Federal law, or the
consent or approval of any governmental or regulatory body, is
necessary or desirable as a condition of, or in connection with,
the granting of such Option or the issuance or purchase of Shares
thereunder, such Option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or
approval shall have been effective or obtained free of any
conditions not acceptable to the Committee.
10. Effect of Termination of Employment or Death
--------------------------------------------
A. In the event of termination of a Grantee's
employment by reason of such Grantee's death, disability, or
retirement with the consent of the Board or in accordance with an
applicable retirement plan, any outstanding Option held by such
Grantee shall, notwithstanding the extent to which such Option was
exercisable prior to termination of employment, immediately become
6
<PAGE>
exercisable as to the total number of Shares purchasable
thereunder. Any such Option shall remain so exercisable at any
time prior to its expiration date or, if earlier, the first
anniversary of termination of the Grantee's employment.
B. In the event of termination of a Grantee's
employment for any reason other than death, disability, or
retirement with the consent of the Board or in accordance with an
applicable retirement plan, all rights of any kind under any
outstanding Option held by such Grantee shall immediately lapse and
terminate, except that the Committee may, in its discretion, elect
to permit exercise for a period ending on the earlier of the
expiration date of the Option and a date thirty days after the
termination of employment as to the total number of Shares
purchasable under the Option as of the date of the termination.
C. Whether an authorized leave of absence or absence in
military or government service shall constitute termination of
employment shall be determined by the Committee. Transfer of
employment between the Company and a Subsidiary corporation or
between one Subsidiary corporation and another shall not constitute
termination of employment.
11. No Special Employment Rights
----------------------------
Nothing contained in the Plan or in any Option shall
confer upon any Grantee any right with respect to the continuation
of his or her employment by the Company or a Subsidiary or
interfere in any way with the right of the Company or a Subsidiary,
subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase
or decrease the compensation of the Grantee from the rate in
existence at the time of the grant of an Option.
12. Rights as a Shareholder
-----------------------
The Grantee of an Option shall have no rights as a
shareholder with respect to any Shares covered by an Option until
the date of issuance of a certificate to him for such Shares.
Except as otherwise expressly provided in the Plan, no adjustment
shall be made for dividends or other rights for which the record
date occurs prior to the date of issuance of such certificate.
13. Anti-dilution Provision
-----------------------
A. In case the Company shall (i) declare a dividend or
dividends on its Shares payable in shares of its capital stock,
(ii) subdivide its outstanding Shares, (iii) combine its
outstanding Shares into a smaller number of Shares, or (iv) issue
any shares of capital stock by reclassification of its Shares
(including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
corporation), the number of Shares authorized under the Plan will
be adjusted proportionately. Similarly, in any such event, there
will be a proportionate adjustment in the number of Shares subject
to unexercised Options (but without adjustment to the aggregate
option price).
7
<PAGE>
B. In the event of any kind of transaction which may
constitute a change in control of the Company, the Committee, with
the approval of the majority of the members of the Board who are
not then holding Options, may modify any and all outstanding
Options so as to accelerate, as a consequence of or in connection
with such transaction, a Grantee's right to exercise any such
Option. Notwithstanding the foregoing, if the operation of this
Paragraph 13B would cause an Option to become exercisable in such
a way as to violate Paragraph 6B hereof, the exercisability of such
Option shall be delayed as necessary to avoid such a violation.
14. Withholding Taxes
-----------------
Whenever an Option is to be exercised under the Plan, the
Company shall have the right to require the Grantee, as a
condition of exercise of the Option, to remit to the Company an
amount sufficient to satisfy the Company's (or a Subsidiary's)
Federal, state and local withholding tax obligation, if any, that
will, in the sole opinion of the Committee, result from the
exercise. In addition, the Company shall have the right, at the
sole discretion of the Committee, to satisfy any such withholding
tax obligation by retention of Shares issuable upon such exercise
having a Fair Market Value on the date of exercise equal to the
amount to be withheld.
15. Amendment of the Plan
---------------------
The Board may at any time and from time to time terminate
or modify or amend the Plan in any respect, except that, without
shareholder approval, the Board may not (a) increase the number of
Shares which may be issued under the Plan, or (b) modify the
requirements as to eligibility for participation under the Plan.
The termination or modification or amendment of the Plan shall not,
without the consent of a Grantee, affect his rights under an Option
previously granted to him or her. With the consent of the Grantee,
the Board may amend outstanding Options in a manner not
inconsistent with the Plan.
16. Miscellaneous
-------------
A. It is expressly understood that this Plan grants
powers to the Committee but does not require their exercise; nor
shall any person, by reason of the adoption of this Plan, be deemed
to be entitled to the grant of any Option; nor shall any rights
begin to accrue under the Plan except as Options may be granted
hereunder.
B. All expenses of the Plan, including the cost of
maintaining records, shall be borne by Company.
17. Governing Law
-------------
This Plan and all rights hereunder shall be governed by
and interpreted in accordance with the laws of the State of
Delaware.
8
EXHIBIT 10.2
ELCOTEL, INC.
DIRECTORS STOCK OPTION PLAN
(as amended through December 5, 1997)
1. Definitions
-----------
As used in this Plan, the following definitions apply
to the terms indicated below:
A. "Board" means the Board of Directors of the Com-
pany.
B. "Committee" means the Compensation and Stock
Option Committee appointed by the Board from time to time to
administer the Plan. The Committee shall consist of at least two
persons, who shall be directors of the Company.
C. "Company" means Elcotel, Inc., a Delaware corp-
oration.
D. "Director" means a member of the Board who is not
an employee of the Company.
E. "Fair Market Value" of a Share on a given day
means, if the Shares are traded in a public market, the mean
between the highest and lowest quoted selling prices of a Share
as reported on the principal securities exchange on which the
Shares are then listed or admitted to trading, or if not so re-
ported, the mean between the highest and lowest quoted selling
prices of a Share, or the mean between the highest asked price
and the lowest bid price as the case may be, as reported on the
National Association of Securities Dealers Automated Quotation
System. If the Shares shall not be so traded, the Fair Market
Value shall be determined by the Committee taking into account
all relevant facts and circumstances.
F. "Grantee" means a person to whom an Option is
granted.
G. "Option" means a right to purchase Shares under
the terms and conditions of this Plan as evidenced by an option
certificate or agreement for Shares in such form, not inconsis-
tent with this Plan, as the Committee may adopt for general use
or for specific cases from time to time.
H. "Plan" means this Elcotel, Inc. Directors Stock
Option Plan, including any amendments to the Plan.
<PAGE>
I. "Share" means a share of the Company's common
stock, par value $.01 per share, either now or hereafter owned by
the Company as treasury stock or authorized but unissued.
J. As used herein, the masculine includes the femi-
nine, the plural includes the singular, and the singular includes
the plural.
2. Purpose
-------
The purposes of the Plan are as follows.
A. To secure for the Company and its shareholders the
benefits arising from share ownership by Directors. The Plan is
intended to provide an incentive to Directors by providing them
with an opportunity to acquire an equity interest or increase an
existing equity interest in the Company, thereby increasing their
personal stake in its continued success and progress.
B. To enable the Company and its Subsidiaries to ob-
tain and retain the services of Directors, by providing Directors
with an opportunity to acquire Shares under the terms and condi-
tions and in the manner contemplated by this Plan.
