UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ___________________
Commission file number 0-15205
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 Number)
6428 Parkland Drive 34243
Sarasota, Florida (Zip Code)
(Address of principal executive offices)
(941) 758-0389
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value, $.01 Per Share
(Title of Class)
Redeemable Warrants
(Title of Class)
Indicate by check mark whether 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 Common Stock held by non-affiliates of
the Registrant at June 17, 1999, computed by reference to the closing price of
the Registrant's Common Stock on such date as quoted by the National Market
System of NASDAQ, was approximately $20,498,466. 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.
At June 17, 1999, there were 13,499,693 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. BUSINESS
General
The Company designs, develops, manufactures and markets a comprehensive line of
integrated public communications products and services. The Company's product
line includes microprocessor-based payphone terminals known in the industry as
"smart" or "intelligent" payphones, software systems to manage and control
networks of the Company's smart payphone terminals, electromechanical payphone
terminals also known in the industry as "dumb" payphones, replacement components
and assemblies, and an offering of industry services including repair, upgrade
and refurbishment of equipment, operator services, customer training and
technical support. The Company provides customized hardware and software
solutions designed to meet the specific application requirements of customers.
The Company's payphone terminals operate and provide service over domestic and
international telephone networks. For a more detailed description of the
Company's products, see "Products," below.
The Company markets its products and services to public telecommunications and
payphone service providers in the United States and in certain foreign
countries. The Company's customers include telephone companies that provide
wireline and wireless local exchange services, telephone companies that provide
wireline and wireless long-distance telephone services and companies that
install and operate payphone terminals as independent payphone service
providers. The Company's international business consists of export sales, and
the Company does not presently have any foreign operations. See "Sales and
Markets," below.
The Company's principal offices are located at 6428 Parkland Drive, Sarasota,
Florida 34243, and its telephone number at that address is (941) 758-0389.
Unless the context requires otherwise, Elcotel, Inc. and its subsidiaries,
Technology Service Group, Inc. ("TSG") and Elcotel Direct, Inc., are referred to
herein collectively as the "Company" or "Elcotel". Unless otherwise stated, all
dollar amounts, other than per share data, set forth in Part I and Part II of
this Form 10-K report are stated in thousands.
Forward Looking Statements
The statements contained in this report on Form 10-K which are not historical
facts contain forward looking information regarding the Company's financial
position, business strategy, plans, projections and future performance based on
the beliefs, expectations, estimates, intentions or anticipations of management
as well as assumptions made by and information currently available to the
Company's management. Such statements reflect the current view of the Company
with respect to future events and are subject to risks, uncertainties and
assumptions related to various factors that could cause the Company's actual
results to differ materially from those expected by the Company, including
competitive factors, customer relations, the integration of operations resulting
from acquisitions, the risk of obsolescence of the Company's products,
relationships with suppliers, the risk of adverse regulatory action affecting
the Company's business or the business of the Company's customers, changes in
the international business climate, product introduction and market acceptance,
general economic conditions, seasonality, changes in industry practices, the
outcome of litigation to which the Company is a party, and other uncertainties
detailed in this report and in the Company's other filings with the Securities
and Exchange Commission.
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Recent Developments
Effective June 11, 1999, Mr. Tracey L. Gray retired from his position as the
President and Chief Executive Officer of the Company, and effective June 10,
1999, Mr. C. Shelton James, Chairman of the Board of Directors, was appointed as
Acting President and Chief Executive Officer. The Company and Mr. James have
reached an agreement in principle with respect to a new employment agreement
that would supercede Mr. James's employment agreement that had become effective
on October 20, 1998. In addition, the Company and Mr. Gray have reached an
agreement in principle with respect to the terms of his retirement that would
supercede Mr. Gray's employment agreement that was effective as of October 20,
1998. See Item 10 - "Directors and Executive Officers of the Registrant."
During the fiscal year ended March 31, 1999 ("fiscal 1999"), the Company was
involved in negotiations concerning a possible business combination with an
international public telecommunications equipment manufacturer. During April
1999, the Company decided that the terms and conditions of the business
combination as then proposed would not be, at that time, in the best long-term
interests of the Company's stockholders, and terminated the negotiations. In
connection therewith, the Company charged to operations approximately $1.2
million of expenses, consisting primarily of legal, accounting and consulting
fees and expenses incurred by the Company during the negotiations and in
connection with due diligence investigations. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8 - "Consolidated Financial Statements and Supplementary Data."
During the fourth quarter of fiscal 1999, the Company adopted a plan to
reorganize certain sales and marketing activities with the purpose of enhancing
customer service, strengthening market focus and improving productivity. In
connection therewith, the Company charged $490 of reorganization expenses, which
include estimated costs of severance and salary continuation arrangements with
respect to terminated employees, to operations during the year ended March 31,
1999. 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 Industry
Domestic Market. Public telecommunications 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
the Regional Bell Operating Companies ("RBOCs") created upon the divestiture of
AT&T; long distance carriers ("IXCs") such as AT&T; independent payphone service
providers; 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 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 service providers 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 service providers. The majority of
payphones deployed by the RBOCs are essentially electronic 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
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intelligence required to process calls. The majority of payphones deployed by
independent payphone service providers 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 service providers 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 service providers 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,
particularly terminal equipment that provides access to new revenue streams. In
that event, the Company believes that existing payphone service providers,
including the RBOCs, might seek to enhance their technology base in order to
improve operating efficiencies and compete more effectively with each other and
with new entrants. 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 service providers 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 service providers
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
dialaround compensation to payphone service providers 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 may
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.
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Over the past several years, in response to the competitive pressures from
independent payphone service providers 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
service providers, 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 three 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 RBOCs) have merged. During the past
year, mergers between SBC Communications, Inc. and Ameritech, Inc. (another
RBOC) and between GTE and Bell Atlantic, Inc. were announced. In addition, there
have been a number of acquisitions and mergers among independent payphone
service providers. 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 service providers using multiple technologies may
move to standardize their technology and terminal equipment, thereby increasing
demand for new payphone terminal equipment.
During the latter part of fiscal 1999, the demand for the Company's products was
constrained by the recent merger activity among both independent payphone
service providers and domestic telephone companies, and on-going disputes
related to the amount and payor of dial-around compensation required by the
Telecommunications Act. Also, the payphone operating units of domestic telephone
companies began to eliminate unprofitable payphone locations as part of their
efforts to improve profitability as separate operating units, which reduced
their product requirements with respect to new installations. The Company
believes, but cannot assure, that the demand of domestic telephone companies for
its products will begin to improve sometime during the next year.
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 product offerings (see "Products," below).
International Market. The Company believes that there are several million
payphones internationally in the installed base. Public communications 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
telecommunications industry is opening the international markets, previously
dominated by monopoly and government infrastructure, to increased competition.
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 wireline and wireless networks
progresses.
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Products
The Company designs, develops, manufactures and markets a comprehensive line of
integrated public communications products and services. The Company's product
line includes microprocessor-based payphone terminals known in the industry as
"smart" or "intelligent" payphones, software systems to manage and control
networks of the Company's smart payphone terminals, electromechanical payphone
terminals also known in the industry as "dumb" payphones, replacement components
and assemblies, and an offering of industry services including repair, upgrade
and refurbishment of equipment, operator services, customer training and
technical support. The Company provides customized hardware and software
solutions designed to meet the specific application requirements of customers.
The Company's payphone terminals operate and provide service over domestic and
international telephone networks.
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 and credit cards, and multi-payment (coin and card)
payphones, for both coin line and business line applications, and an
international card payphone for wireless and cellular applications.
The intelligence of the "smart" payphone resides in an internal, programmable
printed circuit board control module that gives call rating information to the
user via audible voice prompts and then completes the routing of the call based
on programming. These smart terminals operate independently of a telephone
company's central office (CO). While there is an electronic board inside "dumb"
payphones, it acts as a network interface device and requires no programming.
Dumb payphones require a coin line for operation because they are dependent on
the CO for rating and routing of calls. Historically, independent payphone
service providers have used smart payphones while telephone companies have used
dumb payphones.
The Company's intelligent payphone terminals utilize state-of-the-art hardware
and software technology and, except for wireless and cellular applications and
certain configurations provided with Vacuum Fluorescent Displays ("VFD") and
backlit Liquid Crystal Displays ("LCD"), are powered by the low electric current
available from the telephone line. Using the power provided by the telephone
line eliminates the need for external power sources and avoids the expensive
cost of electrical installation.
The Company's intelligent payphone terminals may be remotely programmed and
monitored by the Company's network management systems, and operate by means of
microprocessor-based printed circuit board assemblies containing 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 various standard features
and options that provide, among others, the ability to:
o Monitor and report coin box status;
o Monitor and report the service condition of the payphone via
maintenance and diagnostic alarms;
o Report, in real time, any critical conditions to the
management system;
o Record and store call records, including called numbers, types
and length of calls and call revenue;
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o Remotely retrieve programming information, call records, cash
box status, and maintenance and diagnostic data;
o Program and monitor various options, rates, alarms and free
phone numbers on-site or remotely;
o Download voice prompts;
o Calculate time-of-day discounts and control other timed
functions via clock and calendar features; and
o Download revisions to the phone's software operating system.
Hardware options available with 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 custom designed housings/cabinets, an array
of electronic coin mechanisms 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 and customized call routing features.
The Company's smart payphone terminals include the following:
Gemini System III(TM) Payphone Terminals. The Gemini System III
payphone terminals are provided in GTE style and Western style
configurations, and are equipped with the Gemini System III printed
circuit board control module. This control module is programmable to
operate on either a business (B-1) line or on a coin line. Its modular
connector design allows the payphone service provider to choose the
desired feature set, which reduces installation time. In addition to
the standard features, the Gemini System III terminals include pin and
tone fraud protection, programmable initial rates, curfew
programmability, and multilingual voice prompts. The Gemini System III
terminals are offered in configurations that support a data port
interface for access to the Internet via laptop computers, and multiple
payment options, including coin, credit cards and smart cards. The
features included in the Gemini System III payphone terminals were
designed to meet the special application requirements of domestic
telephone companies, and are marketed primarily to that segment of the
market for installation in indoor and outdoor locations.
Eclipse(TM) and Komet(TM) Payphone Terminals. The Eclipse and Komet
payphone terminals are sophisticated GTE style and Western style
terminals, respectively, equipped with the 5502 printed circuit board
control module. The 5502 control module operates on either a B-1 line
or a coin line. In addition to the standard features, the extensive
capabilities of these terminals include a high-speed modem for faster
data transmission and retrieval, programmable speed dial buttons for
ease of use and generation of additional revenues, and bilingual voice
prompts. The Eclipse and Komet payphone terminals include a data port
interface for access to the Internet via laptop computers, and are
configured for multiple payment options, including coin, credit cards
and smart cards. Their LCD or optional VFD display panels augment
audible voice instructions and provide advertising capability. These
products are marketed to both domestic telephone companies and
independent payphone service providers for installation in high profile
indoor locations such as international airports, major hotels and
convention centers.
Series-5 Payphone Terminal. The Series-5 payphone is a GTE style
terminal equipped with Series-5 control modules. The Series-5 terminal
is generally provided in a coin-only configuration that operates
exclusively on a B-1 line. The Series 5 terminal is also offered in
configurations that support multiple payment options, including coin,
credit cards and smart cards. These products include standard features
designed for domestic independent payphone
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service providers and are marketed primarily to that segment of the
market for installation in indoor and outdoor locations.
Olympian 5501/5500 Payphone Terminals. The Olympian 5501/5500 payphones
are Western style terminals equipped with a 5501 or 5500 module. The
Olympian 5501 terminals operate on either a B-1 line or a coinline. The
Olympian 5500 terminals operate exclusively on a B-1 line. In addition
to the standard features, the features of the Olympian 5501 terminals
include programmable initial rates and timed local coin line calls. The
Olympian terminals are offered in configurations that support multiple
payment options, including coin, credit cards and smart cards. These
products include standard features designed for domestic independent
payphone service providers and are marketed primarily to that segment
of the market for installation in indoor and outdoor locations.
IPT(TM) Payphone Terminal. The IPT payphone terminal is an
international GTE style terminal equipped with the 5502 printed circuit
board control module. The terminal is provided in either a coin
configuration or a coin and card configuration, includes a LCD panel to
augment audible voice instructions and to display remaining card value
when applicable, and is configured to accept and store larger
international coins. This terminal can also be configured with a
backlit LCD with an auxiliary power source. In addition to standard
features, the IPT payphone terminal includes multi-lingual voice prompt
capability, user selectable language, and customized tariff tables.
International Eclipse(TM) Payphone Terminal. Like its domestic
counterpart, the international Eclipse payphone terminal is a
sophisticated GTE style terminal equipped with the 5502 printed circuit
board control module. The international Eclipse payphone terminal is
configured to accept and store larger international coins. In addition
to the standard features, the extensive capabilities of these terminals
include a high-speed modem for faster data transmission and retrieval,
programmable speed dial buttons for ease of use and generation of
additional revenues, and bilingual voice prompts. This payphone
terminal includes a data port interface for access to the Internet via
laptop computers, and is configured for multiple payment options,
including coin, credit cards and smart cards. Their LCD or optional VFD
display panels augment audible voice instructions and provide
advertising capability.
Solarus(TM) Payphone Terminal. The Solarus payphone terminal is a
custom designed stainless steel international card-only terminal
equipped with the 5502 printed circuit board control module, and
includes a LCD panel to augment audible voice instructions and to
display remaining card value when applicable. This terminal can also be
configured with programmable speed dial buttons and a backlit LCD with
an auxiliary power source. In addition to standard features, the
Solarus payphone terminal includes multi-lingual voice prompt
capability, user selectable language, and customized tariff tables. The
optional cellular model allows this payphone to operate in a wireless
environment.
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The Company's electromechanical or dumb payphone terminals perform the functions
of normal residential telephones, operate on a coin line and rely on the CO to
process calls. The Company's electromechanical payphone terminals consist of
coin and coinless terminals. Historically, these terminals have been the
products of choice for domestic telephone companies. They are not programmable,
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 and are simple to install and to maintain. The
Company's electromechanical payphone terminals include:
1D2 Dumb Payphone Terminal. The 1D2 payphone terminal is a Western
style terminal equipped with the 32C chassis board for coin line
operation. The basic features of the 1D2 payphone terminal include
power surge protection, volume amplification and optional pin fraud
protection. The 1D2 payphone terminal is sold domestically,
predominately to telephone companies.
11B Payphone Terminal. The 11B payphone terminal is a coinless terminal
equipped with a network interface that is used only for operator
assisted or toll free access calls. The 1D2 payphone terminal is sold
domestically, predominately to telephone companies.
Network Management Systems. The Company designs, develops and sells payphone
management software systems to manage and control both small and large networks
of the Company's installed smart 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 Company's network management systems include:
PNM Plus(TM) System. The PNM Plus system is a Windows-based management
system that is used to remotely program, manage, and monitor Eclipse,
Komet, and Series-5 payphone terminals. This software system has a
built-in 24-hour monitoring function that reports all pertinent phone
activity, including call detail records, maintenance reports and alarm
reports. At the payphone service provider's discretion, performance and
financial reports can be scheduled and generated for use the next
business day. The monitoring and reporting function can be configured
to be completely hands-free and to perform late at night, optimizing
the busy-hour performance.
PollQuest(TM) System. The PollQuest system is a Windows-based
management system designed to remotely program, manage and monitor the
Company's international payphone terminals. PollQuest has the ability
to generate call detail and maintenance reports, manage communications
with the payphones and generate performance-based reports.
CoinNet(TM) System. The CoinNet system is an Unix or DOS-based
management system that is used to remotely program, manage, and monitor
Gemini System III payphone terminals. The CoinNet system provides call
detail reports, maintenance and alarm reports, and the customized
operating characteristics of each Gemini System III payphone. The
CoinNet system has the ability to support installations of over 100,000
terminals and communicate with large numbers of payphones
simultaneously.
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The Company is also developing its next generation open architecture Windows-NT
compatible software management system that is expected to be capable of
communicating with and managing all of the Company's smart payphone terminals
and those of other manufacturers. See "Research and Development," below.
Components and Assemblies. The Company supplies its microprocessor-based printed
circuit board modules and retrofit kits (see "Payphone Terminals," above) to
RBOCs and other telephone companies that are upgrading the technology of their
installed base of payphones and to independent payphone service providers,
distributors and resellers. In addition, the Company supplies replacement
components and assemblies that include, among others, electromechanical payphone
assemblies, electronic coin mechanisms, card readers, cash box switches, dial
assemblies, handsets, coin relays, and volume amplification assemblies. Some of
the replacement components and assemblies supplied by the Company include:
32C Chassis. The 32C electromechanical chassis provides the connection
to the telephone network via a coin line and offers certain basic
features such as power surge protection. The 32C Chassis is used in
Western style payphone terminals and is marketed primarily to domestic
telephone companies.
22B Electronic Coin Validator. The 22B Electronic Coin Validator, also
known as a Coin Mechanism, tests the validity of coins deposited into
the terminals and reports the coin information to the printed circuit
board control module. Based on the information received from the coin
validator, the control module either processes the call or gives
audible instructions to the user on how to successfully complete the
call. The 22B Electronic Coin Validator is used in Western style
payphone terminals and is marketed primarily to domestic telephone
companies.
UBX Cash Box Switch. The UBX cash box switch is an advanced magnetic
assembly that reliably detects the removal and insertion of a cash box
from a payphone terminal, which is reported to the circuit board
control module. The reliable reporting of cash box collections to the
control module enables the accurate reporting of collection activity,
alarm conditions, coin status and coin revenue to the management
system.
Anti-Stuffing Device. The Anti-Stuffing Device is the assembly that is
installed in a coin return bucket to combat vandalism. This device
deters vandals from stuffing paper and various materials into the coin
return in an attempt to defraud the owner and/or the user of coins.
Volume Amplification Assembly. The Volume Amplification Assembly is
installed in the payphone terminal to amplify the voice signals from
the handset. The assembly provides three volume amplification settings.
Dial Assembly. The Dial Assembly, including keypad, reports called
digits to the printed circuit board control module so that the called
digits can be sent to the network through the telephone line. The
Company offers a variety of reliable dial assemblies compatible with
the various housings and circuit boards in the installed payphone base.
Relay Assembly. The relay assembly receives a signal from the circuit
board instructing it to return or collect the coins deposited in the
payphone terminal based on the result of the attempted or completed
phone call. The relay is an integral component of the payphone's coin
path.
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Customer Support Services. The Company offers comprehensive services to assist
customers in managing, maintaining and expanding their installed payphone
network. The Company provides the following: repair, refurbishment and upgrade
of customer-owned terminals and components, operator services (see "Sales and
Markets - Strategic Alliances," below), training, technical support, service
management, field engineering services, and rate file information.
Repair, Refurbishment and Upgrade of Equipment. The Company repairs,
refurbishes and upgrades payphone terminal equipment, and related
payphone components, owned and operated by its customers. The Company's
refurbishing activities involve the rebuilding of payphone terminals,
components and assemblies to "like new" condition. The Company's
upgrade activities include the modification of payphone terminals and
assemblies to an updated or enhanced technology. The Company believes
that these products foster stronger business relations with its
customer base and provides the Company with valuable intelligence to
guide product development and equipment designs.
Operator Services. The Company offers a complete line of Coin-less
Services, also known in the industry as Operator Services. The Company
has partnered with major providers to offer competitive One-Plus long
distance rates and Zero-Plus commissions to payphone service providers.
The Company's Coin-less Services also provide daily Internet reporting
and reliable payment schedules to its subscribers.
Training. The Company's training staff is fluent with the Company's
product line. A variety of training classes are offered to customers
including hardware maintenance and troubleshooting, network management
system training and advanced programming. The classes are offered at
the Company's headquarters, in cities throughout the U.S. and on
customer premises, at their request. The Company believes that
investment in training pays dividends to customers, as their
technicians are better trained and better able to solve technical
issues.
Technical Support. The Company maintains a technical support
organization that provides telephone support services to customers
twenty-four hours a day via the Company's 800 number, website and
fax-back program. The technical support staff is fluent in the
Company's product line.
Service Management. The Company offers to its customers a hands-off
approach to operating a payphone network. The Service Management team
is an in-house group that programs payphones, updates configuration
files, routinely monitors payphones and faxes reports weekly to
payphone owners. The only tasks for which the payphone owner is
responsible are the collection of coins and the cosmetic and technical
maintenance of the payphone. The service management program is offered
on a monthly subscription basis and customer choices range from a basic
offering to a package of services.
Field Engineering. The Company provides field engineering support
services during the introductory phase of new products and when
customers encounter unusual problems. The Company's field engineers
travel to customer premises and provide technical assistance to operate
the Company's products.
Rates. The Company provides up-to-date rate files necessary to rate and
route phone calls in accordance with all FCC, state and long distance
regulatory requirements. These rate files are available 24 hours a day
from the Company's website.
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Sales and Markets
General. The Company markets its payphone products and systems to public
telecommunications and independent payphone service providers in the United
States and in certain foreign countries. The Company's customers include
telephone companies that provide wireline and wireless local exchange services,
telephone companies that provide wireline and wireless long-distance telephone
services and companies that install and operate payphone terminals as
independent payphone service providers. The Company's customers range from
operators of small private payphone routes to large telephone companies
including the RBOCs, AT&T Local Services and GTE. The Company is a leader in
sales of microprocessor-based payphone terminals, software, and components in
the United States. The Company's international business consists of export
sales, and the Company does not presently have any foreign operations.
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 periodically hosts
customer conferences covering such areas as current and future product
development, regulatory and industry issues, and customer service.
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 from
one 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. Also, these 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. These 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 an agreement. Agreements
between the Company and independent payphone service providers generally set
forth product pricing and terms for specified purchase volumes, and include
provisions that enable the Company to change prices upon thirty (30) to ninety
(90) days notice. Agreements between the Company and its international customers
generally set forth the pricing and terms for specified purchase volumes, and
sales prices are generally fixed with respect to the 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 two years and interest charged at competitive
rates.
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Sales by geographic region for the years ended March 31, 1999, 1998 and 1997
were as follows (also see Note 12 to Item 8 - "Consolidated Financial Statements
and Supplementary Data):
Year Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
United States $ 59,102 $ 37,051 $ 21,583
Canada 3,197 2,012 108
Latin America 2,400 6,168 1,655
Europe, Middle East and Africa 31 195 99
Asia Pacific 495 824 3,180
Other Areas 38 -- 207
-------- -------- --------
Consolidated sales $ 65,263 $ 46,250 $ 26,832
======== ======== ========
Domestic Market. The Company believes that the domestic public communications
market represents a $6 billion market annually and that products 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 four distributors
that have limited exclusive selling arrangements in assigned territories. The
Company's direct sales force consists of eight full-time sales employees and
four sales engineers located regionally throughout the United States.
International. The Company markets its products in international markets
directly and through agent and distributor relationships supported by the
Company's sales, engineering and technical support personnel. The Company's
direct sales force consists of a staff of two international sales managers and
three sales engineers located at the Company's headquarters facility.
The Company believes that the international public communications market
represents a significant growth opportunity, and the Company intends to continue
its international product 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 United States 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
telecommunications services and payphones are often a significant part of the
capital expansion.
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In order to take advantage of these opportunities, the Company has continued its
efforts to:
o Employ individuals with experience in the international telecommunications
market;
o Develop a set of products capable of handling the requirements of the
international market, such as multi-currency capability, large coin
applications and smart card technology which is becoming widely used in
electronic commerce applications;
o Develop digital wireless payphone products;
o Develop software and hardware that allow the Company's products to be adapted
to the varying requirements of different countries; and
o Develop distribution partnerships and strategic alliances.
The Company has sold its products to customers in Bolivia, Morocco, Chile,
Korea, Mexico, Ecuador, Belize, Bermuda, Guatemala, Guam, Canada, Argentina,
Venezuela and the Philippines.
Dependence on Customers. During the fiscal year ended March 31, 1999, one
customer (Bell Atlantic Corporation) accounted for 20% of the Company's
consolidated sales. During the fiscal year ended March 31, 1998, no single
customer accounted for 10% or more of the Company's sales. During the fiscal
year ended March 31, 1997, two customers (Lucent Technologies Inc. and
Philippine Telegraph & Telephone, Inc.) each accounted for approximately 12% of
the Company's sales. The Company's domestic distributors accounted for
approximately 7%, 5% and 11% of the Company's sales during the fiscal years
ended March 31, 1999, 1998 and 1997, respectively.
Sales to telephone companies increased during the years ended March 31, 1999 and
1998 principally due to acquisitions during the year ended March 31, 1998. Sales
to telephone companies (primarily RBOCs) during the fiscal year ended March 31,
1999 aggregated $32,507 as compared to $15,999 during fiscal 1998 and $833
during fiscal 1997. Sales to independent payphone operators, foreign customers
and other domestic customers during the fiscal year ended March 31, 1999
aggregated $32,756 as compared to $30,251 during fiscal 1998 and $25,999 during
fiscal 1997.
The Company anticipates that certain of the 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. During May 1999, the Company entered into an agreement with
Caribbean Hotel Services, Incorporated ("CHS"). Under the agreement, the Company
agreed to manufacture CHS's desktop video payphone terminal on an exclusive
basis, and market the terminal and related services cooperatively with CHS
domestically and internationally. The Company believes that this alliance could
generate meaningful revenues in the future, although there can be no assurance
in that regard.
The Company began marketing operator services cooperatively with a large
domestic operator service provider (the "OSP") during the latter part of fiscal
1998. Under the agreement, the Company markets operator services provided by the
OSP 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
program
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were not significant during the fiscal years ended March 31, 1999 and 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 and products 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 that have the resources
and ability to develop and market products that could compete with the Company's
products. The Company believes its ability to compete depends upon many factors
within and outside its control, including the timing and market acceptance of
new products developed by the Company and its competitors, performance, price,
reliability and customer service and support.
The 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
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
Nortel Networks Corporation. 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 engaged in the public
communications business, 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 payphone terminals. 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.
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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 service 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.
Although the Company expects to continue to be subject to intense competition in
the future, the Company believes that its domestic 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 repairs, refurbishes and upgrades payphone terminal equipment and
components at its Orange, Virginia facility, and repairs printed circuit board
control module assemblies at its Sarasota, Florida 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 for the Company.
Components for the Company's control modules, electronic assemblies 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, the
Company's operations could be adversely affected until alternative sources or
substitute components could be obtained or designed into the Company's products.
The Company outsources the assembly of its electronic circuit board (control
module) 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 assembly operations 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 acquisition of the public terminal assets of Lucent Technologies
Inc. during the year ended March 31, 1998 and a foreign subcontractor
manufactures these housings under a supply agreement with the Company. The
Company has also established alternative suppliers providing essentially
equivalent
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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 acquisition of the public terminal assets of Lucent Technologies
Inc. during the year ended March 31, 1998 and a foreign subcontractor
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 circuit board assemblies are subjected to various automated tests
and defect-inducing processes to improve their quality and reliability. After
testing, the circuit 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 terminal equipment repaired, refurbished or upgraded. 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 the Company's products.
The Company's customer service staff at its corporate offices provides telephone
support services 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.
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Product Development
The Company's development efforts during fiscal 1999 were targeted towards the
development of products that integrate the microprocessor technology and
software systems of TSG and Elcotel, address digital wireless applications,
expand hardware and software product features, and expand the Company's product
line to address the dynamic product requirements of both domestic and
international customers. In particular, the Company is attempting to develop and
is seeking patent protection for new lower cost advanced digital microprocessor
based control modules that would enable integration of the Company's
technologies in advanced video, information and internet terminal applications
to a broad range of vertical markets. In addition, the Company is also
developing its next generation open architecture software management system that
is expected to be capable of communicating with and managing all of the payphone
terminals manufactured by the Company as well as terminals manufactured by
others, and that will support large networks of internet-capable public access
terminals. This advanced network software is also expected to provide the
capability to manage smart chip card and credit card applications, information,
e-mail and e-commerce applications, among others. The Company believes it may
begin to release its advanced technology based public access products during the
next year.
During fiscal 1999, the Company incurred approximately $6,121 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 $4,514 in fiscal 1998 and $2,623 in fiscal
1997. During the years ended March 31, 1999 and 1998, the Company capitalized
software development costs of $639 and $100, respectively.
The Company believes that research and development is important to the
continuation and enhancement of the Company's competitive position and to expand
the size of its addressable market. The Company's ability to adequately fund
future research and development is dependent upon its ability to generate
sufficient funds from operations or external sources.
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, 1999, the backlog of all products on order from
the Company was approximately $5,877, compared with a backlog of approximately
$10,284 at May 31, 1998. 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, most 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
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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
that are functionally equivalent to those of the Company. The Company licenses
the use of its proprietary software and designs through licensing provisions in
its sales agreements, 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 licensed in connection with the acquisition of the
public terminal assets of Lucent Technologies Inc. during the year ended March
31, 1998, from third parties under agreements providing for the payment of
royalties. Royalty expense during the years ended March 31, 1999 and 1998
approximated $220 and $86, respectively.
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 acquisition of the public
terminal assets of Lucent Technologies Inc. and the acquisition of Technology
Service Group, Inc. during the year ended March 31, 1998, 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 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.
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.
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Changes in Telecommunications Law and Regulations. Changes in domestic and
international telecommunications requirements could affect sales of the
Company's products and the operations of the Company's customers. In the United
States, the Company's products must comply with various Federal Communications
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 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 May 31, 1999, the Company employed 300 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.
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 payphone terminal products.
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 appropriate regulatory body has approved the products exported by the
Company.
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The regulation of telecommunications 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 communications 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 that 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.
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 payphone terminals, 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 that mandated fair compensation for all payphone service
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 payphone service 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 service providers to select the operator
service provider serving their payphones. This provision preempted state
regulations that required independent payphone service providers to route
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intralata calls to the telephone companies. The FCC, however, did not establish
conditions that require operator service providers to pay independent payphone
service 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 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 Zero-Plus 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 set 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 was set at the local coin rate
minus $.066. The FCC's decision was appealed to the U.S. Court of Appeals for
the District of Columbia Circuit, which reversed and remanded the matter to the
FCC.
On January 28, 1999, the FCC adopted a Third Report and Order in its proceeding
implementing the payphone compensation provisions of the Telecommunications Act.
This Order stated that compensation issues should be determined by marketplace
negotiations. In the absence of such a negotiated rate, the Order established a
default compensation rate for dial-around and toll free calls of $.24 per
completed call. In addition, the FCC applied the new rate retroactively to all
compensation owed since October 7, 1997. Multiple petitions for reconsideration
of the Order 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. 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.
On January 29, 1998, the FCC adopted a rule that all operator service providers
must orally disclose to 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 had to comply
with the new rule by July 1, 1998. The Company's products provide rate quotes
and comply with the rule with respect to coin
22
<PAGE>
calls. Also, payphone suppliers that offer automated operator service features
in their products and technology that allows payphone service providers to
validate calling and credit cards, and use stored data for billing and
collecting Zero-Plus calls are also required to comply with the rule by
providing rate quote capability in the product. The Company had previously
included such technology in its product features and expected that it would have
to modify its product software to provide the features to comply with the rule.
However, the Company has since discontinued offering such features in its
products and, thus, the Company's payphone terminal products must be programmed
to connect Zero-Plus calls to OSPs selected by the payphone operator in order to
process Zero-Plus calls. Accordingly, the OSP selected by the payphone operator
is responsible for compliance with these rules, and such rules do not affect the
operation of the Company's products.
The Company cannot predict the outcome of future FCC actions with respect to
compensation to payphone service providers or other matters, 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, 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 a Potentially Responsible Party ("PRP") for undertaking response actions
at a facility for the treatment, storage, and disposal of hazardous substances
operated by Seaboard Chemical Corporation from 1975 to 1989 at Jamestown, North
Carolina. However, as a small generator "De Minimis" party, TSG was permitted to
execute a buy-out agreement with 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, based on
information available to the Company, 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.
23
<PAGE>
Item 2. PROPERTIES
The Company owns and occupies 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.
The Company leases the following properties:
o A 16,000 square foot manufacturing facility located at 6448 Parkland Drive,
Sarasota, Florida under a three-year lease that commenced in December 1997;
o 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,
1998 and that is renewable by the Company for three additional terms of one
year each;
o 5,600 square feet of sales and engineering space located in a building at 225
Curie Drive, Alpharetta, Georgia under a three-year lease that commenced on
December 1, 1998.
The Company believes that its owned and leased space is adequate for its current
business.
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 1995 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 1,
Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended
September 30, 1996.
On September 28, 1998, the Company's Motion for Summary Judgment was granted by
the Court and the Court dismissed the Company from the class action. On December
11, 1998, the plaintiffs appealed the Court's decision to grant the Company's
Motion for Summary Judgment. 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 incidental to
the conduct of its business, there are no such pending legal proceedings which
are material to the business of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise during the fourth quarter of the fiscal year ended March
31, 1999.
24
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market System of The
Nasdaq Market under the symbol "ECTL." The Company's Redeemable Warrants to
purchase common stock were listed on the Nasdaq National Market System of The
Nasdaq Market under the symbol "ECTLW" from February 3, 1998 to January 13,
1999. The Redeemable Warrants expired on May 9, 1999. The following table sets
forth the high and low sales prices of the Company's Common Stock for each of
the quarterly periods during the years ended March 31, 1999 and 1998 as reported
by the Nasdaq National Market System:
High Low
---- ---
Fiscal 1999:
Quarter Ended June 30, 1998 6 23/32 4 3/16
Quarter Ended September 30, 1998 6 1/2 4 1/4
Quarter Ended December 31, 1998 6 1/4 4 3/4
Quarter Ended March 31, 1999 5 7/8 3 1/4
Fiscal 1998:
Quarter Ended June 30, 1997 6 5/8 5 1/4
Quarter Ended September 30, 1997 7 1/4 5 5/8
Quarter Ended December 31, 1997 8 1/8 5 5/8
Quarter Ended March 31, 1998 6 1/4 4 3/4
At June 17, 1999, the Company had 407 holders of record of its Common Stock.
The Company has never declared or paid any cash dividends on its Common Stock
and does not intend to pay cash dividends in the foreseeable future. Under the
terms of a Restated Loan and Security Agreement between the Company and its
bank, the Company is prohibited from paying dividends, other than dividends
payable in Common Stock, without the prior written consent of the bank.
----------
25
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data (in thousands, except per share data) is
qualified in its entirety by reference to the more detailed consolidated
financial statements and notes thereto included elsewhere in this report. See
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Results of Operations (1)
Net sales $ 65,263 $ 46,250 $ 26,832 $ 21,462 $ 25,090
Cost of sales 43,635 28,645 15,883 13,238 14,776
Selling, general and administrative
expenses 10,560 9,930 6,326 6,465 5,791
Engineering, research and
development expenses 6,121 4,514 2,623 2,257 1,758
Amortization expense 2,084 654 32 25 --
Other charges (credits) (2) 1,772 -- (331) 1,844 --
Interest (income) expense 517 (103) (205) (215) (285)
Income tax expense (benefit) 213 853 876 (861) (474)
Net income (loss) $ 361 $ 1,757 $ 1,628 $ (1,291) $ 3,524
Earnings (loss) per common and
common equivalent share (3):
Basic $ 0.03 $ 0.18 $ 0.20 $ (0.16) $ 0.48
Diluted $ 0.03 $ 0.18 $ 0.20 $ (0.16) $ 0.45
Financial Position
Current assets $ 31,327 $ 28,124 $ 10,982 $ 10,227 $ 9,927
Current liabilities 10,634 7,887 3,085 3,939 4,352
Working capital 20,693 20,237 7,897 6,288 5,575
Total assets 71,295 67,438 15,944 14,929 16,225
Long-term obligations 10,355 9,891 232 432 782
Retained earnings (deficit) 3,680 3,319 1,562 (66) 1,225
Stockholders' equity $ 50,306 $ 49,660 $ 12,627 $ 10,558 $ 11,091
</TABLE>
(1) On December 18, 1997, the Company acquired Technology Service Group,
Inc. ("TSG") pursuant to a merger and on September 30, 1997 acquired
from Lucent Technologies Inc. ("Lucent") certain assets related to
Lucent's payphone manufacturing and component parts business (the
"Lucent Assets"). The Company's consolidated statement of operations
for the year ended March 31, 1999 includes the operating results of TSG
and the operating results from the Lucent Assets. The Company's
consolidated statement of operations for the year ended March 31, 1998
includes the operating results of TSG and the operating results from
the Lucent Assets from the respective dates of acquisition.