3. Plan Adoption and Term
----------------------
A. This Plan shall become effective upon its adoption
by the Board, and Options shall be issued from time to time
thereafter; provided, however, that the Plan shall be submitted
to the Company's shareholders for their approval at the next
annual meeting of shareholders, or prior thereto at a special
meeting of shareholders expressly called for such purpose; and
provided further, that the approval of the Company's shareholders
shall be obtained within 12 months of the date of adoption of the
Plan. If the Plan is not approved by the affirmative vote of the
holders of a majority of all shares present in person or by
proxy, at a duly called shareholders' meeting at which a quorum
representing a majority of all voting stock is present in person
or by proxy and voting on this Plan, then this Plan and all Op-
tions then outstanding under it shall forthwith automatically
terminate and be of no force and effect.
B. Subject to the provisions hereinafter contained
relating to amendment or discontinuance, this Plan shall continue
to be in effect for ten (10) years from the date of adoption of
this Plan by the Board. No Options may be granted hereunder
except within such period of ten (10) years.
2
<PAGE>
4. Administration of Plan
----------------------
A. This Plan shall be administered by the Committee.
Except as otherwise expressly provided in this Plan, the Commit-
tee shall have authority to interpret the provisions of the Plan,
to construe the terms of any Option, to prescribe, amend and res-
cind rules and regulations relating to the Plan, to determine the
terms and provisions of Options granted hereunder, and to make
all other determinations in the judgment of the Committee neces-
sary or desirable for the administration of the Plan. The
Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any Option in the
manner and to the extent it shall deem expedient to carry the
Plan into effect and shall be the sole and final judge of such
expediency.
B. No member of the Committee shall be liable for any
action taken or omitted or any determination made by him in good
faith relating to the Plan, and the Company shall indemnify and
hold harmless each member of the Committee and each other direc-
tor or employee of the Company to whom any duty or power relating
to the administration or interpretation of the Plan has been
delegated against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim with
the approval of the Committee) arising out of any act or omission
in connection with the Plan, unless arising out of such person's
own fault or bad faith.
C. Any power granted to the Committee may at any time
be exercised by the Board, and any determination by the Committee
shall be subject to review and reversal or modification by the
Board on its own motion.
5. Options
-------
A. Subject to adjustment as provided in Paragraph 12
hereof, an Option shall be granted to each Director on the last
business day of each fiscal year of the Company for the purchase
of (i) 1,000 Shares for each committee on which such Director is
then serving; and (ii) 1,000 Shares for each committee of which
such Director is then the chairperson. Subject to adjustment as
provided in Paragraph 12 hereof, a new Director shall receive a
one-time automatic grant of an option to purchase 4,000 Shares at
the time such Director is either elected by the shareholders to
serve on the Board or appointed by the Board to fill a vacancy.
B. Subject to adjustment as provided in Paragraph 12
hereof, Options may be granted pursuant to the Plan for the
purchase of not more than 225,000 Shares; provided, however, that
if prior to the termination of the Plan, an Option shall expire
or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be
available for the purposes of the Plan.
3
<PAGE>
6. Option Price
------------
The purchase price per Share deliverable upon the
exercise of an Option shall be the greater of:
(1) 100% of the Fair Market Value of such Share on the
date the Option is granted, and
(2) $2.00.
7. Duration of Options
-------------------
Each Option and all rights thereunder shall expire and
the Option shall no longer be exercisable on a date five (5)
years from the date on which the Option was granted. Options
shall be subject to termination before their expiration date as
provided herein.
8. Conditions Relating to Exercise of Options
------------------------------------------
A. The Shares subject to any Option may be purchased
at any time during the term of the Option beginning on the first
anniversary date of the date of the grant of such Option. To the
extent an Option is not exercised when it becomes initially exer-
cisable, or is exercised only in part, the Option or remaining
part thereof shall not expire but shall be carried forward and
shall be exercisable until the expiration or termination of the
Option. Partial exercise as to whole Shares is permitted from
time to time, provided that no partial exercise of an Option
shall be for a number of Shares having a purchase price of less
than $1,000.
B. No Option shall be transferable by the Grantee
thereof other than by will or by the laws of descent and distri-
bution, and Options shall be exercisable during the lifetime of a
Grantee only by such Grantee or by his or her guardian or legal
representative.
C. Certificates for Shares purchased upon exercise of
Options shall be issued either in the name of the Grantee or in
the name of the Grantee and another person jointly with the right
of survivorship. Such certificates shall be delivered as soon as
practical following the date the Option is exercised.
D. An Option shall be exercised by the delivery to
the Company at its principal office, to the attention of its
Secretary, of written notice of the number of Shares with respect
to which the Option is being exercised, and of the name or names
4
<PAGE>
in which the certificate for the Shares is to be issued, and by
paying the purchase price for the Shares. The purchase price
shall be paid in cash or by certified check or bank cashier's
check. Alternatively, to the extent permitted by the Committee
and in its sole discretion, the purchase price may be paid by
delivering to the Company:
(1) Shares (in proper form for transfer and
accompanied by all requisite stock transfer tax stamps or cash in
lieu thereof) owned by the Grantee having a Fair Market Value
equal to the purchase price; or
(2) a notarized statement attesting to ownership
of the number of Shares which are intended to be used at Fair
Market Value to pay the purchase price, with the certificate
number(s) thereof, and requesting that only the incremental
number of Shares as to which the Option is being exercised be
issued by the Company.
E. Notwithstanding any other provision in this Plan,
no Option may be exercised unless and until (i) this Plan has
been approved by the shareholders of the Company, and (ii) the
Shares to be issued upon the exercise thereof have been regis-
tered under the Securities Act of 1933 and applicable state se-
curities laws, or are, in the opinion of counsel to the Company,
exempt from such registration. The Company shall not be under
any obligation to register under applicable Federal or state
securities laws any Shares to be issued upon the exercise of an
Option granted hereunder, or to comply with an appropriate exemp-
tion from registration under such laws in order to permit the
exercise of an Option or the issuance and sale of Shares subject
to such Option. If the Company chooses to comply with such an
exemption from registration, the certificates for Shares issued
under the Plan, may, at the direction of the Committee, bear an
appropriate restrictive legend restricting the transfer or pledge
of the Shares represented thereby, and the Committee may also
give appropriate stop-transfer instructions to the transfer agent
of the Company.
F. Any person exercising an Option or transferring or
receiving Shares shall comply with all regulations and require-
ments of any governmental authority having jurisdiction over the
issuance, transfer or sale of securities of the Company or over
the extension of credit for the purposes of purchasing or carry-
ing any margin securities, or the requirements of any stock ex-
change on which the Shares may be listed, and as a condition to
receiving any Shares, shall execute all such instruments as the
Committee in its sole discretion may deem necessary or advisable.
G. Each Option shall be subject to the requirement
that if the Committee shall determine that the listing, regis-
tration or qualification of the Shares subject to such Option
upon any securities exchange or under any state or Federal law,
or the consent or approval of any governmental or regulatory
body, is necessary or desirable as a condition of, or in connec-
tion with, the granting of such Option or the issuance or pur-
chase of Shares thereunder, such Option may not be exercised in
whole or in part unless such listing, registration, qualifica-
tion, consent or approval shall have been effective or obtained
free of any conditions not acceptable to the Committee.