(2) Other charges for the year ended March 31, 1999 include expenses of
$1,240 incurred in connection with a possible business combination that
was terminated by the Company and $490 of charges related to the
reorganization of the Company's sales and marketing organization (see
Item 1 - "Business - Recent Developments"). Other charges (credits) for
the years ended March 31, 1996 and 1997 represent an impairment reserve
with respect to notes receivable due to the bankruptcy of one of the
Company's customers, legal expenses related to the bankruptcy
proceeding and adjustments thereto related to the settlement of the
proceeding. See Item 8 - "Consolidated Financial Statements and
Supplementary Data."
(3) Earnings per share have been restated for the years ended March 31,
1997, 1996 and 1995 to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
26
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of financial condition and results of operations of the
Company should be read in conjunction with the consolidated financial statements
and notes thereto included in Item 8 - "Consolidated Financial Statements and
Supplementary Data". Dollar amounts, except per share data, are stated in
thousands.
Results of Operations
On December 18, 1997, the Company acquired Technology Service Group, Inc.
("TSG") pursuant to a merger for a total purchase price of $35,605, and 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 "Lucent Assets") for a total purchase price of
$5,957 (the "fiscal 1998 acquisitions"). The Company's consolidated statement of
operations for the year ended March 31, 1999 includes the operating results of
TSG and the operating results from the Lucent Assets. The Company's consolidated
statement of operations for the year ended March 31, 1998 includes the operating
results of TSG and the operating results from the Lucent Assets from their
respective dates of acquisition.
Net income for the year ended March 31, 1999 ("fiscal 1999") declined to $361,
or $.03 per diluted share, from $1,757, or $.18 per diluted share, for the year
ended March 31, 1998 ("fiscal 1998") as compared to $1,628, or $.20 per diluted
share, for the year ended March 31, 1997 ("fiscal 1997"). The decline in net
income for fiscal 1999 is attributable to a number of factors, including, among
others: (i) a reduction in gross profit margin as a percentage of sales; (ii) an
increase in costs and expenses due to the fiscal 1998 acquisitions and
integration of the operations and assets acquired; (iii) expenses of $1,240
incurred in connection with negotiations concerning a possible business
combination that were terminated by the Company; and (iv) a charge of $490
related to the reorganization of the Company's sales and marketing organization,
all of which are more fully explained herein. The Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") amounted to $4,338 for
fiscal 1999 compared to $3,806 for fiscal 1998 and $2,728 for fiscal 1997.
Fiscal 1999 compared to Fiscal 1998
The following table shows certain line items in the Company's consolidated
statements of operations for fiscal 1999 and fiscal 1998 that are discussed
below together with amounts expressed as a percentage of sales and with the
change in the line item from period to period expressed as a percentage increase
or (decrease).
<TABLE>
<CAPTION>
Fiscal Percent Fiscal Percent Percentage
1999 of Sales 1998 of Sales Change
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 65,263 100% $ 46,250 100% 41%
Cost of goods sold 43,635 67 28,645 62 52
Selling, general and administrative
expenses 10,560 16 9,930 21 6
Engineering, research and
development expenses 6,121 9 4,514 10 36
Amorization 2,084 3 654 1 219
Interest (income) expense 517 1 (103) -- (602)
Other charges 1,772 3 -- -- --
Income tax expense 213 -- 853 2 (75)
</TABLE>
27
<PAGE>
Net sales increased by $19,013, or 41%, to $65,263 for fiscal 1999 as compared
to $46,250 for fiscal 1998 primarily due to an increase in volume, a significant
portion of which is attributable to the fiscal 1998 acquisitions, offset by a
slight decline in average selling prices to independent payphone service
providers. Sales to domestic independent payphone service providers during
fiscal 1999 represented 38% of the Company's sales and increased by $4,024 or
19%, to $25,076, from $21,052 during fiscal 1998. Sales to domestic telephone
companies during fiscal 1999 represented 50% of the Company's sales and
increased by $16,508, or 103%, to $32,507, from $15,999 during fiscal 1998.
Export sales during fiscal 1999 represented 12% of the Company's sales and
declined by $1,519, or 17%, to $7,680, from $9,199 during fiscal 1998. During
fiscal 1999, sales of payphone terminals and printed circuit board control
modules and related retrofit kits accounted for $42,548, or 65% of sales, as
compared to $33,356, or 72% of sales, during fiscal 1998. Sales of payphone
components and assemblies approximated $11,820, or 18% of sales, during fiscal
1999 as compared to $9,688, or 21% of sales, during fiscal 1998. Repair,
refurbishment and upgrade sales approximated $9,895, or 15% of sales, during
fiscal 1999 as compared to $2,285, or 5% of sales, during fiscal 1998. Software
sales approximated $380 during fiscal 1999 as compared to $382 during fiscal
1998. Sales related to other services approximated $620 during fiscal 1999 as
compared to $539 during fiscal 1998. Fiscal 1998 sales include sales of $580 to
TSG prior to the acquisition date. During the latter part of fiscal 1999, the
demand for the Company's products was constrained by the recent merger activity
among both independent payphone service providers and domestic telephone
companies, and on-going disputes related to the amount and payor of dial-around
compensation required by the 1996 Telecommunications Act. Also, the payphone
operating units of domestic telephone companies began to eliminate marginal
payphone locations as part of their efforts to improve profitability as separate
operating units, which reduced their product requirements with respect to new
installations. The Company believes, but cannot assure, that the demand of
domestic telephone companies for its products will begin to improve sometime
during the next year. In addition, the Company believes, but cannot assure, that
the final resolution of dial-around compensation (depending upon the nature of
such final resolution) will increase the revenues and cash flows of payphone
service providers, which may stimulate demand for the Company's products.
Cost of sales as a percentage of net sales increased to 67% during fiscal 1999
from 62% during fiscal 1998 as a result of several factors, including: (i) the
increase in the percentage of sales to domestic telephone companies,
particularly repair, refurbishment and upgrade of customer owned equipment, at
margins lower than those achieved from other products; (ii) a slight reduction
in average selling prices, primarily to large independent payphone service
providers; (iii) the introduction of new products, such as the Eclipse(TM)
payphone terminal, with an initially higher start-up manufacturing cost; and
(iv) a shift in export sales towards such new products. The Company is in the
process of implementing programs to reduce the cost of such products, and
believes, but cannot assure, that its profit margins will improve slightly
during the next year with respect to such products.
Selling, general and administrative expenses increased by $630, or approximately
6%, during fiscal 1999 as compared to fiscal 1998, and represented 16% of sales
in fiscal 1999 versus 21% in fiscal 1998. The increase in selling, general and
administrative expenses results from inclusion of TSG's operations for a full
year, versus a part of the year in fiscal 1998, and an increase in sales
commissions related to the 41% increase in sales, offset significantly by
reductions in personnel and facilities costs from the integration of TSG's
operations into those of the Company and from the restructuring of the Company's
selling and marketing organization. In addition, the Company's provision for
credit losses, which in fiscal 1998 included significant reserves related to the
impairment of certain international notes, declined from $1,352 in fiscal 1998
to $117 in fiscal 1999.
Engineering, research and development expenses increased by $1,607, or
approximately 36%, during fiscal 1999 as compared to fiscal 1998, and
represented 9% of sales in fiscal 1999 versus 10% in fiscal 1998. During fiscal
1999, the Company expanded its engineering resources in an attempt to develop
28
<PAGE>
advanced digital microprocessor based technology and an advanced open
architecture network management software system that would enable the
integration of the Company's technologies in advanced video, information and
internet terminal applications for various vertical markets. The increase in
fiscal 1999 engineering, research and development expenses from the expansion of
product development activities and the inclusion of development activities
related to the TSG product line and the technology acquired from Lucent for a
full year, versus a part of the year in fiscal 1998, was partially offset by
reductions in personnel and facilities costs from the integration of TSG's
development activities into those of the Company. In addition, software
development costs capitalized during fiscal 1999 approximated $639 as compared
to approximately $100 in fiscal 1998.
Amortization expense during fiscal 1999 increased by $1,430 to 3% of sales
versus 1% of sales during fiscal 1998. The increase is primarily attributable to
amortization of goodwill and identifiable intangible assets recorded in
connection with the fiscal 1998 acquisitions for an entire year as compared to
part of the year in fiscal 1998.
The Company incurred net interest expense during fiscal 1999 of $517 as compared
to net interest income of $103 during fiscal 1998 primarily as a result of an
increase in average outstanding indebtedness related to the fiscal 1998
acquisitions and capital additions, including capitalized software, of $2,148.
Other charges during fiscal 1999 include $1,240 of expenses, consisting
primarily of legal, accounting and consulting fees incurred in connection with
negotiations concerning a possible business combination that were terminated by
the Company in April 1999 and $490 of charges related to the reorganization of
the Company's sales and marketing organization.
The Company's effective tax rate increased to 37% in fiscal 1999 from 33% in
fiscal 1998 primarily due to an increase in nondeductible expenses consisting
primarily of amortization of goodwill.
Fiscal 1998 compared to Fiscal 1997
The following table shows certain line items in the Company's consolidated
statements of operations for fiscal 1998 and fiscal 1997 that are discussed
below together with amounts expressed as a percentage of sales and with the
change in the line item from period to period expressed as a percentage increase
or (decrease).
<TABLE>
<CAPTION>
Fiscal Percent Fiscal Percent Percentage
1998 of Sales 1997 of Sales Change
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 46,250 100% $ 26,832 100% 72%
Cost of goods sold 28,645 62 15,883 59 80
Selling, general and administrative
expenses 9,930 21 6,326 24 57
Engineering, research and
development expenses 4,514 10 2,623 10 72
Amortization 654 1 32 -- 1,944
Interest (income) (103) -- (205) (1) (50)
Other (credits) -- -- (331) (1) (100)
Income tax expense 853 2 876 3 (3)
</TABLE>
Net sales increased by $19,418, or 72%, to $46,250 for fiscal 1998 as compared
to $26,832 for fiscal 1997, primarily due to the fiscal 1998 acquisitions and an
increase in volume offset a slight reduction in average selling prices to
independent payphone service providers. Sales to domestic independent
29
<PAGE>
payphone service providers during fiscal 1998 represented 46% of sales and
increased by $3,098, or 17%, to $21,052, from $17,954 during fiscal 1997. Sales
to domestic telephone companies during fiscal 1998 represented 36% of sales and
increased by $15,166 to $15,999, from $833 during fiscal 1997. Export sales
during fiscal 1998 represented 20% of sales and increased by $1,154, or 14%, to
$9,199, from $8,045 during fiscal 1997. During fiscal 1998, sales of payphone
terminals and printed circuit board control modules and related retrofit kits
accounted for $33,356, or 72% of sales, as compared to $23,572, or 88% of sales,
during fiscal 1997. Sales of software, payphone components and payphone
assemblies approximated $10,070, or 22% of sales, during fiscal 1998 as compared
to $2,910, or 11% of sales, during fiscal 1997. Repair, refurbishment and
upgrade sales approximated $2,285, or 5% of sales, during fiscal 1998 as
compared to no such revenues during fiscal 1997. Sales related to other services
approximated $539 during fiscal 1998 as compared to $350 during fiscal 1997.
Fiscal 1998 sales include sales of $580 to TSG prior to the acquisition date.
Cost of sales as a percentage of net sales increased to 62% during fiscal 1998
from 59% during fiscal 1997 as a result of: (i) the increase in the percentage
of sales to domestic telephone companies (from 3% in fiscal 1997 to 35% in
fiscal 1998) at margins lower than those achieved from other products; and (ii)
a slight reduction in average selling prices to independent payphone service
providers.
Selling, general and administrative expenses increased by $3,604, or
approximately 57%, during fiscal 1998 as compared to fiscal 1997, and
represented 21% of sales in fiscal 1998 versus 24% in fiscal 1997. The increase
in selling, general and administrative expenses is primarily attributable to the
acquisition of TSG, an increase in sales commissions related to the 72% increase
in sales, an increase in sales and marketing personnel and an increase in the
Company's provision for credit losses of $1,872, which in fiscal 1998 included
significant reserves related to the impairment of certain international notes
and in fiscal 1997 reflected a net recovery of $171 with respect to previous
impairment reserves.
Engineering, research and development expenses increased by $1,891, or
approximately 72%, during fiscal 1998 as compared to fiscal 1997, and
represented 10% of sales in fiscal 1998 and fiscal 1997. The increase in fiscal
1998 engineering, research and development expenses is primarily attributable to
the expansion of engineering resources to support the technology acquired from
Lucent and the acquisition of TSG. Software development costs capitalized during
fiscal 1998 approximated $100. During fiscal 1997, the Company capitalized no
software development costs.
Amortization expense during fiscal 1998 increased by $622 to 1% of sales during
fiscal 1998 due to amortization of goodwill and identifiable intangible assets
recorded in connection with the fiscal 1998 acquisitions.
The decrease in net interest income during fiscal 1998 is primarily attributable
to an increase in average outstanding indebtedness as a result of the fiscal
1998 acquisitions.
Other credits during fiscal 1997 represent the net recovery with respect to a
fiscal 1996 impairment reserve on notes receivable due to the bankruptcy of one
of the Company's customers.
The Company's effective tax rate declined to 33% in fiscal 1998 from 35% in
fiscal 1997 primarily due to an increase in research and development credits,
which was partially offset by an increase in state income tax expense.
Impact of Inflation
The Company's primary costs, inventory and labor, increase with inflation.
However, the Company does not believe that inflation and changing prices have
had a material impact on its business.
30
<PAGE>
Liquidity and Capital Resources
The Company finances its operations, working capital requirements and capital
expenditures from internally generated cash flows and financing available under
a loan agreement between the Company and its bank. The Company believes that its
anticipated cash flow from operations and financing available under the loan
agreement will be sufficient to fund its working capital requirements, capital
expenditures and long term debt obligations through March 31, 2000.
Financing Activities. On March 29, 1999, the Company and its bank entered into
an amendment (the "Amendment") that modified the terms of the Restated Loan and
Security Agreement (the "Loan Agreement") between the parties dated November 25,
1997. Pursuant to the Amendment: (i) the Company's working capital revolving
credit line was reduced from $15 million to $10 million; (ii) the Company
borrowed $4 million pursuant to a term note payable in sixty (60) equal monthly
installments, including interest at an annual interest rate of 7.55%; and (iii)
the Company established a $1.5 million revolving credit line to finance the
Company's capital expenditures. The proceeds from the term note were used to
reduce the Company's then outstanding indebtedness under the $15 million working
capital revolving credit line. Indebtedness outstanding under the Loan Agreement
is collateralized by substantially all of the assets of the Company. The Loan
Agreement contains covenants that prohibit or restrict the Company from engaging
in certain transactions without the consent of the bank, including mergers or
consolidations 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, could accelerate the maturity of the indebtedness
outstanding under the Loan Agreement.
The Company borrows funds under its revolving credit lines to finance capital
expenditures, increases in accounts and notes receivable and inventories and
decreases in bank overdrafts (as drafts clear), accounts payable and accrued
liability obligations to the extent that such requirements exceed cash provided
by operations, if any. The Company also uses the financing available under its
revolving credit lines to fund operations and payments on long-term debt when
necessary. The Company measures its liquidity based upon the amount of funds the
Company is able to borrow under its revolving credit lines, which varies based
upon operating performance and the value of current assets and liabilities.
Indebtedness outstanding under the working capital revolving credit line cannot
exceed the value of eligible collateral, as defined in the Loan Agreement,
consisting of domestic accounts receivable and inventories. The working capital
revolving credit line matures on November 25, 2002. The capital expenditure
revolving credit line matures on July 31, 2000. Interest on amounts borrowed
under the revolving credit lines is payable monthly at the bank's floating 30
day Libor rate plus 1.5% (6.44% at March 31, 1999). Outstanding debt under the
working capital revolving credit line amounts to $5,185 and $7,645 at March 31,
1999 and 1998, respectively. At March 31, 1999, the Company was able to borrow
up to a maximum of $10,000 under the working capital revolving credit line based
on the value of eligible collateral. At March 31, 1999, outstanding debt under
the term note amounted to $4 million. As of March 31, 1999, the Company had not
used the $1.5 million capital expenditure revolving credit line.
During the year ended March 31, 1998, the initial financing 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 and notes incurred to finance the
purchase of the Lucent assets, including a $3,050 installment note due on
October 2, 2004 and term notes of $3,800 that were due on March 31, 1998. In
addition, on December 18, 1997, the Company retired TSG's outstanding bank
indebtedness of $3,970 from proceeds drawn under the Loan Agreement. During the
year ended March 31, 1999, net payments under the Company's working capital
credit line amounted to $2,460. Net proceeds under the working capital revolving
credit
31
<PAGE>
line during the year ended March 31, 1998 amounted to $3,675. During the year
ended March 31, 1997, net payments under the Company's working capital credit
line amounted to $965.
On November 26, 1997, the Company borrowed $1,920 pursuant to the terms of a
mortgage note and retired its then outstanding mortgage note with a principal
balance of $315 and a maturity date of May 23, 1999. The November 26, 1997
mortgage note bears interest at a rate of 8.5% per annum and is payable in
fifty-nine equal monthly installments of $19 and a final installment of $1,533
due on November 26, 2002. Principal payments under the mortgage notes during the
years ended March 31, 1999, 1998 and 1997 amounted to $66, $452 and $431,
respectively.
During the years ended March 31, 1999, 1998 and 1997, the net proceeds from the
exercise of common stock options amounted to $285, $295 and $266, respectively.
Operating Activities. Cash used for operating activities during fiscal 1999
amounted to $2,686. During fiscal 1998 and 1997, the Company generated cash from
operating activities of $2,701 and $2,921, respectively. Cash flow from
operations before changes in operating assets and liabilities decreased to
$4,412 in fiscal 1999 from $4,680 in fiscal 1998 as compared to $2,334 in fiscal
1997. Changes in operating assets and liabilities during fiscal 1999 and 1998,
particularly accounts and notes receivable, inventories, accounts payable and
accrued liabilities, have significantly reduced or exceeded cash flows provided
by operations before such changes. During fiscal 1999 and fiscal 1998, the
Company used $7,098 and $1,979 of cash to fund net increases in operating assets
and liabilities. During fiscal 1997, the Company generated cash of $587 from a
net reduction in operating assets and liabilities.