5
<PAGE>
9. Effect of Termination of Directorship or Death
----------------------------------------------
A. In the event of termination of a Grantee's status
as a Director by reason of such Grantee's death or disability,
any outstanding Option held by such Grantee shall, notwithstand-
ing the extent to which such Option was exercisable prior to such
termination, immediately became exercisable as to the total
number of Shares purchasable thereunder. Any such Option shall
remain so exercisable at any time prior to its expiration date
or, if earlier, only until the first anniversary of termination
of the Grantee's status as a Director.
B. In the event of termination of a Grantee's status
as a Director for any reason other than death or disability, any
outstanding Option held by such Grantee shall remain exercisable
at any time prior to its expiration date or, if earlier, only
until the date thirty days after the termination of Director
status.
C. Whether an authorized leave of absence or absence
in military or government service shall constitute termination of
status as a Director shall be determined by the Committee.
10. No Special Rights
-----------------
Nothing contained in the Plan or in any Option shall
confer upon any Grantee any right with respect to the continua-
tion of his or her status as a Director or interfere in any way
with the right of the Company at any time to terminate such
status or to increase or decrease the compensation of the Grantee
from the rate in existence at the time of the grant of an Option.
11. Rights as a Shareholder
-----------------------
The Grantee of an Option shall have no rights as a
shareholder with respect to any Shares covered by an Option until
the date of issuance of a certificate to him for such Shares.
Except as otherwise expressly provided in the Plan, no adjustment
shall be made for dividends or other rights for which the record
date occurs prior to the date of issuance of such certificate.
6
<PAGE>
12. Anti-dilution Provision
-----------------------
A. In case the Company shall (i) declare a dividend
or dividends on its Shares payable in shares of its capital
stock, (ii) subdivide its outstanding Shares, (iii) combine its
outstanding Shares into a smaller number of Shares, or (iv) issue
any shares of capital stock by reclassification of its Shares
(including any such reclassification in connection with a consol-
idation or merger in which the Company is the continuing corpora-
tion), the number of Shares authorized under the Plan will be
adjusted proportionately. Similarly, in any such event, there
will be a proportionate adjustment in the number of Shares
subject to unexercised Options (but without adjustment to the
aggregate option price).
B. In the event of any kind of transaction which may
constitute a change in control of the Company, the Committee,
with the approval of the majority of the members of the Board who
are not then holding Options, may modify any and all outstanding
Options so as to accelerate, as a consequence of or in connection
with such transaction, a Grantee's right to exercise any such
Option.
13. Amendment of the Plan
---------------------
The Board may at any time and from time to time termi-
nate or modify or amend the Plan in any respect, except that
(1) without shareholder approval, the Board may not
(a) materially increase the number of securities which may be
issued under the Plan or (b) materially modify the requirements
as to eligibility for participation under the Plan; and
(2) the Plan provisions governing the amounts and
purchase prices of Shares and the requirements as to eligibility
for participation may not be amended more than once every six (6)
months, other than to comport with changes in the Internal
Revenue Code or the rules thereunder.
The termination or modification or amendment of the Plan shall
not, without the consent of a Grantee, affect his rights under an
Option previously granted to him or her.
14. Miscellaneous
-------------
A. It is expressly understood that this Plan grants
powers to the Committee but does not require their exercise; nor
shall any rights begin to accrue under the Plan except as Options
may be granted hereunder.
7
<PAGE>
B. All expenses of the Plan, including the cost of
maintaining records, shall be borne by Company.
15. Governing Law
-------------
This Plan and all rights hereunder shall be governed by
and interpreted in accordance with the laws of the State of
Delaware.
8
EXHIBIT 10.3
TECHNOLOGY SERVICE GROUP, INC.
1994 Omnibus Stock Plan
___________________________________________
1. Plan Purpose.
(a) This Technology Service Group, Inc. 1994 Omnibus Stock
Plan (the "Plan") is intended to provide incentives to
(i) the officers and other employees of Technology Service
Group, Inc. (the "Company"), its parent (if any) and
any present or future subsidiaries of the Company
(collectively, "Related Corporations") by providing
them with opportunities to purchase stock in the
Company pursuant to options that qualify as "incentive
stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended, (the "Code") granted
hereunder ("ISO" or "ISOs");
(ii) the directors, officers, employees and consultants of
the Company and Related Corporations by providing them
with opportunities to purchase stock in the Company
pursuant to options granted hereunder that do not
qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options");
and
(iii) the directors, officers, employees and consultants of
the Company and Related Corporations by providing
them with opportunities to make direct purchases of
restricted stock in the Company ("Restricted Stock").
(b) Both ISOs and Non-Qualified Options are referred to
hereafter individually as an "Option" and collectively
as "Options." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary
corporation" as those terms are defined in Section 425
of the Code.
2. Administration of the Plan.
(a) The Plan shall be administered by the Compensation
Committee Board of Directors (the "Board") until such
time as the Board appoints a Stock Plans Committee in
connection with the Company's initial public offering
(the "Committee"). In the event the Company registers
any class of any equity security pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, each
member of the Committee shall be a "disinterested
person" as defined in Rule 16b-3 under that Act.
Subject to ratification of the grant of each Option or
Restricted Stock by the Board (if so required by
applicable state law), and subject to the terms of the
Plan, the Committee shall have the authority
(i) to determine (subject to the eligibility requirements
of Paragraph 3) the employees of the Company and
Related Corporations to whom ISOs may be granted and
to determine to whom Non-Qualified Options or
Restricted Stock may be granted;
(ii) to determine the time or times at which Options or
Restricted Stock may be granted;
(iii) to determine the purchase price of Restricted Stock
and the option price of shares subject to Option,
which in the case of ISOs shall not be less than the
minimum specified in Paragraph 6;
(iv) to determine whether an Option granted shall be an ISO
or a Non-Qualified Option;
(v) to determine the time or times when each Option shall
become exercisable and (subject to Paragraph 7) the
duration of the exercise period;
<PAGE>
(vi) to determine whether restrictions such as repurchase
rights are to be imposed on shares subject to Options
and to Restricted Stock, and the nature of such
restrictions, if any; and
(vii) to interpret the Plan and prescribe and rescind rules
and regulations relating to it.
(b) If the Committee determines to issue a Non-Qualified
Option, it shall take whatever actions it deems
necessary under Section 422 of the Code and the
regulations promulgated thereunder to ensure that such
Option is not treated as an ISO.
(c) The Committee may from time to time adopt such rules and
regulations for carrying out the Plan as it may deem
best. The interpretation and construction by the
Committee of any provisions of the Plan or of any Option
or authorization or agreement for Restricted Stock shall
be final unless otherwise determined by the Board.
(d) The Committee may select one of its members as its
chairman, and shall hold meetings at such times and
places as it may determine. Any act taken by a majority
of the members of the Committee whether in person, by
conference telephone call, or by written consent shall
be the valid act of the Committee.
(e) From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members
in substitution therefor, fill vacancies however caused,
or remove all members of the Committee and thereafter
directly administer the Plan. All references in the
Plan to the Committee shall mean the Board if there is
no Committee.
(f) No member of the Board or the Committee shall be liable
for any action or determination made in good faith with
respect to the Plan or any Option or Restricted Stock
grant.
3. Eligibility.
(a) ISOs may be granted to any officer or other employee of
the Company or any Related Corporation. Those directors
of the Company who are not employees may not be granted
ISOs under the Plan.
(b) Non-Qualified Options and Restricted Stock may be
granted to any director (whether or not an employee),
officer, employee or consultant of the Company or any
Related Corporation.
(c) The Committee may take into consideration an optionee's
individual circumstances in determining whether to grant
an ISO, a Non-Qualified Option or Restricted Stock.
(d) Granting of any Option or Restricted Stock to any
individual or entity shall neither entitle that
individual or entity to, nor disqualify him from,
participation in any other grant of Options or
Restricted Stock.
(e) Subject to adjustment as provided in Paragraph 13,
below, the maximum number of shares with respect to
which options may be granted during the term of the Plan
to any one employee under the Plan shall not exceed
300,000 shares of common stock.
4. Stock. The stock subject to Options and Restricted Stock
shall be authorized but unissued shares of Common Stock of
the Company, par value $.01 per share, (the "Common Stock")
or shares of Common Stock re-acquired by the Company in any
manner. The aggregate number of shares that may be issued
pursuant to the Plan is 635,000, subject to adjustment as
2
<PAGE>
provided in Paragraph 13. Any such shares may be issued as
ISOs, Non-Qualified Options or Restricted Stock so long as
the aggregate number of shares issued does not exceed such
number, as so adjusted. If any Option granted under the
Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, or if any Restricted
Stock shall be forfeited or shall be reacquired by the
Company by exercise of its repurchase right, the shares
subject to such expired or terminated Option and the
forfeited or reacquired shares of Restricted Stock shall
again be available for grants of Options or Restricted
Stock under the Plan.
5. Grants Under the Plan. Options or Restricted Stock may be
granted under the Plan at any time on or after the Adoption
Date and on or before the Expiration Date (as those terms
are defined in Paragraph 17). Any grants of ISOs shall be
subject to the receipt within 12 months of the Adoption
Date of the approval of stockholders as provided in
Paragraph 17(c). The date of grant of an Option under the
Plan will be the date specified by the Committee at the
time it awards the Option; provided, however, that such
date shall not be prior to the date of award. The
Committee shall have the right, with the consent of the
optionee, to convert an ISO granted under the Plan to a
Non-Qualified Option pursuant to Paragraph 15.
6. Minimum Option Price and ISO Limitations.
(a) The price per share specified in the agreement relating
to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on
the date of grant.
(b) In the case of an ISO granted to an employee owning
stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or
any Related Corporation, the price per share specified
in the option agreement shall not be less than 110% of
the fair market value of Common Stock on the date of
grant.
(c) The fair market value determined as of the grant date of
Common Stock first exercisable by an ISO optionee in a
given calendar year under all his ISOs (granted under
all stock option plans of the Company and any Related
Corporation) shall not exceed $100,000.
(d) If at the time an Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market
value" shall be determined as of the last business day
for which the prices or quotes referred to below are
available prior to the date such Option is granted and
shall mean -
(i) the closing price on that day of the Common Stock if
such stock is then traded on a national securities
exchange; or
(ii) the last reported sale price on that day of the Common
Stock if the Common Stock is traded through the NASDAQ
National Market System or the Small Cap Market; or
(iii) the closing bid price (or average of closing bid
prices) last quoted on that day by an established
quotation service for over-the-counter securities, if
the Common Stock is not reported on a national
securities exchange or on the NASDAQ National Market
System or Small Cap Market.
(e) However, if the Common Stock is not publicly traded at
the time an Option is granted under the Plan, "fair
market value" shall be deemed to be the fair value of
the Common Stock as determined by the Committee after
3
<PAGE>
taking into consideration all factors that it deems
appropriate, including, but without limitation thereto,
recent sale and offer prices of the Common Stock in
private transactions negotiated at arm's length.
7. Option Duration. Subject to earlier termination as
provided in Paragraphs 9 and 10, each Option shall expire
on the date specified by the Committee, but not more than
10 years from the date of grant. In the case of ISOs
granted to an employee owning stock possessing more than
10% of the total combined voting power of all classes of
stock of the Company or any Related Corporation, each such
ISO shall expire not more than 5 years from date of grant.
Subject to earlier termination as provided in Paragraphs 9
and 10, the term of each ISO shall be the term set forth in
the option agreement.
8. Exercise of an Option. Subject to the provisions of
Paragraphs 9 through 12, each Option granted under the Plan
shall be exercisable as follows:
(a) The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such
installments as the Committee may specify.
(b) Once an installment becomes exercisable, it shall remain
exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee.
(c) Each Option or installment thereof that becomes
exercisable may be exercised at any time or from time to
time, in whole or in part thereafter until the Option
terminates.
(d) The Committee shall have the right to accelerate the
date of exercise of any installment, except that the
Committee shall not accelerate the exercise date of any
installment of any Option granted to an employee as an
ISO (and not previously converted into a Non-Qualified
Option pursuant to Paragraph 15) if such acceleration
would violate the annual vesting limitation contained in
Section 422(d) of the Code, and the provisions of
Paragraph 6(b).
9. Termination of Employment.
(a) By Reason of Death. If an ISO optionee ceases to be
employed by the Company and all Related Corporations by
reason of his death, any ISO of his may be exercised, to
the extent of the number of shares with respect to which
he could have exercised it on the date of his death, by
his estate, personal representative or beneficiary who
has acquired the ISO by will or by the laws of descent
and distribution, at any time prior to the earlier of
the ISO's specified expiration date or 180 days from the
date of the optionee's death.
(b) By Reason of Disability. If an ISO optionee ceases to
be employed by the Company and all Related Corporations
by reason of his disability, he shall have the right to
exercise any ISO held by him on the date of termination
of employment to the extent of the number of shares with
respect to which he could have exercised it on that
date, at any time prior to the earlier of the ISO's
specified expiration date or 180 days from the date of
the termination of the optionee's employment. For
purposes of the Plan, the term "disability" shall have
the meaning assigned to it in Section 22(e)(3) of the
Code or any successor statute.
(c) For Any Other Reasons.
(i) If an ISO optionee ceases to be employed by the
Company or any Related Corporation other than by
reason of his death or disability, no further
installments of his then outstanding ISOs shall become
exercisable, and his ISOs shall terminate on the
4
<PAGE>
earlier to occur of (a) the expiration of 60 days from
the date of the termination of his employment, or (b)
his ISOs' specified expiration dates, unless the
Committee shall convert his ISOs into Non-Qualified
Options pursuant to Paragraph 15 and shall agree to
the continuation of his Options in such respect as it
shall determine in its discretion.
(1) Leave of absence with the written approval of the
Committee shall not be considered an interruption of
employment under the Plan if such written approval
contractually obligates the Company or any Related
Corporation to continue the employment of the employee after
the approved period of absence.
(2) Employment shall also be considered as continuing
uninterrupted during any other bona fide leave of absence (such
as those attributable to illness, military obligations or
governmental service) provided that the period of such leave
does not exceed 90 days or, if longer, any period during which
such optionee's right to re-employment is guaranteed by statute.
(d) Nothing in the Plan shall be deemed to give any grantee
of any Option or Restricted Stock the right to be
retained in employment or other service by the Company
or any Related Corporation for any period of time.
Options granted under the Plan shall not be affected by
any change of employment within or among the Company and
Related Corporations, so long as the optionee continues
to be an employee of the Company or any Related
Corporation.
(e) In the case of holders of Non-Qualified Options, the
foregoing termination and cancellation provisions shall
also apply unless specifically otherwise provided in the
option agreement pursuant to which the Option was
granted or by a subsequent determination of the
Committee.