Extension of credit to customers and inventory purchases represent the principal
working capital requirements of the Company. The Company's current assets
increased by $3,203, or approximately 11%, from $28,124 at March 31, 1998 to
$31,327 at March 31, 1999, predominantly from an increase in accounts and notes
receivable of $802 and an increase in inventory of $4,890. Current liabilities
increased by $2,747, or approximately 35%, from $7,887 at March 31, 1998 to
$10,634 at March 31, 1999, predominantly from an increase in accounts payable
and bank overdrafts. The Company experiences varying accounts receivable
collection periods from its three primary customer markets. The Company believes
that uncollectible accounts and notes receivable will not have a significant
effect on future liquidity, as a significant portion of its accounts and notes
receivable are due from customers with substantial financial resources.
The level of inventory maintained by the Company is dependent on a number of
factors, including delivery requirements of its customers, availability and lead
time of components and the ability of the Company to estimate and plan the
volume of its business. The Company markets a wide range of services and
products and the requirements of its customers may vary significantly from
period to period. Accordingly, inventory levels may vary significantly.
Investing Activities. Net cash used for investing activities during the years
ended March 31, 1999, 1998 and 1997 amounted to $2,140, $7,493 and $634,
respectively. Cash used for the acquisitions of TSG and the Lucent assets
aggregated $447 and $5,957, respectively, during the year ended March 31, 1998.
The Company's capital expenditures consist primarily of manufacturing tooling
and equipment, computer equipment and building improvements required for the
support of operations. Cash used for capital expenditures and capitalized
software aggregated $2,148, $1,089 and $635 during the years ended March 31,
1999, 1998 and 1997, respectively. The Company has not entered into any
significant commitments for the purchase of capital assets other than
manufacturing tooling in an amount of approximately $500.
32
<PAGE>
Year 2000 Discussion
The Company is continuing its efforts to assess the impact of Year 2000 on its
business and address Year 2000 issues. Year 2000 issues result from computer
programs designed to use two-digit date codes rather than four digits to define
the applicable year. As a result, there is a risk that programs with
time-sensitive software may recognize a year using "00" as the year 1900 rather
than the year 2000, resulting in system miscalculations or system failures.
The Company has identified several general areas in which Year 2000 concerns may
be material if not resolved before January 1, 2000. These areas include (1)
products and services of the Company, (2) management information systems and
other systems within the Company, and (3) third parties that provide materials
and services (including utilities) to the Company.
The Company established a "Validation Test Plan" to assess Year 2000 compliance
of all products and services currently sold or supported by the Company. This
test plan was designed to identify the products and services currently supported
by the Company, features of such products and services that required assessment,
and the approach and resources required. The Validation Test Plan was also
designed to assess Year 2000 compliance of those items in order of relative
importance to the Company. As of April 1999, the Company believes that it has
completed its Year 2000 compliance testing with respect to the products and
systems it currently sells and supports. In addition, as of April 1999, the
Company has completed substantially all Year 2000 software modifications to such
products, and the Company believes that such products are Year 2000 compliant or
Year 2000 compliant with issues. The Company continues to modify certain product
software or develop Year 2000 complaint software for certain products, and
believes, but cannot assure, that the products the Company presently sells and
supports will be Year 2000 compliant or Year 2000 compliant with issues by
December 31, 1999. The Company believes that products defined as Year 2000
compliant with issues will operate properly in year 2000 if programmed and
configured in accordance with the Company's published guidelines. Based on the
present status of the Company's compliance testing and remediation activities to
date, the Company does not believe that it will incur material additional
engineering expenses to bring the remaining products and systems it presently
sells and supports into Year 2000 compliance. However, there can be no assurance
that the Company's tests pursuant to its Validation Test Plan have detected or
will detect all instances of Year 2000 noncompliance, that the cost of future
remediation activities will not be material or that all software upgrades for
all of the Company's products and systems will be available by December 31,
1999.
Based on the Company's compliance testing and identification of software
modifications required to achieve Year 2000 compliance of its products, the only
products historically sold by the Company that will not be Year 2000 compliant
or compliant with issues are products the manufacture of which has been
discontinued and that are no longer supported by the Company. These discontinued
products are not Year 2000 compliant and the Company does not intend to bring
these products into compliance, and has so notified its customers. The Company
does not believe that it has an obligation to bring these discontinued products
into compliance or an obligation to replace these products under its warranties
since those products were last sold more than five years ago. Accordingly, the
Company has not recorded any liability related to these products in its
financial statements.
The Company has provided information to its customers and others about its Year
2000 compliance program. The Company's web site describes each product
historically supplied by the Company and its status as "compliant", "not
compliant", "compliant with issues" with an attached description of the issues,
or "compliance anticipated" with a projected release date.
The Company has concluded that its internally managed call rating software
should be rewritten to upgrade its features and to integrate the software into
the Company's new open architecture management
33
<PAGE>
software system presently under development, in addition to the modifications
required to bring the software into Year 2000 compliance. The upgrade of the
Company's call rating software is being undertaken by outside consultants in
conjunction with the Company's personnel at an estimated cost of approximately
$150, and is expected to be completed by no later than December 31, 1999. If the
Company does not complete the upgrade by December 31, 1999, the Company would
not be able to provide Year 2000 compliant call rating files to its customers.
However, such files are available from third parties.
The risks associated with the failure of the Company's products to be Year 2000
compliant include: (1) loss of data from or an adverse impact on the reliability
of data generated by the Company's products; (2) loss of functionality; (3)
failure to communicate with other non-Company user applications of its customers
that may not be Year 2000 compliant; and (4) potential litigation by customers
with respect to products and services no longer supported.
The Company purchased new business software in June 1997, and based on
representations received from the vendor, the Company believes that its
management information system is Year 2000 compliant. Based on the Company's
internal testing, the Company believes that substantially all of the Company's
related operating systems are also Year 2000 compliant with the exception of
certain items which the Company does not believe are material. The Company
continues to assess Year 2000 compliance of its other internal systems such as
engineering, shipping, payroll and EDI systems and is upgrading these systems as
required if deficiencies within these systems are deemed to be critical. The
costs related to such system upgrades or acquisition of new Year 2000 compliant
software to date have not been material, but the costs to complete such upgrades
or acquisitions could be material. The risks associated with failure of such
systems to be Year 2000 compliant are primarily the increase in administrative
related functions and increased costs associated with such functions. The
Company believes that all critical internal systems will be assessed and
remediated by the end of the third calendar quarter of 1999.
The Company has completed an inventory and tested all internal computer
equipment, including personal computers, related servers and software for Year
2000 compliance. Based on the Company's testing, the Company plans to spend
approximately $100 to replace and upgrade such equipment and software to achieve
Year 2000 compliance. The Company believes that the necessary replacements and
upgrades can be completed by the end of the third calendar quarter of 1999.
The Company has relationships with various third parties in the ordinary course
of business. The Company continues to assess the readiness of third parties,
especially critical suppliers and others that have material relationships with
the Company, by sending questionnaires, evaluating responses and identifying the
risks with respect to Year 2000 plans of those third parties. The Company will
continue to identify the risks associated with third parties based on responses
to those questionnaires and will then formulate appropriate contingency plans on
a case by case basis to mitigate such risks. The Company expects to complete its
assessment of the readiness of third parties by the end of the third quarter of
calendar year 1999. The effect, if any, on the Company's results of operations
from failure of these third parties to be Year 2000 compliant is not reasonably
estimable but could be material.
The Company has begun, but not yet completed, an analysis of the operational
problems that would be reasonably likely to result from the failure of the
Company and certain third parties to complete efforts necessary to achieve Year
2000 compliance on a timely basis. The Company's Year 2000 efforts to date have
been undertaken largely with its existing engineering and information technology
personnel. The Company does not separately track the costs incurred for such
efforts and such costs are principally the related compensation costs for those
personnel.
34
<PAGE>
The Company presently has no contingency plans for Year 2000 compliance problems
that might arise, but will develop such contingency plans, as the Company
identifies situations in which Year 2000 compliance could be a problem. However,
there can be no assurance that any contingency plan will be timely or effective
to avoid a material disruption of the Company's operations.
Selected Quarterly Data
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:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998 (1)
-------- ------------ ----------- ---------
Unaudited
<S> <C> <C> <C> <C>
Net sales $ 6,753 $ 7,630 $ 13,592 $ 18,275
Cost of goods sold 3,838 4,175 8,565 12,067
Net income $ 375 $ 418 $ 709 $ 255
Earnings per common and
common equivalent share:
Basic $ 0.05 $ 0.05 $ 0.08 $ 0.02
Diluted $ 0.05 $ 0.05 $ 0.08 $ 0.02
</TABLE>
(1) During the quarter ended March 31, 1998, the Company recorded
additional impairment reserves related to notes receivable of
approximately $866 as a result of the deterioration of the financial
condition of certain foreign customers.
The following sets forth a summary of selected statements of operations data
(unaudited) for the quarters ended June 30, 1998, September 30, 1998, December
31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999 (1)
-------- ------------- ----------- ---------
Unaudited
<S> <C> <C> <C> <C>
Net sales $ 15,636 $ 18,808 $ 16,859 $ 13,960
Cost of goods sold 10,309 12,276 11,320 9,730
Net income (loss) $ 237 $ 865 $ 779 $ (1,520)
Earnings (loss) per common and
common equivalent share:
Basic $ 0.02 $ 0.06 $ 0.06 $ (0.11)
Diluted $ 0.02 $ 0.06 $ 0.06 $ (0.11)
</TABLE>
(1) During the quarter ended March 31, 1999, the Company recorded other
charges of $1,772, including expenses of $1,240 incurred in
connection with negotiations concerning a possible business
combination that were terminated by the Company and $490 of charges
related to the reorganization of the Company's sales and marketing
activities.
35
<PAGE>
Effects of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, which establishes standards for accounting
of derivative instruments including certain derivative instruments embedded in
other contracts, and hedging activities. SFAS 133 is effective for fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires
entities to recognize derivative instruments as assets and liabilities and
measure them at fair value, and to match the timing of gain or loss recognition
on hedging instruments with the recognition of changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. Management does not
believe that the adoption of SFAS 133 will have a significant impact on the
Company's consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and new cost recognition principles and identifies the
characteristics of internal use software. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to
have a material impact on the Company's results of operations, financial
position or cash flows.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk, including changes in interest rates, and
to foreign currency exchange rate risks. The Company does not hold any financial
instruments for trading purposes or any investments in cash equivalents. The
Company believes that its primary market risk exposure relates to the effects
that changes in interest rates have on outstanding debt obligations that do not
have fixed rates of interest. In addition, changes in interest rates impact the
fair value of the Company's notes receivable and debt obligations. Additional
information relating to the fair value of certain of the Company's financial
assets and liabilities is included in Note 1 to the Company's consolidated
financial statements included in Item 8 - "Consolidated Financial Statements and
Supplementary Data."
The Company's international business consists of export sales, and the Company
does not presently have any foreign operations. The Company's export sales to
date have been denominated in U.S. dollars and as a result, no losses related to
foreign currency exchange rate fluctuations have been incurred. There is no
assurance, however, that the Company will be able to continue to export its
products in U.S. dollar denominations or that its business will not become
subject to significant exposure to foreign currency exchange rate risks. The
Company has contracted with a foreign manufacturer to produce payphones and
payphone assemblies for the Company, and related purchases have been denominated
in U.S. dollars. Fluctuations in foreign exchange rates may affect the cost of
the Company's products. However, changes in purchase prices related to foreign
exchange rate fluctuations to date have not been material. The Company has not
entered into foreign currency exchange forward contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.
----------
36
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 38
Consolidated Balance Sheets at March 31, 1999 and 1998 39
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997 40
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997 41
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 1999, 1998 and 1997 42
Notes to Consolidated Financial Statements 43
Financial Statement Schedules:
All financial statement schedules are omitted because they are
not required or are not applicable, or the required
information is shown in the consolidated financial statements
or notes thereto
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
----------
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Elcotel, Inc.:
We have audited the accompanying consolidated balance sheets of Elcotel, Inc.
and subsidiaries (the "Company") as of March 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Tampa, Florida
June 11, 1999
38
<PAGE>
<TABLE>
<CAPTION>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16 $ 1,655
Accounts and notes receivable, less allowances for credit
losses of $1,970 and $1,923, respectively 12,209 11,407
Inventories 13,978 9,088
Refundable income taxes 1,997 809
Deferred tax asset - current portion 2,215 4,141
Prepaid expenses and other current assets 912 1,024
-------- --------
Total current assets 31,327 28,124
Property, plant and equipment, net 5,064 4,779
Notes receivable, less allowances for credit losses
of $312 and $487, respectively 898 346
Identified intangible assets, net of accumulated amortization
of $1,541 and $371, respectively 7,734 8,904
Capitalized software, net of accumulated amortization of
$240 and $55, respectively 1,573 1,078
Goodwill, net of accumulated amortization of $878
and $190, respectively 23,218 23,906
Deferred tax asset 948 --
Other assets 533 301
-------- --------
$ 71,295 $ 67,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 1,428 $ --
Accounts payable 4,186 3,210
Accrued expenses and other current liabilities 4,197 4,609
Notes and debt obligations payable within one year 823 68
-------- --------
Total current liablilities 10,634 7,887
Notes and debt obligations payable after one year 10,355 9,476
Deferred tax liability -- 415
-------- --------
Total liabilities 20,989 17,778
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value,
30,000,000 shares authorized, 13,551,693
and 13,416,850 shares issued, respectively 136 134
Additional paid-in capital 46,667 46,384
Retained earnings 3,680 3,319
Less - cost of 52,000 shares of common stock in treasury (177) (177)
-------- --------
Total stockholders' equity 50,306 49,660
-------- --------
$ 71,295 $ 67,438
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended March 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues and net sales:
Product sales $ 54,748 $ 43,426 $ 26,482
Services 10,515 2,824 350
-------- -------- --------
65,263 46,250 26,832
-------- -------- --------
Cost of revenues and sales:
Cost of products sold 34,755 26,624 15,723
Cost of services 8,880 2,021 160
-------- -------- --------
43,635 28,645 15,883
-------- -------- --------
Gross profit 21,628 17,605 10,949
-------- -------- --------
Other costs and expenses:
Selling, general and administrative 10,560 9,930 6,326
Engineering, research and development 6,121 4,514 2,623
Amortization 2,084 654 32
Other charges (credits) 1,772 -- (331)
Interest expense (income) 517 (103) (205)
-------- -------- --------
21,054 14,995 8,445
-------- -------- --------
Income before income tax expense 574 2,610 2,504
Income tax expense (213) (853) (876)
-------- -------- --------
Net income $ 361 $ 1,757 $ 1,628
======== ======== ========
Earnings per common and common
equivalent share:
Basic $ 0.03 $ 0.18 $ 0.20
======== ======== ========
Diluted $ 0.03 $ 0.18 $ 0.20
======== ======== ========
Weighted average number of common
and common equivalent shares outstanding:
Basic 13,456 9,641 8,096
======== ======== ========
Diluted 13,777 9,842 8,316
======== ======== ========
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended March 31,
-----------------------------
1999 1998 1997
------- ------- -------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 361 $ 1,757 $ 1,628
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,247 1,299 429
Provision for credit losses 117 1,352 (520)
(Gain) loss on disposal of equipment 12 2 (1)
Deferred tax expense 563 270 798
Stock option compensation 112 -- --
Changes in operating assets and liabilities
(net of acquisition of Technology Service Group, Inc.
and certain assets from Lucent Technologies Inc.):
Accounts and notes receivable (1,471) (2,695) (360)
Inventories (4,890) 3,125 67
Refundable income taxes (1,188) (110) 412
Prepaid expenses and other current assets 112 (555) (282)
Other assets (113) (199) 28
Accounts payable 976 (1,695) 241
Accrued liabilities (524) 150 481
------- ------- -------
Net cash flow provided by (used in) operating activities (2,686) 2,701 2,921
------- ------- -------
Cash flows from investing activities
Net cash used for acquisition of Technology
Service Group, Inc -- (447) --
Acquisition of certain assets of Lucent Technologies Inc. -- (5,957) --
Capital expenditures (1,468) (960) (478)
Capitalized software (680) (129) (157)
Proceeds from disposal of equipment 8 -- 1
------- ------- -------
Net cash flow used in investing activities (2,140) (7,493) (634)
------- ------- -------
Cash flows from financing activities
Proceeds from exercise of common stock options 285 295 266
Net proceeds (payments) under revolving credit line (2,460) 3,675 (965)
Increase in bank overdraft 1,428 -- --
Proceeds from notes payable 4,000 8,770 --
Principal payments on notes payable (66) (7,302) (811)
------- ------- -------
Net cash flow provided by (used in) financing activities 3,187 5,438 (1,510)
------- ------- -------
Net increase (decrease) in cash (1,639) 646 777
Cash at beginning of year 1,655 1,009 232
------- ------- -------
Cash at end of year $ 16 $ 1,655 $ 1,009
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(Dollars in thousands)
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, 1996 8,061 $ 81 $ 10,720 $ (66) $ (177) $ 10,558
Exercise of stock options 173 1 265 -- -- 266
Tax benefit from exercise of
stock options -- -- 175 -- -- 175
Net income -- -- -- 1,628 -- 1,628
------- ------- ---------- --------- -------- --------
Balance, March 31, 1997 8,234 82 11,160 1,562 (177) 12,627
Exercise of stock options 158 2 293 -- -- 295
Tax benefit from exercise of
stock options -- -- 62 -- -- 62
Acquisition of Technology Service
Group, Inc. 5,025 50 35,208 -- -- 35,258
Registration expenses of
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
Exercise of stock options 135 2 283 -- -- 285
Net income -- -- -- 361 -- 361
------- ------- ---------- --------- -------- --------
Balance, March 31, 1999 13,552 $ 136 $ 46,667 $ 3,680 $ (177) $ 50,306
======= ======= ========== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Elcotel, Inc. and its wholly owned subsidiaries (the "Company") design, develop,
manufacture and market a comprehensive line of integrated public communications
products and services. The Company's product line includes microprocessor-based
payphone terminals known in the industry as "smart" or "intelligent" payphones,
software systems to manage and control networks of the Company's smart payphone
terminals, electromechanical payphone terminals also known in the industry as
"dumb" payphones, replacement components and assemblies, and an offering of
industry services including repair, upgrade and refurbishment of equipment,
operator services, customer training and technical support.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Elcotel, Inc. and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Sales of products and related costs are recorded upon shipment or when customers
accept title to such goods. The Company recognizes revenues from software
licenses upon delivery of the software. Revenue from repair, refurbishment and
upgrade of customer-owned equipment is recorded upon shipment. Revenues from
other services are recognized as the services are rendered.