10. Dissolution of an Entity That is an Optionee. If a
partnership, corporation or other entity holds a Non-Qualified
Option and such entity is dissolved, liquidated,
becomes insolvent or enters into a merger or acquisition
with respect to which such optionee is not the surviving
entity, such Option shall terminate immediately upon the
occurrence of such event.
11. Assignability. No Option shall be assignable or
transferable by the optionee except by will or by the laws
of descent and distribution. During the lifetime of the
Optionee each Option shall be exercisable only by him.
12. Terms and Conditions of Options.
(a) Options shall be evidenced by option agreements (which
need not be identical) in such form as the Committee may
from time to time approve. The agreements shall conform
to the terms and conditions set forth in Paragraphs 6
through 11 hereof, but may contain such other provisions
as the Committee deems advisable that are not
inconsistent with the Plan, including transfer and
repurchase restrictions applicable to shares of Common
Stock issuable upon exercise of Options. The Committee
may from time to time confer authority and
responsibility on one or more of its own members and/or
one or more officers of the Company to execute and
deliver such agreements. The appropriate officers of
the Company are authorized and directed to take any and
all action necessary or advisable from time to time to
carry out the terms of such instruments.
5
<PAGE>
(b) Each employee who receives an ISO shall by signing the
option agreement relating to such ISO automatically
thereby agree to notify the Company in writing
immediately after the employee makes a disqualifying
disposition of any Common Stock received pursuant to the
exercise of an ISO (a "Disqualifying Disposition").
Disqualifying Disposition means any disposition
(including any sale) of such stock before the expiration
of (a) two years after the grant date of the ISO under
which such stock was acquired, or (b) one year after the
optionee acquired such stock by exercising such ISO,
whichever period expires later. If the optionee dies
before such stock is sold, the holding period
requirements no longer apply and thereafter, no
Disqualifying Disposition can occur.
13. Adjustments. Upon the happening of any of the following
described events, an optionee's rights with respect to his
Options shall be adjusted as hereinafter provided:
(a) If shares of Common Stock shall be sub-divided or
combined into a greater or smaller number of shares, or
if upon a merger, consolidation, reorganization, split-up,
liquidation, combination, recapitalization or the
like of the Company, the shares of Common Stock shall be
exchanged for other securities of the Company or of
another corporation, each optionee shall be entitled
(subject to the conditions herein stated) to purchase
such number of shares of common stock or of other
securities of the Company or of such other corporation
as were exchangeable for the number of shares of Common
Stock that such optionee would have been entitled to
purchase except for such action, and appropriate
adjustments shall be made in the purchase price per
share to reflect such subdivision, combination, or
exchange.
(b) In the event the Company shall issue any of its shares
as a stock dividend upon or with respect to the shares
of stock of the class that shall at the time be subject
to an Option hereunder, each optionee upon exercising an
Option shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which he
is exercising his Option and, in addition thereto (at no
additional cost), such number of shares of the class or
classes in which such stock dividend or dividends were
declared or paid, and such amount of cash in lieu of
fractional shares, as he would have received if he had
been the holder of the shares as to which he is
exercising his Option at all times between the date of
grant of such Option and the date of its exercise.
(c) Notwithstanding the foregoing, any adjustments made
pursuant to subparagraph 13(a) or (b) shall be made only
after the Committee, having consulted with counsel for
the Company, determines whether such adjustments with
respect to ISOs will constitute a "modification" of such
ISOs as that term is defined in Section 425 of the Code,
or will cause any adverse tax consequences for the
holders of such ISOs. No adjustments of any kind shall
be made for dividends paid in cash or in property other
than securities of the Company.
(d) No fractional shares shall be issued under the Plan.
Any fractional share that, but for this subparagraph
13(d), would have been issued to an optionee pursuant to
an Option shall be deemed to have been issued and
immediately sold to the Company for its fair market
value, and the optionee shall receive from the Company
cash in lieu of such fractional share.
(e) Upon the happening of any of the events described in
subparagraphs 13(a) or (b), above, the class and
aggregate number of shares set forth in Paragraph 4
hereof that are subject to Options that previously were
or subsequently may be granted under the Plan shall also
be appropriately adjusted to reflect the events
specified in such subparagraphs. The Committee shall
6
<PAGE>
determine the specific adjustments to be made under this
Paragraph 13, and subject to Paragraph 2, its
determination shall be conclusive.
(f) Unless the approval of stockholders is not obtained
within the time period set forth in Paragraph 17(a), no
action of the Board or stockholders may alter or impair
the rights of an optionee or purchaser of Restricted
Stock without his consent under any Option or Restricted
Stock previously granted to him.
14. Means of Exercising Options.
(a) An Option (or any part or installment thereof) shall be
exercised by giving written notice to the Company at its
principal office address. The notice shall identify the
Option being exercised and specify the number of shares
being exercised, and shall be accompanied by full
payment of the purchase price therefor either
(i) in United States dollars in cash or by check;
(ii) at the discretion of the Committee, through the
delivery of shares of Common Stock having a fair
market value equal as of the date of the exercise to
the cash exercise price of the Option;
(iii) at the discretion of the Committee, by delivery of
the optionee's personal recourse note bearing
interest payable not less frequently than annually at
no less than 100% of the lowest applicable Federal
rate, as defined in Section 1274(d) of the Code; or
(iv) at the discretion of the Committee, by any combination
of (i), (ii) and (iii) above.
(b) If the Committee exercises its discretion to permit
payment of the exercise price of an ISO by means of the
methods set forth in clauses (ii) or (iii) above, such
discretion shall be exercised in writing at the time of
the grant of the ISO in question.
(c) The holder of an Option shall not have the rights of a
shareholder with respect to the shares covered by his
Option until the date of issuance of a stock certificate
to him for such shares. Except as expressly provided
above in Paragraph 13 with respect to a change in
capitalization and stock dividends, no adjustment shall
be made for dividends or similar rights for which the
record date is before the date such stock certificate is
issued.
15. Conversion and Termination of ISOs. At the written request
or with the written consent of any optionee, the Committee
may in its discretion take such actions as may be necessary
to convert such optionee's ISOs (or any installments or
portions of installments thereof) that have not been
exercised into Non-Qualified Options at any time prior to
the expiration of such ISOs, regardless of whether the
optionee is an employee of the Company or a Related
Corporation at the time of such conversion. Such actions
may include, but shall not be limited to, extending the
exercise period or reducing the exercise price. At the
time of such conversion, the Committee (with the consent of
the optionee) may impose such conditions on the exercise of
the resulting Non-Qualified Options as the Committee in its
discretion may determine, provided that such conditions
shall not be inconsistent with the Plan. However, nothing
in the Plan shall be deemed to give any optionee the right
to have his ISOs converted into Non-Qualified Options, and
no such conversion shall occur until and unless the
Committee takes appropriate action. The Committee with the
consent of the optionee may also terminate any portion of
any ISO that has not been exercised at the time of such
termination.
7
<PAGE>
16. Restricted Stock. Each Grant of Restricted Stock under the
Plan shall be evidenced by an instrument (a "Restricted
Stock Agreement") in such form as the Committee shall
prescribe from time to time in accordance with the Plan and
shall comply with the following terms and conditions, and
with such other terms and conditions as the Committee in
its discretion shall establish:
(a) The Committee shall determine the number of shares of
Common Stock to be issued to an eligible person pursuant
to the grant of Restricted Stock, and the extent, if
any, to which they shall be issued in exchange for cash,
other consideration, or both.