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.
Reserves to provide for losses due to obsolescence and excess quantities are
established in the period in which such losses become probable.
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, five years for equipment, furniture and fixtures and thirty-five
years for buildings.
Additions, improvements and expenditures that significantly extend the useful
life of an asset are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. When assets are retired or disposed of, the
cost and accumulated depreciation thereon are removed from the accounts, and any
gains or losses are included in income.
43
<PAGE>
Engineering, Research and Development Costs
Costs and expenses incurred for the purpose of product research, design and
development are charged to operations as incurred. Engineering, research and
development costs consist primarily of costs associated with development of new
products and manufacturing processes. The Company capitalizes software
development costs once technological feasibility has been achieved. Once the
product is released, the capitalized costs are amortized to operations based on
the straight-line method over the estimated useful life of the product, which is
generally five years. Capitalized software development costs are reported at the
lower of cost, net of accumulated amortization, or net realizable value.
Software development costs incurred prior to achieving technological feasibility
are charged to research and development expense as incurred. Software
development costs capitalized during the years ended March 31, 1999 and 1998
approximated $639 and $100, respectively. No software development costs were
capitalized during the year ended March 31, 1997.
Amortization of Goodwill and Identified Intangible Assets
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. Identified intangible assets are being amortized over
the following estimated useful lives: trade names and workforce - 35 years;
customer contracts - 3.45 years; license agreements - 5 years; patented
technology - 4 years; non-compete agreement - 2 years; and customer
relationships - 15 years.
Income Taxes
The Company uses the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109"), Accounting for Income Taxes. Income tax expense (benefit) is based upon
income (loss) recognized for financial statement purposes and includes the
effects of temporary differences between such income (loss) and that recognized
for tax purposes. 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.
Earnings Per Common Share
Earnings per common share is computed in accordance with Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, which requires
disclosure of basic earnings per share and diluted earnings per share. Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share are 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. The weighted average number of shares outstanding
during the years ended March 31, 1999, 1998 and 1997 for purposes of computing
basic earnings per share were 13,456,255, 9,640,530 and 8,095,539, respectively.
During the years ended March 31, 1999, 1998 and 1997, dilutive stock options had
the effect of increasing the weighted average number of shares outstanding used
in the computation of diluted earnings per share by 321,144 shares, 201,585
shares and 220,581 shares, respectively.
44
<PAGE>
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable and accounts payable
approximates fair value due to the short maturity of the instruments. The fair
value of notes receivable is estimated by discounting the future cash flows
using current interest rates offered for similar transactions and approximates
carrying value. The fair value of the Company's debt obligations is estimated
based on the interest rates currently available to the Company for bank loans
with similar terms and average maturities and approximates carrying value.
Credit Policy and Concentration of Credit Risks
Credit is granted under various terms to customers that the Company deems
creditworthy. In addition, the Company provides limited secured note financing
with terms generally not exceeding two years and interest charged at competitive
rates. Trade accounts and notes receivable are the primary financial instruments
that subject the Company to significant concentrations of credit risk. In order
to minimize this risk, the Company performs ongoing credit evaluations of its
customers. With respect to notes receivable, the Company generally requires
collateral consisting primarily of the payphone terminals and related equipment.
Allowances for credit losses on accounts and notes receivable are estimated
based upon expected collectibility. Allowances for impairment of notes
receivable are measured based upon the fair value of collateral or the Company's
estimate of the present value of future expected cash flows in accordance with
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan."
Warranty Reserves
The Company accrues and recognizes 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.
Stock Based Compensation Plans
The Company recognizes compensation expense with respect to stock-based
compensation plans based on the difference, if any, between the per-share market
value of the stock and the option exercise price on the measurement date in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"). In
addition, in accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company discloses
the pro forma effects on net income and earnings per share assuming the adoption
of the fair value based method of accounting for compensation cost related to
stock options and other forms of stock-based compensation set forth in SFAS 123.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of property plant and equipment,
goodwill and other intangible assets when indicators of impairment are present,
and recognizes impairment losses if the carrying value of the assets is less
than expected future cash flows of the underlying business in accordance with
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Impairment losses are measured by the amount of the asset carrying values
in excess of fair market value. No impairment losses have been recorded during
the years ended March 31, 1999, 1998 and 1997.
45
<PAGE>
Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," during the
year ended March 31, 1999. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements, and 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. In addition, SFAS 130
requires enterprises to 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. The Company had no items of other
comprehensive income during the years ended March 31, 1999, 1998, and 1997.
Disclosure about Segments of an Enterprise and Related Information
During the year ended March 31, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual and interim financial statements. See Note 12.
Derivative Financial Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
of derivative instruments including certain derivative instruments embedded in
other contracts, and hedging activities. SFAS 133 is effective for fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires
entities to recognize derivative instruments as assets and liabilities and
measure them at fair value, and to match the timing of gain or loss recognition
on hedging instruments with the recognition of changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. Management does not
believe that the adoption of SFAS 133 will have a significant impact on the
Company's consolidated financial statements.
Computer Software Developed or Obtained for Internal Use
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and new cost recognition principles and identifies the
characteristics of internal use software. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to
have a material impact on the Company's results of operations, financial
position or cash flows.
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 estimates.
46
<PAGE>
Reclassification of Prior Years
The Company's consolidated financial statements at March 31, 1998 and 1997 and
for the years then ended have been reclassified to conform to the presentation
at and for the year ended March 31, 1999.
NOTE 2 - ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase method.
Accordingly, the purchase prices have been allocated to assets acquired and
liabilities assumed based on fair value at the dates of acquisition. The results
of acquired businesses and assets are included in the consolidated financial
statements of the Company from the dates of acquisition.
On December 18, 1997, the Company acquired, via a merger, Technology Service
Group, Inc. ("TSG"), and issued 4,944,292 shares of common stock in exchange for
the outstanding common stock of TSG based on an exchange ratio of 1.05 shares of
the Company's common stock for each share of common stock of TSG, and TSG became
a wholly owned subsidiary of the Company. In addition, the Company issued 80,769
shares of common stock in payment of certain acquisition expenses. Further,
holders of options and rights to purchase shares of common stock of TSG pursuant
to 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. 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.
A summary of the purchase price is set forth below.
Issuance of 4,944,292 shares of common stock
stock at a market price of $6.50 per share $ 32,138
Fair value of outstanding common stock
warrants, options and purchase rights 2,595
Costs and expenses of the merger 872
--------
Total purchase price $ 35,605
========
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.
47
<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 recorded at the acquisition date
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
Capitalized software 875 846
Identified intangible assets 147 6,684
Other assets 29 29
Accounts payable (3,634) (3,634)
Accrued expenses (1,519) (2,719)
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 fair value of identified intangible assets includes TSG's trade names of
$2,869, assembled workforce of $1,372, patented technology of $419 and customer
contracts of $2,024 (see Note 6). The fair value of inventories was reduced by
$4,810 to reflect the estimated net realizable value of inventories related to
products discontinued by the Company. The fair value of accrued liabilities
includes estimated liabilities of $1,200 pursuant to a plan to exit certain
activities of TSG and terminate and relocate employees of TSG (see Note 8).
On September 30, 1997, the Company acquired from Lucent Technologies Inc.
("Lucent") inventories, machinery, equipment and tooling, as well as licenses of
certain patent and other intellectual property rights, related to the payphone
manufacturing and component parts business conducted by Lucent. The purchase
price, including acquisition expenses of $367, was $5,957.
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 $ 2,991
Equipment and tooling 500
Intangible assets 2,591
Accrued warranty expense (125)
Total purchase price -------
$ 5,957
=======
Identified intangible assets are comprised of license agreements of $938, a
non-compete agreement of $77 and customer relationships of $1,576 (see Note 6).
48
<PAGE>
Assuming the acquisitions had occurred on April 1, 1997, the Company's pro forma
results of operations for the years ended March 31, 1998 and 1997 would have
been as follows:
1998 1997
-------- --------
Net Sales $ 66,554 $ 60,304
======== ========
Net income $ 14 $ 1,662
======== ========
Basic earnings per share $ -- $ 0.21
======== ========
Diluted earnings per share $ -- $ 0.20
======== ========
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 carrying value of
intangible assets and amortization over their estimated useful lives, a decrease
in depreciation of $228 due to an increase in the carrying value of property and
equipment and depreciation over different 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 carrying value of
intangible assets and amortization over their estimated useful lives, a decrease
in depreciation of $557 due to an increase in the carrying value of property and
equipment and depreciation over different 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 3 - ACCOUNTS AND NOTES RECEIVABLE
Current accounts and notes receivable at March 31, 1999 and 1998 include notes
receivable due within one year of $803 and $2,318, respectively, net of credit
and impairment allowances of $1,242 and $989, respectively. Notes receivable
consist of trade notes receivable from customers with remaining maturities of
two years or less, and are generally collateralized by the payphone equipment
sold and giving rise to the asset. The notes bear interest at rates ranging from
12% to 16%. Interest income on impaired notes is recognized as the interest is
collected. The Company recognizes interest income on notes with no related
credit loss allowance as earned.
49
<PAGE>
Changes in allowances for credit losses on accounts and notes receivable for the
years ended March 31, 1999, 1998 and 1997 are summarized as follows:
1999 1998 1997
------- ------- -------
Balance, beginning of year $ 2,410 $ 1,301 $ 3,106
Provision (reversal) for credit losses 117 1,352 (520)
Write-offs, net of recoveries (245) (243) (1,285)
------- ------- -------
Balance, end of year 2,282 2,410 1,301
Long-term allowances (312) (487) (97)
------- ------- -------
Current allowances $ 1,970 $ 1,923 $ 1,204
======= ======= =======
NOTE 4 - INVENTORIES
Inventories at March 31, 1999 and 1998 consisted of the following:
1999 1998
-------- --------
Finished products $ 1,875 $ 1,383
Work-in-process 924 1,545
Purchased components 11,630 6,260
-------- --------
14,429 9,188
Reserve for obsolescence (451) (100)
-------- --------
$ 13,978 $ 9,088
======== ========
Substantially all inventories are pledged to secure bank indebtedness (See Note
7).
Changes in reserves for potential losses due to obsolescence and slow moving
inventories for the years ended March 31, 1999, 1998 and 1997 are summarized as
follows:
1999 1998 1997
----- ----- -----
Balance, beginning of year $ 100 $ 100 $ 100
Provision for losses 406 13 --
Write-offs (55) (13) --
----- ----- -----
Balance, end of year $ 451 $ 100 $ 100
===== ===== =====
50
<PAGE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1999 and 1998 is comprised of the
following:
1999 1998
------- -------
Land $ 372 $ 372
Buildings 2,962 2,812
Engineering and manufacturing equipment 4,171 3,237
Furniture, fixtures and office equipment 1,841 1,502
------- -------
9,346 7,923
Less accumulated depreciation (4,282) (3,144)
------- -------
$ 5,064 $ 4,779
======= =======
Depreciation expense for the years ended March 31, 1999, 1998, and 1997 was
$1,163, $645, and $397, respectively. Substantially all property, plant and
equipment are pledged to secure bank indebtedness (see Note 7).
NOTE 6 - IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets recorded in connection with acquisitions, net of
accumulated amortization, at March 31, 1999 and 1998 consisted of the following:
1999 1998
------ ------
Trade names, net of accumulated
amortization of $105 and $23 $2,764 $2,846
Customer contracts, net of accumulated
amortization of $754 and $168 1,270 1,856
Workforce, net of accumulated
amortization of $50 and $11 1,322 1,361
License agreements, net of accumulated
amortization of $281 and $101 657 837
Patented technology, net of accumulated
amortization of $135 and $30 284 389
Non-compete agreement, net of accumulated
amortization of $58 and $19 19 58
Customer relationships, net of accumulated
amortization of $158 and $19 1,418 1,557
------ ------
$7,734 $8,904
====== ======
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<PAGE>
NOTE 7 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations payable at March 31, 1999 and 1998 are summarized as
follows:
1999 1998
-------- --------
Secured Promissory Notes Payable to Bank:
Revolving credit line due November 25, 2002 $ 5,185 $ 7,645
7.55% installment note, payable in sixty equal
monthly installments of $80 4,000
8.5% mortgage note, payable in fifty-nine
equal monthly installments of $19 with
remaining principal balance of $1,533 due
on November 26, 2002 1,833 1,899
Unsecured promissory note, payable in thirty
equal monthly installments of $6 160
-------- --------
11,178 9,544
Amount payable within one year (823) (68)
-------- --------
Amount payable after one year $ 10,355 $ 9,476
======== ========
On March 29, 1999, the Company and its bank entered into an amendment (the
"Amendment") that modified the terms of the Restated Loan and Security Agreement
(the "Loan Agreement") between the parties dated November 25, 1997. Pursuant to
the Amendment, the Company's working capital revolving credit line was reduced
from $15 million to $10 million and the Company borrowed $4 million pursuant to
an installment note and established a $1.5 million revolving credit line to
finance the Company's capital expenditures. The proceeds from the term note were
used to reduce the Company's outstanding indebtedness under the $15 million
revolving credit line. Indebtedness outstanding under the Loan Agreement is
collateralized by substantially all of the assets of the Company.
Indebtedness outstanding under the working capital revolving credit line cannot
exceed the value of eligible collateral, as defined in the Loan Agreement,
consisting of domestic accounts receivable and inventories. The working capital
revolving credit line matures on November 25, 2002. The capital expenditure
revolving credit line matures on July 31, 2000. Interest on amounts borrowed
under the revolving credit lines is payable monthly at the bank's floating 30
day Libor rate plus 1.5% (6.44% at March 31, 1999). As of March 31, 1999 the
Company was able to borrow up to the maximum of $10,000 under the working
capital revolving credit line based on the value of eligible collateral. As of
March 31, 1999, the Company had not used the $1.5 million capital expenditure
revolving credit line.
The Loan Agreement contains covenants that prohibit or restrict the Company from
engaging in certain transactions without the consent of the bank, including
mergers or consolidations 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 and a ratio of total
liabilities to net worth of 1.25 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, 1999.
During the year ended March 31, 1998, the initial financing 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 and notes incurred to finance the
purchase of the Lucent assets, including a $3,050 installment note due
52
<PAGE>
on October 2, 2004 and term notes of $3,800 that were due on March 31, 1998. In
addition, on December 18, 1997, the Company retired TSG's outstanding bank
indebtedness of $3,970 from proceeds drawn under the Loan Agreement.
On November 26, 1997, the Company borrowed $1,920 pursuant to the terms of a
mortgage note and retired its then outstanding mortgage note with a principal
balance of $315.
Scheduled maturities of notes and debt obligations payable for the next five
years are as follows:
Fiscal 2000 $ 823
Fiscal 2001 883
Fiscal 2002 915
Fiscal 2003 7,632
Fiscal 2004 925
-------
$11,178
=======
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of March 31, 1999 and 1998
consist of the following:
1999 1998
------- ------
Payroll and payroll taxes $1,218 $1,443
Warranty expense 1,101 1,170
Relocation, severance and reorganization charges 615 1,048
Professional fees 248 145
Royalities and technology transfer fees 284 --
Customer advances 457 254
Other 273 549
------ ------
$4,196 $4,609
====== ======
During the year ended March 31, 1999, the Company reorganized its sales and
marketing organization. The Company accrued and recognized reorganization
charges of $490, which included the estimated costs of severance and salary
continuation arrangements and related employee benefits with respect to
terminated employees. These charges are reflected as other charges (credits) in
the accompanying consolidated statement of operations for the year ended March
31, 1999.
In connection with the acquisition of TSG, the Company assumed estimated
liabilities of $1,200 pursuant to a plan to exit certain activities of TSG and
terminate and relocate employees of TSG. These liabilities included the
estimated costs of severance and salary continuation arrangements and related
employee benefits of $730 and the estimated costs to relocate employees and
property of TSG of $470. The plan provided for the closure of TSG's corporate
facility and the integration of TSG's general, administrative and engineering
activities into those of the Company, and identified the employees that were
expected to be relocated or terminated as a result of the acquisition.
53
<PAGE>
Changes in accrued relocation, severance and reorganization charges for the
years ended March 31, 1999 and 1998 are summarized as follows:
1999 1998
------- -------
Balance, beginning of year $ 1,048 $ --
Acquired obligations -- 1,200
Reorganization charges 490 --
Payments (923) (152)
------- -------
Balance, end of year $ 615 $ 1,048
======= =======
Changes in accrued warranty expense for the years ended March 31, 1999, 1998 and
1997 are summarized as follows:
1999 1998 1997
------- ------- -------
Balance, beginning of year $ 1,170 $ 295 $ 311
Acquired obligations -- 1,075 --
Expense provision 419 240 295
Charges incurred (488) (440) (311)
------- ------- -------
Balance, end of year $ 1,101 $ 1,170 $ 295
======= ======= =======
NOTE 9 - SUPPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the years
ended March 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
------- ------- -------
Cash paid (received) during the year for
Interest $ 861 $ 427 $ 122
Income taxes 845 694 (383)
Non-cash investing and financing activities
Tax benefit from exercise of options $ -- $ 62 $ 175
Issuance of common stock to acquire
Technology Service Group, Inc. (see Note 2) -- 35,258 --
Other assets acquired by issuance -- --
of note payable 160 -- --
NOTE 10 - SHAREHOLDERS' EQUITY
Common Stock
The Company is authorized, under its Certificate of Incorporation 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 during the years ended March 31, 1999, 1998 and 1997.
54
<PAGE>
Common Stock Warrants
At the acquisition date of TSG, TSG had issued and outstanding 1,150,000
redeemable warrants to purchase 575,000 shares of common stock at an exercise
price of $11.00 per share (the "Redeemable Warrants") and warrants to purchase
100,000 shares of common stock at an exercise price of $10.80 per share (the
"Underwriter Warrants"). In connection with the acquisition, the Redeemable
Warrants were converted into warrants of the Company 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 of the Company to purchase 105,000 shares
of common stock at a per share exercise price of $10.29 (see Note 2).
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. On May 9, 1999, the Redeemable Warrants, none
of which had been exercised or redeemed, expired pursuant to their terms.
The Underwriter Warrants may be exercised at any time until May 9, 2001, the
expiration date of the Underwriter Warrants. 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 their exercise.
Stock Option Plans
On July 2, 1991, the Company adopted the 1991 Stock Option Plan (the "1991
Plan"). The 1991 Plan provides the Board of Directors of the Company with the
authority to grant to employees, officers and directors of the Company
non-qualified stock options and incentive stock options within the meaning of
Section 422A of the Internal Revenue Code. At March 31, 1999, an aggregate of
2,100,000 shares of the Company's common stock may be issued under the 1991
Plan. The Board's authority to grant options under the 1991 Plan expires on July
2, 2001.
The Board has the authority to determine the number of shares subject to options
granted and such other terms and conditions under which options may be
exercised. The per-share option price of stock options granted under the 1991
Plan shall not be less than the greater of the per-share fair market value of
the Company's common stock as of the date of grant or $.75, or 110% of the
per-share market value with respect to incentive stock options granted to
employees owning 10% or more of the total combined voting power of all classes
of the Company's stock. Options granted under the 1991 Plan expire five years
from the date of grant or 30 days after termination of employment, unless the
Board of Directors extends such 30-day period.
As of March 31, 1999, options to purchase 311,959 shares of common stock were
available for grant under the 1991 Plan. The weighted average exercise price of
options outstanding under the 1991 Plan at March 31, 1999, 1998 and 1997 was
$5.0908, $4.7224 and $5.3463, respectively. At March 31, 1999, 1998 and 1997,
options outstanding under the 1991 Plan had weighted average remaining
contractual lives of 3.0 years, 3.2 years and 4.12 years, respectively.
55
<PAGE>
The following table summarizes information, including the status and changes in
stock options outstanding, with respect to the 1991 Plan for each of the years
in the three-year period ended March 31, 1999:
Number of Option Price
Shares Range Per Share
--------- ----------------
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
Granted 561,000 $4.5625 - $5.875
Exercised (22,600) $1.81 - $3.50
Cancelled (57,675) $3.50 - $6.9375
---------
Outstanding at March 31, 1999 1,026,000 $3.50 - $7.375
=========
Options exercisable at March 31, 1999 291,255 $3.50 - $7.375
=========
Options exercisable at March 31, 1998 137,800 $1.81 - $6.1875
=========
Options exercisable at March 31, 1997 101,454 $1.3125 - $9.1875
=========
On July 2, 1991, the Company adopted a Directors' Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for the grant of non-qualified
stock options to directors who are not employees of the Company. At March 31,
1999, an aggregate of 225,000 shares of the Company's common stock may be issued
under the Directors Plan. The Board's authority to grant options under the
Directors Plan expires on July 2, 2001.
Pursuant to the Directors Plan, each new non-employee director automatically
receives a non-qualified option to purchase 4,000 shares of common stock upon
appointment or election to the Board. Thereafter, on March 31 of each year, each
non-employee director receives a non-qualified stock option to purchase 1,000
shares of common stock for each committee of the Board on which such
non-employee director is then serving and for each committee of the Board on
which such non-employee director is then serving as chairman. Non-employee
directors are also eligible for discretionary grants of options under the
Directors Plan. The per-share option price of stock options granted under the
Directors Plan shall not be less than the greater of the per-share fair market
value of the Company's common stock as of the date of grant or $2.00. Options
granted under the Directors Plan become exercisable on the first anniversary of
the date of grant, and expire five years from the date of grant. Options granted
under the Directors Plan expire five years from the date of grant or 30 days
after the date a director ceases to serve as a director, except that such 30-day
period does not apply if director status ceased within one year after a change
in control of the Company.
As of March 31, 1999, options to purchase 41,000 shares of common stock were
available for grant under the Directors Plan. The weighted average exercise
price of options outstanding under the Directors Plan at March 31, 1999, 1998
and 1997 was $4.749, $4.7789 and $4.6244, respectively. At March 31, 1999,
56
<PAGE>
1998 and 1997, options outstanding under the Directors Plan had weighted average
remaining contractual lives of 3.9 years, 2.3 years and 4.57 years,
respectively.
The following table summarizes information, including the status and changes in
stock options outstanding, with respect to the Directors Plan for each of the
years in the three-year period ended March 31, 1999:
Number of Option Price
Shares Range Per Share
--------- ------------------
Outstanding at March 31, 1996 98,000 $2.00 - $5.25
Granted 17,000 $6.31
Exercised (15,000) $2.00
Cancelled --
-------
Outstanding at March 31, 1997 100,000 $2.00 - $6.3125
Granted 28,000 $5.5625 - $5.8750
Exercised (31,000) $2.00 - $3.9375
Cancelled (4,000) $5.875
-------
Outstanding at March 31, 1998 93,000 $3.81 - $6.3125
Granted 51,000 $3.5938 - $4.5625
Exercised (22,000) $3.81 - $5.25
Cancelled (28,000) $3.81 - $6.3125
-------
Outstanding at March 31, 1999 94,000 $3.5938 - $6.3125
=======
Options exercisable at March 31, 1999 43,000 $3.9375 - $6.3125
=======
Options exercisable at March 31, 1998 69,000 $3.81 - $6.3125
=======
Options exercisable at March 31, 1997 83,000 $2.00 - $5.25
=======
In connection with the acquisition of TSG, options to purchase 41,000 shares of
common stock outstanding under TSG's 1995 Non-Employee Director Stock Plan (the
"1995 Directors Plan") were converted into options to purchase 43,050 shares of
common stock of the Company. No additional options may be granted under the 1995
Directors Plan subsequent to the acquisition. Such options became exercisable in
full as a result of the acquisition of TSG and expire one year after the date a
director ceases to serve as a director of TSG or ten years from the date of
grant, whichever is earlier. At March 31, 1998, options to purchase 43,050
shares of common stock were outstanding at exercise prices ranging from $4.7619
to $10.2971 per share, and all such options were exercisable. The weighted
average exercise price of options outstanding under the 1995 Directors Plan at
March 31, 1998 was $7.8273, and the remaining weighted average contractual life
of such options was .7 years. During the year ended March 31, 1999, all options
outstanding under the 1995 Directors Plan expired unexercised.
In addition, in connection with the acquisition of TSG, options to purchase
531,125 shares of common stock outstanding under TSG's 1994 Omnibus Stock Plan
(the "Omnibus Plan") were converted into options to purchase 557,682 shares of
common stock of the Company. No additional options may be granted under the
Omnibus Plan subsequent to the acquisition. The options are exercisable in four
equal annual installments beginning on the date of grant, and expire ten years
from the date of grant. The weighted average exercise price of options
outstanding under the Omnibus Plan at March 31, 1999 and 1998 was $3.0986 and
$3.0919, respectively. At March 31, 1999 and 1998, options outstanding under
57
<PAGE>
the Omnibus Plan had weighted average remaining contractual lives of 5.2 years
and 6.5 years, respectively.
The following table summarizes information, including the status and changes in
stock options outstanding, with respect to the Omnibus Plan for the years ended
March 31, 1998 and 1999:
Number of Option Price
Shares Per Share
--------- -----------------
Options assumed and converted 557,682 $.9524 - $10.2637
Exercised (68,479) $.9524 - $4.7619
Cancelled (40,297) $.9524 - $10.2637
-------
Outstanding at March 31, 1998 448,906 $.9524 - $10.2637
Exercised (90,244) $.9524 - $4.7619
Cancelled (23,887) $.9524 - $10.2637
-------
Outstanding at March 31, 1999 334,775 $.9524 - $9.0476
=======
Options exercisable at March 31, 1999 320,662 $.9524 - $9.0476
=======
Options exercisable at March 31, 1998 402,614 $.9524 - $10.2637
=======
Accounting for Stock-Based Compensation
During the year ended March 31, 1999, the Company modified the terms of certain
outstanding options to include provisions that would accelerate their vesting
upon a change in control of the Company and to extend the exercise period of
vested options upon certain events. As a result of the modifications, the
Company recognized stock-based compensation expense of $112 during the year
ended March 31, 1999. The Company did not recognize any compensation expense
with respect to stock options granted under the Company's plans during the years
ended March 31, 1998 and 1997.
A comparison of the Company's net income (loss) and earnings (loss) per share as
reported and on a pro forma basis for the years ended March 31, 1999, 1998 and
1997 assuming the Company had adopted the fair value based method of accounting
for compensation cost related to stock options and other forms of stock-based
compensation set forth in SFAS 123 is as follows:
1999 1998 1997
-------- --------- ---------
Net income (loss) As reported $ 361 $ 1,757 $ 1,628
Pro forma $ (173) $ 1,522 $ 1,574
Basic income (loss) As reported $ 0.03 $ 0.18 $ 0.20
per share Pro forma $ (0.01) $ 0.16 $ 0.19
Diluted income (loss) As reported $ 0.03 $ 0.18 $ 0.20
per share Pro forma $ (0.01) $ 0.15 $ 0.19
58
<PAGE>
The fair value of each option granted under the Company's stock option plans is
estimated on the date of grant using the Black-Scholes Option pricing model. The
significant weighted-average assumptions used during the years ended March 31,
1999, 1998 and 1997 to estimate the fair values of options granted under the
Company's stock option plans are summarized below:
1999 1998 1997
--------- --------- --------------
1991 Plan
Expected dividend yield -- -- --
Expected Volatility 47.07% 45.32% 54.90%
Risk free interest rate 6.20% 6.20% 6.20%
Expected life 4.7 years 3.8 years 3.4 years
Directors Plan
Expected dividend yield -- -- --
Expected Volatility 45.33% 45.32% 54.90%
Risk free interest rate 6.20% 6.20% 6.20%
Expected life 4.0 years 3.8 years 3.4 years
Based on these assumptions, the weighted average fair value of each option
granted under the Company's 1991 Plan during the years ended March 31, 1999,
1998 and 1997 was $2.25, $2.46 and $3.10, respectively. The weighted average
fair value of each option granted under the Company's Directors Plan during the
years ended March 31, 1999, 1998 and 1997 was $1.80, $2.38 and $2.86,
respectively.
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 at March 31,
1999 and 1998 is summarized as follows:
1999 1998
--------- ----------
Stock Option Plans 1,771,734 2,009,515
Redeemable Warrants 603,750 603,750
Underwriter Warrants 105,000 105,000
The Company adopted a Stockholder Rights Plan and granted common stock purchase
rights as a dividend at the rate of one right ("Right") for each share of
outstanding common stock of the Company held of record as of the close of
business on May 11, 1999. When the Rights become exercisable, the holders
thereof will be entitled to purchase, for an amount equal to $10 per Right (the
"Purchase Price," which is subject to adjustment) common stock of the Company
with a fair market value equal to two times such amount. Subject to certain
exceptions, if certain persons or entities (an "Acquiror"), as defined in the
Stockholder Rights Agreement between the Company and its transfer agent, become
the beneficial owners of 10% or more of the common stock of the Company or
announce a tender or exchange offer which would result in its ownership of 10%
or more of the common stock of the Company, the Rights, unless redeemed by the
Company, become exercisable ten (10) days after a public announcement that an
Acquiror has become such. If, following the Rights becoming exercisable, the
Company is acquired in a merger or similar transaction, or if 50% or more of the
Company's assets or earning power are sold in one or more related transactions,
the holders of the Rights would be entitled to purchase, upon exercise, common
stock of the acquiring company with a fair market value of two times the
Purchase Price. The Rights may be redeemed at any time until ten days following
a public
59
<PAGE>
announcement that an Acquiror has become such at $.001 per Right upon a vote
therefor by a majority of the outside directors. Presently, the Rights are not
exercisable nor are they separately traded from the Company's common stock. The
Rights expire on May 11, 2009.
NOTE 11 - INCOME TAXES
Income tax expense for the years ended March 31, 1999, 1998 and 1997 is
comprised of the following:
1999 1998 1997
----- ----- -----
Current tax expense (benefit):
Federal $(422) $ 624 $ 253
State 72 21 --
----- ----- -----
(350) 645 253
----- ----- -----
Deferred tax expense (benefit):
Federal 550 124 593
State 13 84 30
----- ----- -----
563 208 623
----- ----- -----
Net tax expense $ 213 $ 853 $ 876
===== ===== =====
Deferred tax assets and liabilities as of March 31, 1999 and March 31, 1998 are
comprised of the following:
1999 1998
-------- -------
Deferred tax assets:
Accounts and notes receivable reserves $ 845 $ 893
Inventory and inventory reserves 723 2,279
Warranty and other accruals 847 680
Other assets and liabilities 432
Tax credit carryforwards 1,213 473
Net operating loss carryforwards 3,729 4,181
------- -------
7,357 8,938
------- -------
Deferred tax liabilities:
Property, plant and equipment 75 125
Intangible and other assets 1,675 2,100
State taxes 85 78
------- -------
1,835 2,303
------- -------
Excess of deferred tax assets over
deferred tax liabilities 5,522 6,635
Less valuation allowance (2,359) (2,909)
------- -------
Net deferred tax asset 3,163 3,726
Less current deferred tax asset (2,215) (4,141)
------- -------
Non-current deferred tax asset (liability) $ 948 $ (415)
======= =======
At March 31, 1999, the Company has available net operating loss carryforwards
for federal and state tax purposes of approximately $10,100 and $9,000,
respectively, which expire from 2000 through 2014. In
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<PAGE>
addition, the Company has available approximately $1,213 in research and other
tax credit carryforwards, which expire from 2001 through 2014.
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. In addition, these pre-change losses may
only be utilized to the extent that taxable income is generated by TSG. These
limitations do not reduce the total amount of net operating losses that may be
taken for federal income tax purposes, but rather substantially limit the amount
that 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 $2,359 as of
March 31, 1999.
The reconciliation of income tax attributable to income before taxes for the
years ended March 31, 1999, 1998 and 1997 computed at the U.S. statutory tax
rate to the Company's effective tax rate is as follows:
1999 1998 1997
----- ---- ----
U.S. statutory rate 34.0% 34.0% 34.0%
Increases (decreases) resulting from:
State taxes, net 10.5 2.7 --
Business credits (71.6) (7.4) (2.9)
Amortization of goodwill 40.8 2.5 --
Stock option compensation 6.6 -- --
Expired net operating losses 7.8 -- --
Other permanently nondeductible items 8.9 .9 3.9
---- ---- ----
Effective rate 37.0% 32.7% 35.0%
==== ==== ====
NOTE 12 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION
The Company has organized its business to address market segments, and has three
reportable segments: the private segment, the telephone company segment and the
international segment. The private segment provides payphone terminals,
software, payphone components and assemblies and services to domestic
independent payphone service providers. The telephone company segment provides
payphone terminals, software, payphone components and assemblies and services to
telephone companies. The international segment exports payphone terminals,
software and payphone components and assemblies to public communications service
providers in foreign countries including telephone companies and private
payphone service providers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies set forth in Note 1. The Company
evaluates its performance based on profit or loss from operations before income
taxes.
The Company's reportable segments are based upon the market segments that the
Company addresses. The products provided by each of the reportable segments are
similar in nature. There are no transactions between the reportable segments,
and external customers account for all sales revenue. The information that is
provided to the chief operating decision maker to measure the profit or loss of
reportable segments includes sales, cost of sales based on standards and gross
profit based on standards. Operating expenses, including depreciation,
amortization and interest are not included in the information provided to the
chief operating decision maker to measure performance of reportable segments.
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<PAGE>
The sales revenue and profit of each reportable segment for the years ended
March 31, 1999, 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Sales Profit Sales Profit Sales Profit
-------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Private $ 25,076 $ 12,511 $ 21,052 $ 10,446 $ 17,954 $ 8,402
Telephone company 32,507 9,746 15,999 5,247 833 337
International 7,680 2,350 9,199 4,176 8,045 2,831
- ------------- -------- -------- -------- -------- -------- --------
$ 65,263 $ 24,607 $ 46,250 $ 19,869 $ 26,832 $ 11,570
======== ======== ======== ======== ======== ========
</TABLE>
The Company does not allocate assets or other corporate expenses to reportable
segments. A reconciliation of segment profit information to the Company's
financial statements is as follows:
1999 1998 1997
-------- -------- ---------
Total profit of reportable segments $ 24,607 $ 19,869 $ 11,570
Unallocated cost of sales (2,979) (2,264) (621)
Unallocated corporate expenses (21,054) (14,995) (8,445)
-------- -------- --------
Income before income taxes $ 574 $ 2,610 $ 2,504
======== ======== ========
Information with respect to sales of products and services during the years
ended March 31, 1999, 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Private segment:
Payphone terminals $10,835 $ 8,558 $ 8,300
Printed circuit board control modules and kits 12,051 9,987 7,712
Components and assemblies 1,190 1,586 1,210
Rates and management system software 380 382 382
Operator services 244 101 16
Other services 376 438 334
------- ------- -------
25,076 21,052 17,954
------- ------- -------
Telephone company segment:
Payphone terminals 7,420 5,822 833
Printed circuit board control modules and kits 6,607 327 --
Components and assemblies 8,585 7,565 --
Repair, refurbishment and upgrade services 9,895 2,285 --
------- ------- -------
32,507 15,999 833
------- ------- -------
International segment:
Payphone terminals 5,503 8,540 4,092
Printed circuit board control modules and kits 132 122 2,635
Components and assemblies 2,045 537 1,318
------- ------- -------
7,680 9,199 8,045
------- ------- -------
$65,263 $46,250 $26,832
======= ======= =======
</TABLE>
62
<PAGE>
The Company sells its payphone products in the United States and in certain
foreign countries. The Company's international business consists of export
sales, and the Company does not presently have any foreign operations. Sales by
geographic region for the years ended March 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
------- ------- -------
United States $59,102 $37,051 $21,583
Canada 3,197 2,012 108
Latin America 2,400 6,168 1,655
Europe, Middle East and Africa 31 195 99
Asia Pacific 495 824 3,180
Other Areas 38 -- 207
------- ------- -------
$65,263 $46,250 $26,832
======= ======= =======
During the year ended March 31, 1999, one customer in the telephone company
segment accounted for 20% of the Company's sales. During the year ended March
31, 1998, no single customer accounted for 10% or more of the Company's sales.
During the year ended March 31, 1997, one customer in each of the private and
international segments accounted for approximately 12% of the Company's sales.