(b) Shares issued pursuant to a grant of Restricted Stock
may not be sold, assigned, transferred, pledged or
otherwise disposed of, except by will or the laws of
descent and distribution, or as otherwise determined by
the Committee in the Restricted Stock Agreement, for
such period as the Committee shall determine, from the
date on which the Restricted Stock is granted (the
"Restricted Period"). The Company shall have the right
to repurchase the Common Stock at such price as the
Committee shall have fixed in the Restricted Stock
Agreement, which right will be exercisable
(i) if the Participant's continuous employment or
performance of services for the Company and the
Related Corporations shall terminate prior to the
expiration of the Restricted Period;
(ii) if on or prior to the expiration of the Restricted
Period or the lapse of such repurchase right, the
Participant has not paid to the Company an amount
equal to any federal, state, local or foreign income
or other taxes that the Company determines is required
to be withheld in respect of such Restricted Stock; or
(iii) under such other circumstances as the Committee in
its discretion shall determine.
(c) Such repurchase right shall be exercisable on such
terms, in such manner and during such period as is set
forth in the Restricted Stock Agreement.
(d) Each certificate for shares issued as Restricted Stock
shall bear an appropriate legend referring to the
foregoing repurchase right and other restrictions; shall
be deposited by the stockholder with the Company,
together with a stock power endorsed in blank; or shall
be evidenced in such other manner permitted by
applicable law as determined by the Committee in its
discretion. Any attempt to dispose of any such shares
in contravention of the foregoing repurchase right and
other restrictions shall be null, void and without
effect.
(e) If shares issued as Restricted Stock shall be
repurchased pursuant to a repurchase right, and if the
stock certificates representing such shares were not
retained by the Company, the stockholder, or in the
event of his death, his personal representative, shall
forthwith deliver to the Secretary of the Company such
certificates, accompanied by such instrument of
transfer, if any, as may reasonably be required by the
Secretary of the Company.
(f) If the repurchase right described above is not exercised
by the Company before it lapses, such repurchase right
and the restrictions shall terminate and be of no
further force and effect.
(g) If a person who has been in continuous employment or
performance of services for the Company or a Related
Corporation since the date on which Restricted Stock was
granted to him shall, while in such employment or
performance of services, die, or terminate his
employment or performance of services by reason of his
8
<PAGE>
disability or early, normal or deferred retirement under
an approved retirement program of the Company or a
Related Corporation (or such other plan or arrangement
as may be approved for this purpose by the Committee in
its discretion) and if any of such events shall occur
after the date on which the Restricted Stock was granted
to him and prior to the end of the Restricted Period,
the Committee may cancel the repurchase right (and any
and all other restrictions) on any or all of the shares
of Restricted Stock.
17. Term, Termination and Amendment of the Plan.
(a) The Plan was adopted by the Board on November 1, 1994
(the "Adoption Date") subject to the approval of the
Plan by the holders of a majority of the outstanding
voting stock of the Company within 12 months of the
Adoption Date.
(b) The Plan shall expire on the tenth anniversary of the
Adoption Date (the "Plan Expiration Date") (except as to
Options and Restricted Stock outstanding on that date).
(c) Subject to the provisions of Paragraph 5, above, Options
and Restricted Stock may be granted under the Plan by
the Committee, prior to the date of stockholder approval
of the Plan. If the approval of stockholders is not
obtained by within 12 months of the Adoption Date, any
grants of Options or Restricted Stock under the Plan
made prior to that date shall be rescinded.
(d) The Board may terminate or amend the Plan in any respect
at any time, except that the following amendments shall
be null and void if not approved by stockholders within
12 months of the adoption thereof by the Board:
(i) any increases the total number of shares that may be
issued under the Plan (except by adjustment pursuant
to Paragraph 13);
(ii) any changes in the class of persons eligible to
participate in the Plan; or
(iii) any material increase in the benefits to participants
under the Plan.
18. Application of Funds. The proceeds received by the Company
from the sale of shares pursuant to Options and Restricted
Stock shall be used for general corporate purposes.
19. Governmental Regulation. The Company's obligation to sell
and deliver shares of Common Stock under the Plan is
subject to any governmental approval required in connection
with the authorization, issuance or sale of such shares.
20. Withholding of Additional Income Taxes. In accordance with
the Code, upon (a) the exercise of a Non-Qualified Option;
(b) the purchase of Common Stock for less than its fair
market value; (c) the lapse of restrictions on Restricted
Stock; or (d) the making of a Disqualifying Disposition (as
defined in Paragraph 12(b)), the Company may require the
employee to pay additional withholding taxes in respect of
the amount that is considered compensation includible in
such person's gross income.
21. Governing Law and Construction of the Plan. The validity
and construction of the Plan and the instruments evidencing
Options and Restricted Stock shall be governed by the laws
of the State of Delaware. In construing the Plan, the
singular shall include the plural and the masculine gender
shall include the feminine and neuter, unless the context
otherwise requires.
___________________
9
<PAGE>
Adopted by the Board of Directors on November 1, 1994
Approved by the Shareholders on November 2, 1994
Amended by the Board of Directors on May 10, 1995 with the
Approval of Stockholders on December 26, 1995
10
EXHIBIT 10.4
TECHNOLOGY SERVICE GROUP, INC.
1995 Non-Employee Director Stock Option Plan
________________________________________________________
1. Purpose. This Non-Qualified Stock Option Plan, to be known as
the 1995 Non-Employee Director Stock Option Plan (the "Plan")
is intended to promote the interests of Technology Service
Group, Inc., a Delaware corporation, (hereinafter, the
"Company") by providing an inducement to obtain and retain the
services of qualified persons who are not employees or officers
of the Company to serve as members of its Board of Directors
(the "Board").
2. Available Shares.
(a) The total number of shares of Common Stock, par value $.01
per share, of the Company (the "Common Stock"), for which
options may be granted under the Plan shall not exceed
100,000 subject to adjustment in accordance with Paragraph
11 of the Plan.
(b) The number of shares of Common Stock set forth in
Paragraph 2(a) and Paragraph 4 reflect and give effect to
any stock split carried out in connection with the initial
public offering of the Company's Common Stock.
(c) Shares subject to the Plan are authorized but unissued
shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under
the Plan are surrendered before exercise or lapse without
exercise, in whole or in part, the shares reserved
therefor shall continue to be available under the Plan.
3. Administration.
(a) The Plan shall be administered by the Board until such
time as it appoints a Stock Plans Committee in connection
with the Company's initial public offering (the
"Committee"). References to the Committee shall be deemed
references to the Board if no such committee is in
existence.
(b) The Committee shall, subject to the provisions of the
Plan, have the power to construe the Plan, to determine
all questions hereunder, and to adopt and amend such rules
and regulations for the administration of the Plan as it
may deem desirable.
4. Granting of Options.
(a) Initial Grant. On the consummation of the initial public
offering of the Company's Common Stock (the "Public
Offering Date"), each person who is then a member of the
Board, and who is not a current or former employee or
officer of the Company (a "non-employee director"), shall
be automatically granted an initial option (the "Initial
Option") to purchase 10,000 shares of the Common Stock at
the offering price per share to the public in such
offering.