Ten domestic customers and five international customers account for $5,494 (47%)
and $2,060 (18%), respectively, of the Company's accounts receivable at March
31, 1999. 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 for credit losses) $508 (16%) and $1,760 (54%) respectively,
of the Company's notes receivable at March 31, 1999. The domestic customers
include private operators and the international customers include a telephone
company and private operators in Mexico and the Philippines.
NOTE 13 - SAVINGS PLAN
The Company has a savings plan pursuant to Section 401(k) of the Internal
Revenue Code, whereby eligible employees may voluntarily contribute a percentage
of their compensation, but not in excess of the maximum allowed under the Code.
The TSG 401(k) retirement and profit sharing plan was merged into the Company's
savings plan on January 1, 1999, and the Company's plan was amended to include
provisions at least as favorable as those of the TSG plan. The Company matches
up to 50% of the participants' contributions, up to an additional 2% of the
participants' compensation. Participants are 100% vested with respect to their
contributions to the plan. Vesting in Company matching contributions begins at
20% after one year of service with the Company and increases annually each year
thereafter until full (100%) vesting upon five years of service. The plan pays
retirement benefits based on the participant's vested account balance. Benefit
distributions are generally available upon a participant's death, disability or
retirement. Participants generally qualify to receive retirement benefits upon
reaching the age of 65. Early retirees generally qualify for benefits provided
they have reached age 55 and have completed 5 years of service with the Company.
Benefits are payable in lump sums equal to 100% of the participant's account
balance. Plan expense approximated $151, $114 and $104, respectively, for the
years ended March 31, 1999, 1998 and 1997.
63
<PAGE>
NOTE 14 - OTHER CHARGES (CREDITS)
During the year ended March 31, 1999, the Company was involved in negotiations
concerning a possible business combination with an international
telecommunications equipment manufacturer. During April 1999, the Company
decided that the terms and conditions of the business combination as then
proposed would not be, at that time, in the best long-term interests of the
Company's stockholders, and terminated the negotiations. In connection
therewith, the Company charged to operations approximately $1.2 million of
expenses, consisting primarily of legal, accounting and consulting fees and
expenses incurred by the Company during the negotiations and in connection with
due diligence investigations. This charge, together with charges of $490 related
to the reorganization discussed in Note 8 and other miscellaneous charges of
$42, are reflected as other charges (credits) in the accompanying consolidated
statement of operations for the year ended March 31, 1999.
During the year ended March 31, 1997, the Company sold equipment that was
received in settlement of outstanding obligations due from a customer in
bankruptcy. The amount realized by the Company from this transaction resulted in
a $331 recovery, net of legal fees and related expenses, in excess of the
impairment loss previously recorded by the Company. The recovery is reflected as
other charges (credits) in the accompanying consolidated statement of operations
for the year ended March 31, 1997.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant in a putative class action alleging that 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 that customer 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 28, 1998, the Company's Motion for Summary Judgment was granted by
the Court and the Court dismissed the Company from the class action. On December
11, 1998, the plaintiffs appealed the Court's decision to grant the Company's
Motion for Summary Judgment. 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 incidental to
its business, there are no such pending legal proceedings which are material to
the business of the Company.
Operating Leases
Minimum future rental payments at March 31, 1999 under non-cancelable operating
leases with an initial term of more than one year are summarized as follows:
Fiscal 2000 $ 178
Fiscal 2001 138
Fiscal 2002 37
-----
$ 353
=====
64
<PAGE>
Rent expense for the years ended March 31, 1999, 1998 and 1997 approximated
$421, $253 and $159 respectively.
Royalty and Technology Transfer Fee Agreements
Pursuant to the terms of patent license and technology transfer agreements
entered into in connection with the acquisition of the Lucent assets, the
Company agreed to pay royalties and fees with respect to sales of products
acquired for a period of two years ending September 30, 1999. Royalties and fees
under these agreements during the fiscal years ended March 31, 1999 and 1998
approximated $220 and $86, respectively.
Employment Contracts
Effective October 20, 1998, the Company entered into employment agreements with
its President and Chief Executive Officer and its Chairman. The employment
agreement between the Company and its President expires on September 30, 2001
and the employment agreement between the Company and its Chairman expires on
December 31, 1999, with each agreement subject to certain earlier termination
and automatic renewal provisions. Pursuant to the agreements, the President and
the Chairman are entitled to minimum compensation of at least $200,000 and
$94,000 annually, respectively. In addition, these executives are entitled to
receive an annual incentive bonus based on the financial performance of the
Company. If the Company without cause terminates the agreements, the executives
are entitled to receive the amount of compensation, bonus and benefits they
would otherwise have received for the remaining term of the agreements or for
twelve months from the date of notice of termination, whichever period is
longer.
Effective June 11, 1999, the Company's President and Chief Executive Officer
retired from his position and the Chairman of the Board of Directors of the
Company was appointed as Acting President and Chief Executive Officer effective
June 10, 1999. The Company and the Acting President and Chief Executive Officer
have reached an agreement in principle with respect to a new employment
agreement that would supercede his employment agreement that had become
effective on October 20, 1998. In addition, the Company and the former President
and Chief Executive Officer have reached an agreement in principle with respect
to the terms of his retirement that would supercede his employment agreement
that was effective as of October 20, 1998.
In addition, the Company has entered into employment agreements with its other
officers that continue in effect until either party to the agreement terminates
the agreement with at least 60 days prior written notice, subject to certain
earlier termination provisions. Pursuant to the agreements, the officers are
entitled to minimum compensation aggregating $767,000 annually. In addition, if
these agreements are terminated by the Company without cause, the officers are
entitled to receive the amount of compensation and benefits they would otherwise
have received for a period of six months from the date of termination and
thereafter until they locate employment comparable to their employment at the
date of termination but not for a period longer than twelve months from the date
of termination of employment.
65
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name and age of each director and executive officer
of the Company, their positions and offices with the Company, their period of
service with the Company and their business experience for at least the last
five years, and with respect to directors, their principal occupation and other
directorships held in public companies.
Directors
Directors are elected to serve for a one-year term and until their successors
are elected and qualified. Directors of the Company who were serving as such at
the end of fiscal 1999 are as follows:
Name Age Director Since
C. Shelton James 59 1991
Tracey L. Gray 67 1991
Joseph M. Jacobs 46 1998
Dwight Jasmann 63 1993
Charles H. Moore 69 1993
Thomas E. Patton 58 1989
Mark L. Plaumann 43 1997
David R. A. Steadman 62 1997
Mr. James, currently Chairman of the Board, was appointed as Acting President
and Chief Executive Officer effective June 10, 1999. He had previously served as
Chief Executive Officer of the Company from May 1991 until December 1997 and has
been a director of the Company since December 1990. While Mr. James 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, DRS Technologies, Technisource, Inc.,
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 retired from his position as the President and Chief Executive Officer
of the Company effective June 11, 1999. He had served as President of the
Company since July 1991 and as Chief Operating Officer of the Company from July
1991 until December 1997, at which time he became Chief Executive Officer. Mr.
Gray 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 also served in various positions with industry professional
associations. Mr. Gray is a member of the board of Canada Payphone Corporation.
66
<PAGE>
Mr. Jacobs was appointed a director of the Company in February 1998. Mr. Jacobs
has been President of Wexford Management LLC, a manager of several private
investment partnerships including Wexford Partners Fund L.P., since its
inception 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. 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 Sports Authority and 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. Mr. Plaumann has
been a Managing Director of Greyhawke Capital Advisors LLC, an investment firm,
since June 1998, and a consultant to Wexford Management LLC since March 1998.
From January 1996 to March 1998, Mr. Plaumann was Senior Vice President of
Wexford Management LLC, 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. Mr. Plaumann is a director of BCAM International, Inc., an ergonomic
technology company, and Vivax Medical
67
<PAGE>
Corporation, a manufacturer of specialty beds and wound care products. Mr.
Plaumann was a director of TSG prior to the acquisition of TSG in December 1997.
Mr. Steadman became a director of the Company in December 1997. 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 acquisition of TSG 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 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 acquisition of TSG in December
1997.
Pursuant to a stockholders' agreement among the Company, Fundamental Management
Corporation and Wexford Partners Fund, L.P., each of which is a beneficial owner
of over 5% of the outstanding common stock of the Company (see Item 12 -
"Security Ownership of Certain Beneficial Owners and Management"), 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 during the period ending after the next annual meeting of
stockholders of the Company,.
Executive Officers
Executive officers are elected by the Board of Directors and serve until they
resign or are removed by the Board. The Company's executive officers that were
serving as such at the end of fiscal 1999 are as follows:
Name Age Positions and Offices
C. Shelton James 59 Chairman of the Board of Directors
Tracey L. Gray 67 President and Chief Executive Officer
Eduardo Gandarilla 49 Executive Vice President,
Sales and Marketing
David F. Hemmings 52 Senior Vice President,
Business Development
and Technology/Systems
Development
Kenneth W. Noack 61 Vice President, Operations
William H. Thompson 46 Senior Vice President,
Administration/Finance,
Chief Financial Officer and Secretary
The business experience of Mr. James and Mr. Gray is set forth above under the
listing of directors of the Company. Effective June 11, 1999, Mr. Gray retired
from his position as the Company's President and Chief Executive Officer, and
effective June 10, 1999, Mr. James was appointed as Acting President and Chief
Executive Officer.
68
<PAGE>
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/Systems Development. From June 1997 until May 1998,
he was President of NetInvest, 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.
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. Thompson joined the Company as Senior Vice President of
Administration/Finance in December 1997, was elected Secretary in February 1998,
and became the Chief Financial Officer in December 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 PriceWaterhouseCoopers LLP, certified public accountants.
----------
69
<PAGE>
Item 11. EXECUTIVE COMPENSATION
This item contains information about compensation, stock options and employment
arrangements and other information concerning certain executive officers of the
Company.
Summary Compensation Table
The following table sets forth the compensation earned for services rendered
during the fiscal years indicated by the Company's Chief Executive Officer and
the four most highly compensated executive officers of the Company other than
the Chief Executive Officer whose salary and bonus exceeded $100,000 during the
fiscal year ended March 31, 1999 and who were serving as executive officers as
of March 31, 1999, and one other executive officer that was not serving as such
as of March 31, 1999 ("named executive officers").
<TABLE>
<CAPTION>
Long Term
Compen-
sation
Annual Compensation Awards
------------------------------------- ---------
(a) (b) (c) (d) (e) (g) (i)
Other Securities
Annual Underlying All Other
Compen- Option/ Compen-
Name and Principal sation SARs sation
Position Year Salary ($) Bonus ($) ($) (1) (#) (2) ($)
------------------- ---- ---------- --------- ------- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tracey L. Gray 1999 195,635 -- -- 50,000 5,168 (3)
President and Chief 1998 162,096 66,010 -- 41,000 4,621
Executive Officer 1997 148,928 60,450 -- -- 3,656
Eduardo Gandarilla (4) 1999 215,350 8,155 19,868 35,000 4,371 (5)
Executive Vice President 1998 184,453 17,965 -- 10,000 2,066
1997 162,123 12,000 44,617 50,000 2,030
David F. Hemmings (6) 1999 118,269 14,596 15,480 50,000 4,054 (7)
Senior Vice President 1998 -- -- -- -- --
1997 -- -- -- -- --
Kenneth W. Noack 1999 105,000 8,094 -- 25,000 2,802 (8)
Vice President 1998 98,167 16,687 -- 8,000 2,580
1997 75,554 13,663 -- -- 1,961
Henry W. Swanson (9) 1999 117,000 4,445 -- 25,000 2,994 (10)
Vice President 1998 112,677 16,787 -- 8,000 2,066
1997 56,538 -- 35,000 40,000 2,030
William H. Thompson (11) 1999 124,282 10,525 17,221 25,000 1,592 (12)
Senior Vice President 1998 35,551 3,725 -- 30,000 281
1997 -- -- -- -- --
- ----------
</TABLE>
70
<PAGE>
Footnotes to Summary Compensation Table
(1) Other annual compensation with respect to Mr. Gandarilla, Mr. Thompson and
Mr. Swanson represents reimbursements of relocation expenses and/or
related income taxes. Other annual compensation with respect to Mr.
Hemmings includes an employment signing bonus of $15,000 and a
reimbursement of relocation expenses of $480.
(2) Represents the number of shares of Common Stock underlying options granted
under the Company's 1991 Stock Option Plan.
(3) Includes the taxable portion of Company paid group term life insurance of
$1,260 and matching contributions of $3,908 made by the Company to the
Company's 401(k) savings plan for the account of the executive.
(4) The salary of Mr. Gandarilla includes sales commissions paid to Mr.
Gandarilla under the sales compensation plan between Mr. Gandarilla and
the Company.
(5) Includes the taxable portion of Company paid group term life insurance of
$174 and matching contributions of $4,197 made by the Company to the
Company's 401(k) savings plan for the account of the executive.
(6) Mr. Hemmings joined the Company on June 1, 1998 as Senior Vice President
of Business Development and Technology/Systems Development.
(7) Includes the taxable portion of Company paid group term life insurance of
$169 and matching contributions of $2,308 made by the Company to the
Company's 401(k) savings plan for the account of the executive. Also
includes $1,577 related to additional life insurance premiums paid by the
Company.
(8) Includes the taxable portion of Company paid group term life insurance of
$702 and matching contributions of $2,100 made by the Company to the
Company's 401(k) savings plan for the account of the executive.
(9) Mr. Swanson serves the Company as the Vice President of Development and
served as the executive officer of the Company's engineering, research and
development activities until June 1, 1998.
(10) Includes the taxable portion of Company paid group term life insurance of
$702 and matching contributions of $2,292 made by the Company to the
Company's 401(k) savings plan for the account of the executive.
(11) Mr. Thompson joined the Company on December 18, 1997 as Senior Vice
President of Administration and Finance upon the acquisition of TSG.
(12) Includes the taxable portion of Company paid group term life insurance of
$260 and matching contributions of $1,332 made by the Company to the
Company's 401(k) savings plan for the account of the executive.
71
<PAGE>
Stock Option Grants in the Last Fiscal Year
The following table sets forth certain information with respect to stock options
to purchase shares of the Company's Common Stock that were granted to each of
the named executive officers during the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (2)
- ---------------------------------------------------------------------------------------------- ----------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number Options
of Granted to
Securities Employees Exercise
Underlying in Fiscal Price Expiration
Name Options (1) Year ($/Share) Date 5% 10%
- ---- ----------- ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tracey L. Gray 50,000 9% $ 4.560 7/13/03 $ 63,027 $ 139,273
Eduardo Gandarilla 35,000 6% $ 4.560 7/13/03 44,119 97,491
David F. Hemmings 50,000 9% $ 5.090 6/01/03 70,366 155,491
Kenneth W. Noack 25,000 5% $ 4.560 7/13/03 31,513 69,636
Henry W. Swanson 25,000 5% $ 4.560 7/13/03 31,513 69,636
William H. Thompson 25,000 5% $ 4.560 7/13/03 31,513 69,636
- ----------
</TABLE>
(1) These options were granted at an exercise price equal to the per
share market value of the Common Stock on the grant date. The
options become exercisable twenty-five percent each year beginning
one year after the date of grant.
(2) The potential realizable value is calculated based on the term of
the option (five years) at its date of grant. It is calculated by
assuming that the stock price on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of
the option; however, the optionee will not actually realize any
benefit from the option unless the market value of the Company's
stock price in fact increases over the option price.
----------
72
<PAGE>
Aggregated Stock Option Exercises in the Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth for each of the named executive officers certain
information with respect to stock options exercised during the fiscal year ended
March 31, 1999 and the number and value of exercisable and unexercisable options
held by named executive officers as of March 31, 1999. The "Value Realized" on
"Shares Acquired on Exercise" during the fiscal year ended March 31, 1999 is
based on the difference between the closing market price of the Common Stock on
the exercise date and the option exercise price per share. The "Value of
Unexercised In-the-Money Options at Fiscal Year End" is based on the difference
between the closing market price of the Common Stock on March 31, 1999 ($3.75
per share) and the option exercise price per share.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Fiscal
Acquired Year-End Year-End
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
- ------------------- --------- --------------------------- -------------
<S> <C> <C> <C> <C>
Tracey L. Gray 5,000 19,388 49,000/87,000 5,000/0
Eduardo Gandarilla -- -- 27,500/67,500 0/0
David F. Hemmings -- -- 0/50,000 0/0
Kenneth W. Noack 8,000 30,520 20,562/33,188 3,000/0
Henry W. Swanson -- -- 22,000/51,000 0/0
William H. Thompson -- -- 63,073/49,677 88,124/0
</TABLE>
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Mr. C. Shelton James. The Company and Mr. James entered into an employment
agreement that became effective as of October 20, 1998. The agreement expires on
December 31, 1999, 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. Under the agreement, the base salary of Mr. James is
subject to annual review for merit and other increases at the discretion of the
Board. Mr. James is also entitled to the same benefits made available to the
other senior executives of the Company on the same terms and conditions as such
executives. Under the terms of the agreement, 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 is based on 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. In addition, the
agreement provides that outstanding options held by Mr. James immediately vest
in the event of a change in control of the Company, including the transfer,
exchange or sale of a substantial portion of the Company's assets to a
non-affiliated third party, a merger or consolidation of the Company pursuant to
which the stockholders of the Company own less than 50% of the surviving
73
<PAGE>
entity or the entity into which the common stock of the Company is converted or
if any person, other than Wexford Management LLC or its affiliates or
Fundamental Management Corporation or its affiliates, become the owner directly
or indirectly of securities of the Company or its successor representing 35% or
more of the combined voting power of the Company's or its successor's securities
then outstanding. If the Company without cause terminates the agreement, 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.
Effective June 10, 1999, Mr. James was appointed as the Company's Acting
President and Chief Executive Officer. The Company and Mr. James have reached an
agreement in principle with respect to a new employment agreement that would
supercede his employment agreement that became effective on October 20, 1998.
Also, effective June 10, 1999, Mr. James began to receive compensation based on
an annual salary of $250,000 and a non-accountable monthly expense allowance of
$2,000.
Mr. Tracey L. Gray. The Company and Mr. Gray entered into an employment
agreement that became effective as of October 20, 1998. The employment agreement
expires on September 30, 2001, subject to certain earlier termination
provisions. Pursuant to the agreement, Mr. Gray is paid an annual salary of at
least $200,000. His base salary is subject to annual review for merit and other
increases at the discretion of the Board. Mr. Gray is also entitled to the same
benefits made available to the other senior executives of the Company on the
same terms and conditions as such executives. In addition, Mr. Gray is 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 is based on 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. Further, the
agreement provides that outstanding options held by Mr. Gray immediately vest
and continue in effect until the termination of such options in accordance with
their terms in the event Mr. Gray's employment is terminated without cause. In
addition, if the agreement is terminated by the Company without cause, Mr. Gray
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.