(b) Subsequent Grants. Each non-employee director who
received an Initial Option and who is serving as a non-employee director
at the close of business on September 1
in any year after the Public Offering Date shall be
automatically granted on such date an option to purchase
an additional 3,000 shares of Common Stock.
(c) Newly Elected or Appointed Non-Employee Directors. Each
person who becomes a non-employee director after the
Public Offering Date shall be automatically granted an
option to purchase 3,000 shares of Common Stock effective
upon his or her election or appointment to the Board and
shall be automatically granted an option to purchase an
additional 3,000 shares of Common Stock on each
anniversary of the date of his or her election or
appointment to the Board, providing that on such
anniversary he or she is a non-employee director.
<PAGE>
(d) Except for the specific options referred to above, no
other options shall be granted under the Plan.
5. Option Price.
(a) The option (purchase) price of the stock covered by an
option granted pursuant to the Plan shall be equal to the
fair market value of such shares on the day the option is
granted. The option price will be subject to adjustment
in accordance with the provisions of Paragraph 11 of the
Plan.
(b) If the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date an option
is granted and shall mean
(i) the closing price (on that date) of the Common Stock on
the principal national securities exchange on which the
Common Stock is traded, if such stock is then traded on
a national securities exchange; or
(ii) the last reported sale price (on that date) of the
Common Stock on the Nasdaq National Market or SmallCap
Market, if the Common Stock is then traded in either of
such markets; or
(iii) the closing bid price (or average of bid prices)
last quoted (on that date) by an established
quotation service for over-the-counter securities,
if the Common Stock is not reported on a national
securities exchange, the Nasdaq National Market or
the Nasdaq SmallCap Market.
(c) If the Common Stock is not publicly traded at the time an
Option is granted under the Plan, "fair market value"
shall be deemed to be the fair value of the Common Stock
as determined by the Committee after taking into
consideration all factors which it deems appropriate,
including, but without limitation thereto, recent sale
and offer prices of the Common Stock in private
transactions negotiated at arm's length.
6. Period of Option. Unless sooner terminated in accordance with the
provisions of Paragraph 9 of the Plan, an option granted
hereunder shall expire on the tenth anniversary of the grant
date.
7. Vesting of Shares and Legend.
(a) Vesting. All Initial Options shall be fully exercisable
from and after the date six months after the date of
grant. All other options granted hereunder shall be
fully exercisable from and after the first anniversary of
the grant date.
(b) Acceleration Upon Change in Control. Anything in the
Plan to the contrary notwithstanding, each outstanding
option granted under the Plan shall become immediately
exercisable in full in the event a Change in Control (as
defined in Paragraph 12) of the Company occurs.
(c) Legend on Certificates. The certificates representing
shares purchased under the Plan shall carry such
appropriate legend and such written instructions shall be
given to the Company's transfer agent as may be deemed
necessary or advisable by counsel to the Company in order
to comply with the requirements of the Securities Act of
1933 or any state securities laws.
8. Non-Transferability of Options. Any option granted pursuant to the
Plan shall not be assignable or transferable other than by will
or the laws of descent and distribution or pursuant to a
domestic relations order and shall be exercisable during the
optionee's lifetime only by him or her. If and to the extent
that Rule 16b-3(a)(2) under the Securities Exchange Act of 1934
(the "Exchange Act") is amended so as to permit transfers of
options to members of an optionee's family or to trusts
2
<PAGE>
established for the benefit of such family members, options
granted hereunder may be transferable to the extent and on the
terms provided by Rule 16b-3(a)(2), as so amended.
9. Termination of Option Rights.
(a) In the event an optionee ceases to be a member of the
Board for any reason other than death or permanent
disability, any then unexercised portion of options
granted to such optionee shall, to the extent not then
vested, immediately terminate and become void; any
portion of an option which is then vested, but has not
been exercised at the time the optionee so ceases to be
a member of the Board may be exercised, to the extent it
is then vested, by the optionee within 180 days of the
date the optionee ceased to be a member of the Board; and
all such optionee's options shall terminate after such
180 days have expired.
(b) In the event that an optionee ceases to be a member of
the Board by reason of his or her death or permanent
disability, any option granted to such optionee shall be
immediately and automatically accelerated and become
fully vested and all unexercised options shall be
exercisable by the optionee (or by the optionee's
personal representative, heir or legatee, in the event of
death) until the scheduled expiration date of the option.
10. Exercise of Option.
(a) Subject to the terms and conditions of the Plan and the
relevant option agreement, an option granted hereunder
shall, to the extent then exercisable, be exercisable in
whole or in part by giving written notice to the Company
by mail or in person stating the number of shares with
respect to which the option is being exercised,
accompanied by payment in full for such shares. Payment
may be
(i) in United States dollars in cash or by check;
(ii) in whole or in part in shares of Common Stock of the
Company already owned by the person exercising the
option or shares subject to the option being exercised
(subject to such restrictions and guidelines as the
Committee may adopt from time to time), valued at fair
market value determined in accordance with the
provisions of Paragraph 5; or
(iii) consistent with applicable law, through the
delivery of an assignment to the Company of a
sufficient amount of the proceeds from the sale of
the Common Stock acquired upon exercise of the
option and an authorization to the broker or
selling agent to pay that amount to the Company,
which sale shall be at the participant's direction
at the time of exercise.
(b) The Company's transfer agent shall, on behalf of the
Company, prepare a certificate or certificates
representing shares acquired pursuant to the exercise of
an option, shall register the optionee as the owner of
such shares on the books of the Company and shall cause
the fully executed certificates(s) representing such
shares to be delivered to the optionee as soon as
practicable after payment of the option price in full.
(c) The holder of an option shall not have any rights of a
stockholder with respect to the shares covered by the
option, except to the extent that one or more
certificates for such shares shall be delivered to him or
her upon the due exercise of the option.
11. Adjustments Upon Changes in Capitalization and Other Matters. Subject
to the provisions of Paragraph 7(b), upon the occurrence of
any of the following events adjustments shall be made as
hereinafter provided:
(a) Stock Dividends and Stock Splits. If after the Company's
initial public offering of its Common Stock the shares of
Common Stock shall be subdivided or combined into a
greater or smaller number of shares or if the Company
3
<PAGE>
shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of
shares then subject to outstanding options shall be
appropriately increased or decreased proportionately and
appropriate adjustments shall be made in the purchase
price per share to reflect such subdivision, combination
or stock dividend.
(b) Merger; Consolidation; Liquidation; Sale of Assets. In
the event of any consolidation or merger of the Company
in which the Company is not the surviving or continuing
corporation or pursuant to which shares of Common Stock
are converted into cash, securities or other property,
or if the Company is liquidated or sells or otherwise
disposes of all or substantially all of its assets to
another corporation while unexercised options remain
outstanding under the Plan
(i) subject to the provisions of clauses (iii), (iv) and
(v) below, after the effective date of such merger,
consolidation or sale, as the case may be, each holder
of an outstanding option shall be entitled, upon
exercise of such option, to receive in lieu of shares
of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock
received pursuant to the terms of the merger,
consolidation or sale; or
(ii) the Committee may waive any discretionary limitations
imposed with respect to the exercise of the option so
that all options from and after a date prior to the
effective date of such merger, consolidation,
liquidation or sale, as the case may be, specified by
the Committee, shall be exercisable in full; or
(iii) all outstanding options may be canceled by the
Committee as of the effective date of any such
merger, consolidation, liquidation or sale,
provided that notice of such cancellation shall be
given to each holder of an option, and each such
holder thereof shall have the right to exercise
such option in full (without regard to any
discretionary limitations imposed with respect to
the option) during a 30-day period preceding the
effective date of such merger, consolidation,
liquidation or sale; or
(iv) all outstanding options may be canceled by the
Committee as of the date of any such merger,
consolidation, liquidation or sale, provided that
notice of such cancellation shall be given to each
holder of an option and each such holder thereof shall
have the right to exercise such option, but only to the
extent exercisable in accordance with any discretionary
limitations imposed with respect to the option prior to
the effective date of such merger, consolidation,
liquidation or sale; or
(v) the Committee may provide for the cancellation of all
outstanding options and for the payment to the holders
thereof of some part or all of the amount by which the
value thereof exceeds the payment, if any, which the
holder would have been required to make to exercise
such option.
(c) Issuance of Securities. Except as expressly provided
herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall
be made for dividends paid in cash or in property other
than securities of the Company.
(d) Other Adjustments. Upon the happening of any of the
foregoing events after the Company's initial public
offering of Common Stock, the class and aggregate number
of shares set forth in Paragraphs 2 and 4 that may
subsequently be the subject of options granted under the
Plan shall also be appropriately adjusted to reflect such
events. The Committee shall determine the specific
adjustments to be made under this Paragraph 11 and its
determination (subject to Paragraph 7(b)) shall be
conclusive.
4
<PAGE>
12. Change of Control. For purposes of the Plan, a "Change in
Control" shall be deemed to have occurred if
(a) there shall be consummated -
(i) any consolidation or merger of the Company in which the
Company is not the surviving or continuing corporation
or pursuant to which shares of Common Stock would be
converted into cash, securities or other property,
other than a merger of the Company in which the holders
of the Common Stock immediately prior to the merger
have the same proportionate ownership of common stock
of the surviving corporation immediately after the
merger, or
(ii) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all
or substantially all of the assets of the Company, or
(b) the stockholders of the Company shall approve a plan or
proposal for liquidation or dissolution of the Company,
or
(c) any person (as such term is used in Section 13(d) and
Section 14(d)(2) of the Exchange Act) shall become the
beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act) of 40% or more of the Common Stock
other than pursuant to a plan or arrangement entered into
by such person and the Company, or
(d) during any period of two consecutive years, individuals
who at the beginning of such period constitute the entire
Board shall cease for any reason to constitute a majority
thereof, unless the election or the nomination for
election by the Company's stockholders of each new
director was approved by a vote of at least two-thirds of
the directors then still in office who were directors at
the beginning of such period.
13. Restrictions on Issuance of Shares. Notwithstanding the provisions
of Paragraph 7 and Paragraph 10 of the Plan, the Company
shall have no obligation to deliver any certificate or
certificates upon exercise of an option until one of the
following conditions shall be satisfied:
(a) The shares with respect to which the option has been
exercised are at the time of the issue of such shares
effectively registered under applicable federal and state
securities laws as now in force or hereafter amended; or
(b) Counsel for the Company shall have given an opinion that
such shares are exempt from registration under federal
and state securities laws as now in force or hereafter
amended; and the Company has complied with all applicable
laws and regulations with respect thereto, including
without limitation all regulations required by any stock
exchange upon which the Company's outstanding Common
Stock is then listed.
14. Investment Representations of Optionee. If requested by the
Company, the optionee shall deliver to the Company written
representations and warranties upon exercise of an option
that are necessary to show compliance with federal and state
securities laws, including representations and warranties to
the effect that a purchase of shares under the option is made
for investment and not with a view to their distribution (as
that term is used in the Securities Act of 1933).
15. Option Agreement. Each option granted under the provisions of
the Plan shall be evidenced by an option agreement, which
agreement shall be duly executed and delivered on behalf of
the Company and by the optionee to whom such option is
granted. The option agreement shall contain such terms,
provisions and conditions not inconsistent with the Plan as
may be determined by the Committee.
5
<PAGE>
16. Termination and Amendment of Plan. Options may no longer be
granted under the Plan after the close of business on the
tenth anniversary of the date of its adoption, and the Plan
shall terminate when all options granted or to be granted
hereunder are no longer outstanding. The Board may at any
time terminate the Plan or make such modification or
amendment thereof as it deems advisable; provided, however,
that the Board may not, without approval by the affirmative
vote of the holders of a majority of the shares of Common
Stock present in person or by proxy and entitled to vote at
the meeting
(a) increase the maximum number of shares for which options
may be granted under the Plan (except by adjustment
pursuant to Paragraph 11);
(b) materially modify the requirements as to eligibility to
participate in the Plan;
(c) materially increase benefits accruing to option holders
under the Plan; or
(d) amend the Plan in any manner that would cause Rule 16b-3
under the Exchange Act ("Rule 16b-3") to become
inapplicable to the Plan;
and provided further that the provisions of the Plan specified
in Rule 16b-3(c)(2)(ii)(A) (or any successor or amended
provision thereof) under the Exchange Act (including without
limitation, provisions as to eligibility, amount, price and
timing of awards) may not be amended more than once every six
months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act, or
the rules thereunder. Termination or any modification or
amendment of the Plan shall not, without consent of a
participant, affect his or her rights under an option
previously granted to him or her.
17. Withholding of Income Taxes. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal
Revenue Code, may require the optionee to pay withholding
taxes in respect of amounts considered to be compensation
includible in the optionee's gross income.
18. Compliance with Regulations. It is the Company's intent that
transactions under the Plan comply with all applicable
conditions of Rule 16b-3 and any applicable Securities and
Exchange Commission interpretations thereof. To the extent
that any provision of the Plan or action by the Board or the
Committee fails to so comply, it shall be deemed null and
void to the extent permitted by law and deemed advisable by
either of them.
19. Governing Law. The validity and construction of the Plan and
the instruments evidencing options shall be governed by the
laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
_____________________
Adopted by the Board of Directors this 10th day of May, 1995
Approved by Stockholders on December 26, 1995
Amended by the Board of Directors on August 11, 1997
6
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------
State of %
Name Incorporation Ownership
- ---------------------- ------------- ----------
Technology Service
Group, Inc. Delaware 100%
Elcotel Direct, Inc. Delaware 100%
Public Communication
Managers, Inc. Delaware 19.9%
Public Communication-I
Corporation Delaware 100%
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-46559, 33-46561, 33-46563, 33-46573, 33-68806, 33-68808, 33-62631
and 33-62633 of Elcotel, Inc. and subsidiaries on Forms S-8, of our report
dated June 24, 1998, appearing in the Annual Report on Form 10-K of
Elcotel, Inc. and subsidiaries for the year ended March 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATMENTS AS OF MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,655
<SECURITIES> 0
<RECEIVABLES> 11,407
<ALLOWANCES> 0
<INVENTORY> 9,088
<CURRENT-ASSETS> 28,124
<PP&E> 4,779
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,438
<CURRENT-LIABILITIES> 7,887
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 49,526
<TOTAL-LIABILITY-AND-EQUITY> 67,438
<SALES> 46,250
<TOTAL-REVENUES> 46,250
<CGS> 28,645
<TOTAL-COSTS> 28,645
<OTHER-EXPENSES> 15,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (103)
<INCOME-PRETAX> 2,610
<INCOME-TAX> 853
<INCOME-CONTINUING> 1,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,757
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