Effective June 11, 1999, Mr. Gray retired from his position as the President and
Chief Executive Officer of the Company. The Company and Mr. Gray have reached an
agreement in principle with respect to the terms of his retirement that would
supercede his employment agreement that was effective as of October 20, 1998.
Other Executive Officers. Each of Messrs. Gandarilla, Hemmings, Noack, Swanson
and Thompson entered into an employment agreement with the Company which became
effective as of December 10, 1998 and that continue in effect until either party
to the agreement terminates the agreement with at least 60 days prior written
notice, subject to certain earlier termination provisions. Pursuant to the
agreements, Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson are paid
annual salaries of at least $155,000, $150,000, $105,000, $117,000 and $125,000,
respectively, and with respect to Mr. Gandarilla commissions on the basis
determined by the Company. Their base salaries are subject to annual review for
merit and other increases at the discretion of the Board. Messrs. Gandarilla,
Hemmings, Noack, Swanson and Thompson are reimbursed (in accordance with Company
policy from time to time in effect) for all reasonable business expenses
incurred by them in the performance of their duties.
Pursuant to the terms of the agreements, Messrs. Gandarilla, Hemmings, Noack,
Swanson and Thompson are 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. Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson are
also entitled to receive an annual incentive bonus, if any, as determined or
approved by the
74
<PAGE>
Board or the Compensation Committee pursuant to the Company's incentive
compensation plan. Pursuant to the terms of the agreements, Messrs. Gandarilla,
Hemmings, Noack, Swanson and Thompson will be granted such options to purchase
shares of the Company's common stock as approved by the Compensation Committee.
In addition, pursuant to the terms of the agreements, outstanding options held
by Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson immediately vest in
the event of a change in control of the Company, including the transfer,
exchange or sale of substantially all of the Company's assets to a
non-affiliated third party, a merger or consolidation of the Company pursuant to
which the stockholders of the Company own less than 50% of the surviving entity
or the entity into which the common stock of the Company is converted or if any
person, other than Wexford Management LLC or its affiliates or Fundamental
Management Corporation or its affiliates, becomes the owner directly or
indirectly of securities of the Company or its successor representing 35% or
more of the combined voting power of the Company's or its successor's securities
then outstanding. Also, vested outstanding options held by Messrs. Gandarilla,
Hemmings, Noack, Swanson and Thompson continue in effect in accordance with
their terms, but not to exceed one year from the date of termination of
employment in the event their employment is terminated other than for cause or
upon death or disability. In addition, if these agreements are terminated by the
Company without cause, Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson
are entitled to receive the amount of compensation and benefits they would
otherwise have received for a period of six months from the date of termination
and thereafter until they locate employment comparable to their employment at
the date of termination but not for a period longer than twelve months from the
date of termination of employment.
Under the terms of the agreements, Messrs. Gandarilla, Hemmings, Noack, Swanson
and Thompson are indemnified by the Company with respect to claims made against
them as officers and/or employees 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.
Directors' Compensation
Directors who are not employees of the Company receive an annual retainer fee of
$5,000 plus $1,500 for each Board meeting attended, and $500 for each Board
committee meeting attended. Directors are also reimbursed for expenses in
attending Board and Board committee meetings.
Non-employee directors of the Company automatically receive "formula" stock
option grants under the Company's Directors' Stock Option Plan. Each
non-employee director first elected to the Board automatically receives an
option to purchase 4,000 shares of Common Stock on the date of his or her
election to the Board. In addition, each non-employee director then serving on a
committee of the Board and each non-employee director then serving as chairman
of a committee of the Board automatically receives on the last day of the fiscal
year (March 31) an option to purchase 1,000 shares of Common Stock with respect
to each such committee and each such chairmanship. In addition, on July 13,
1998, the Directors' Stock Option Plan was amended to provide for the grant of
stock options to non-employee directors at the discretion of the Compensation
and Stock Option Committee.
On July 13, 1998, the Company granted options to purchase 5,000 shares of Common
Stock at an exercise price of $4.5625 per share to each non-employee director
(Messrs. Jacobs, Jasmann, Moore, Patton, Plaumann and Steadman) pursuant to the
Company's Directors' Stock Option Plan. In addition, on March 31, 1999, the
Company granted formula options to Messrs. Jacobs, Jasmann, Moore, Patton,
Plaumann and Steadman pursuant to the Company's Directors' Stock Option Plan to
purchase 2,000 shares, 4,000 shares, 4,000 shares, 4,000 shares, 2,000 shares
and 5,000 shares of Common Stock, respectively, at an exercise price of $3.5938
per share. Options granted pursuant to the Directors' Stock
75
<PAGE>
Option Plan become fully exercisable one year after the date of grant and expire
five years from the date of grant.
Also, during the fiscal year ended March 31, 1999, the Board approved the
payment of certain additional fees to members of the Compensation Committee and
a Special Acquisition Committee established during the year. Additional fees
paid to each of Messrs. Jasmann, Plaumann and Steadman as members of the
Compensation Committee amounted to $1,000 during the year ended March 31, 1999.
Additional fees paid to Messrs. Jasmann, Moore, Patton and Steadman as members
of the Special Acquisition Committee with respect to the year ended March 31,
1999 aggregated $12,700, $10,200, $10,400 and $19,200, respectively.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board, which during the year ended March 31,
1999 consisted of Messrs. Dwight Jasmann, Mark L. Plaumann and David R.A.
Steadman, makes decisions concerning executive compensation. Messrs. Jasmann,
Plaumann and Steadman are neither officers nor employees of the Company or any
of its subsidiaries. During fiscal 1999, no executive officer of the Company
served as a member of the compensation committee or as director of another
entity of which any executive officers thereof served as a director or member of
the Compensation Committee of the Company. Mr. Steadman was an employee of the
Company from December 18, 1997 to March 31, 1998, and was an employee and
Chairman of the Board of Directors of TSG prior to the Company's acquisition of
TSG on December 18, 1997.
76
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth certain information regarding beneficial
ownership of the outstanding Common Stock of the Company at June 2, 1999
according to information supplied to the Company by: (i) each person known by
the Company to own beneficially more than 5% of the Common Stock; (ii) each of
the directors of the Company; (iii) each of the named executive officers; and
(iv) 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, such as upon the exercise of options or
warrants. The numbers and percentages assume for each person or group listed,
the exercise of all warrants and stock options held by such person or group that
are exercisable within 60 days of June 2, 1999, but not the exercise of such
warrants and stock options owned by any other person. Except as otherwise
indicated in the footnotes, the Company believes that the beneficial owners of
the Common Stock listed below have sole investment and voting power with respect
to the shares of Common Stock shown as beneficially owned by them.
Security Ownership of Certain Beneficial Owners
Name and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned of Class
- -------------------------------------------------------------------------------
Wexford Partners Fund L.P. 2,617,269 (1) 19.4%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Fundamental Management Corporation 959,202 (2) 7.1%
4000 Hollywood Boulevard
Suite 610N
Hollywood, Florida 33021
- ----------
(1) Includes 10,000 shares that may be purchased by Mr. Jacobs, a director of
the Company and an affiliate of Wexford Partners Fund L.P., and 10,000
shares that may be purchased by Mr. Plaumann, a director of the Company
and a consultant to and former employee of Wexford, upon exercise of stock
options within 60 days as to which Wexford Partners Fund L.P. exercises
shared voting or investment power.
(2) On June 2, 1999, Fundamental Management Corporation, as General Partner of
various limited partnerships, effected an in-kind distribution of 524,446
shares of Common Stock of the Company to the holders of the limited
partnership interests.
77
<PAGE>
Security Ownership of Management
Number of Shares Percentage
Name Beneficially Owned of Class
- --------------------------------------------------------------------------------
Tracey L. Gray 205,784 (1) 1.5%
Joseph M. Jacobs 2,617,269 (2) 19.4%
C. Shelton James 1,133,072 (3) 8.4%
Dwight Jasmann 13,890 (4) *
Charles H. Moore 17,100 (5) *
Thomas E. Patton 15,000 (6) *
Mark L. Plaumann 10,000 (7) *
David R.A. Steadman 82,202 (8) *
Eduardo Gandarilla 51,250 (9) *
David F. Hemmings 22,500 (10) *
Kenneth W. Noack 58,472 (11) *
Henry W. Swanson 30,250 (12) *
William H. Thompson 72,129 (13) *
All directors and executive officers as
as a group (13 persons) 4,318,918 (14) 30.9%
* Less than 1%
- ----------
(1) Includes 71,750 shares that may be purchased upon exercise of stock
options within 60 days.
(2) Includes 2,597,269 shares held by Wexford Partners Fund L.P., as to
which shares Mr. Jacobs disclaims beneficial ownership, and 20,000
shares that may be purchased upon exercise of stock options within
60 days.
(3) Includes 959,202 shares held by Fundamental Management Corporation,
as to which shares Mr. James disclaims beneficial ownership, and
58,250 shares that may be purchased upon exercise of stock options
within 60 days.
(4) Includes 11,000 shares that may be purchased upon exercise of stock
options within 60 days.
(5) Includes 75 shares held by Mr. Moore's wife and 25 shares held by
Mr. Moore's daughter. Includes 16,000 shares that may be purchased
upon exercise of stock options within 60 days.
(6) Includes 500 shares held jointly with Mr. Patton's wife. Includes
14,000 shares that may be purchased upon exercise of stock options
within 60 days.
(7) Represents 10,000 shares that may be purchased upon exercise of
stock options within 60 days.
(8) Includes 80,250 shares that may be purchased upon exercise of stock
options within 60 days.
(9) Represents 51,250 shares that may be purchased upon exercise of
stock options within 60 days.
(10) Includes 12,500 shares that may be purchased upon exercise of stock
options within 60 days.
(11) Includes 28,812 shares that may be purchased upon exercise of stock
options within 60 days.
(12) Represents 30,250 shares that may be purchased upon exercise of
stock options within 60 days.
78
<PAGE>
(13) Includes 71,500 shares that may be purchased upon exercise of stock
options within 60 days.
(14) Includes a total of 959,202 shares held by Fundamental Management
Corporation, 2,597,269 shares held by Wexford Partners Fund L.P. and
600 shares held by family members as to which shares the respective
officers and directors disclaim beneficial ownership. Also includes
465,562 shares that may be purchased upon exercise of stock options
within 60 days. On June 2, 1999, Fundamental Management Corporation,
as General Partner of various limited partnerships, effected an
in-kind distribution of 524,446 shares of Common Stock of the
Company to the holders of the limited partnership interests. After
such distribution, all directors and executive officers as a group
beneficially own 4,318,918 shares, or 30.9%, of the Common Stock of
the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Tracey L. Gray, the Company's President and Chief Executive Officer until
June 11, 1999, is a majority stockholder of NuTel Systems, Inc. ("NuTel"), a
customer of the Company. During the year ended March 31, 1999, the Company's
sales to NuTel aggregated $32. At March 31, 1999, notes and accounts receivable
from NuTel amounted to $43. The Company's sales to NuTel during the year ended
March 31, 1999 have been made on an arms length basis at sales prices and terms
no more favorable than made to other customers acquiring similar amounts of
products from the Company.
In connection with the acquisition of TSG, the Company entered into
stockholders' agreement with Fundamental Management Corporation and Wexford
Partners Fund, L.P., each of which is a beneficial owner of over 5% of the
Company's outstanding common stock. 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.
----------
79
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report.
(1) Financial Statements - See the index to the financial statements in
Item 8.
(2) Financial Statement Schedules - See the index to the financial
statement schedules in Item 8.
(3) Exhibits -
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Certificate of Incorporation, as amended (incorporated by reference
to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the
year ended March 31, 1998)
3.2 By-Laws, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
1992)
4.1 Form of Common Stock Certificate (incorporated by reference to
Registrant's Registration Statement on Form 8-A dated November 21,
1986)
4.2 Representative's Warrant Agreement between Technology Service Group,
Inc. and Brookehill Equities, Inc. dated May 10, 1996 (incorporated
by reference to Exhibit 4.3 to Registrant's Registration Statement
on Form S-4, File No. 333-38439)
4.3 Warrant Agreement between Technology Service Group, Inc. and Liberty
Bank and Trust Company of Oklahoma City, N.A. dated May 10, 1996
(incorporated by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-4, File No. 333-38439)
4.4 Supplemental Warrant Agreement between the Registrant, Technology
Service Group, Inc. and Brookehill Equities, Inc. dated December 18,
1997 (filed herewith)
4.5 Supplemental Warrant Agreement between the Registrant, Technology
Service Group, Inc., Liberty Bank and Trust Company of Oklahoma City
N.A. and American Stock Transfer and Trust Company dated December
23, 1997 (filed herewith)
80
<PAGE>
4.6 Rights Agreement, dated as of May 10, 1999, between Registrant and
American Stock Transfer and Trust Company (incorporated by reference
to Exhibit 99.1 to Registrant's Form 8-K dated April 19, 1999)
10.1* 1991 Stock Option Plan, as amended (incorporated by reference to
Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998)
10.2* Directors Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998)
10.3* 1994 Omnibus Stock Plan of Technology Service Group, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998)
10.4* 1995 Non-Employee Director Stock Option Plan of Technology Service
Group, Inc. (incorporated by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the year ended March 31,
1998)
10.5 Restated Loan Agreement between Registrant and NationsBank, N.A.
dated November 25, 1997 (incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997)
10.6 First Amendment to Loan and Security Agreement between Registrant
and NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.7 Promissory Note between Registrant and NationsBank, N.A. dated March
29, 1999 (filed herewith)
10.8 First Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.9 Second Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.10 Mortgage Modification and Future Advance Agreement between
Registrant and NationsBank, N.A. November 26, 1997 (incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997)
81
<PAGE>
10.11* Amended and Restated Employment Agreement between Elcotel, Inc. and
Tracey L. Gray dated October 20, 1998 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998)
10.12* Amended and Restated Employment Agreement between Elcotel, Inc. and
C. Shelton James dated October 20, 1998 (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998)
10.13* Employment Agreement between Elcotel, Inc. and David F. Hemmings
dated December 10, 1998 (incorporated by reference to Exhibit 10.3
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.14* Employment Agreement between Elcotel, Inc. and William H. Thompson
dated December 10, 1998 (incorporated by reference to Exhibit 10.4
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.15* Employment Agreement between Elcotel, Inc. and Kenneth W. Noack
dated December 10, 1998 (incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.16* Employment Agreement between Elcotel, Inc. and Henry W. Swanson
dated December 10, 1998 (incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.17* Employment Agreement between Elcotel, Inc. and Darold R. Bartusek
dated December 10, 1998 (incorporated by reference to Exhibit 10.7
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.18* Employment Agreement between Elcotel, Inc. and Hugh H. Durden dated
December 10, 1998 (incorporated by reference to Exhibit 10.8 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
10.19* Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla
dated December 10, 1998 (incorporated by reference to Exhibit 10.9
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998)
82
<PAGE>
10.20 Technology and Transfer Agreement between Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by
reference to Exhibit 2.2 to Registrant's Form 8-K dated September
30, 1997)
10.21 Patent License Agreement between Registrant and Lucent Technologies
Inc. dated September 30, 1997 (incorporated by reference to Exhibit
2.3 to Registrant's Form 8-K dated September 30, 1997)
10.22 Stockholders' Agreement (incorporated by reference to Exhibit 2.3 to
Registrant's Registration Statement on Form S-4, File No. 333-38439)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditor's Consent (filed herewith)
27 Financial Data Schedule (Edgar filing only)
* Management compensation agreements and plans.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year ended March 31, 1999.
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized, on the 28th day of June
1999.
ELCOTEL, INC.
By: /s/ C. Shelton James
---------------------------
C. Shelton James
Acting President &
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints each of C. Shelton James and William H. Thompson
jointly and severally his true and lawful attorneys-in-fact and agent with full
powers of substitution for him and in his name, place and stead in any and all
capacities to sign on his behalf, individually and in each capacity stated below
and to file any and all amendments to this Annual Report on Form 10-K with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/ C. Shelton James Acting President & Chief June 28,1999
-------------------------- Executive Officer, Director
C. Shelton James and Chairman of the Board
By: /s/ William H. Thompson Senior Vice President, June 28, 1999
-------------------------- Chief Financial Officer,
William H. Thompson Secretary (principal financial
officer)
By: /s/ Scott M. Klein Controller (principal June 28, 1999
-------------------------- accounting officer)
Scott M. Klein
By: /s/ Tracey L. Gray Director June 28, 1999
--------------------------
Tracey L. Gray
By: /s/ Joseph M. Jacobs Director June 28, 1999
--------------------------
Joseph M. Jacobs
By: /s/ Dwight Jasmann Director June 28, 1999
--------------------------
Dwight Jasmann
By: /s/ Charles H. Moore Director June 28, 1999
--------------------------
Charles H. Moore
By: /s/ Thomas E. Patton Director June 28, 1999
--------------------------
Thomas E. Patton
By: /s/ Mark L. Plaumann Director June 28, 1999
--------------------------
Mark L. Plaumann
By: /s/ David R.A. Steadman Director June 28, 1999
--------------------------
David R.A. Steadman
</TABLE>
84
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report on Form
10-K for the year ended March 31, 1998)
3.2 By-Laws, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended March
31, 1992)
4.1 Form of Common Stock Certificate (incorporated by reference to
Registrant's Registration Statement on Form 8-A dated November 21,
1986)
4.2 Representative's Warrant Agreement between Technology Service
Group, Inc. and Brookehill Equities, Inc. dated May 10, 1996
(incorporated by reference to Exhibit 4.3 to Registrant's
Registration Statement on Form S-4, File No. 333-38439)
4.3 Warrant Agreement between Technology Service Group, Inc. and
Liberty Bank and Trust Company of Oklahoma City, N.A. dated May
10, 1996 (incorporated by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-4, File No. 333-38439)
4.4 Supplemental Warrant Agreement between the Registrant, Technology
Service Group, Inc. and Brookehill Equities, Inc. dated December
18, 1997 (filed herewith)
4.5 Supplemental Warrant Agreement between the Registrant, Technology
Service Group, Inc., Liberty Bank and Trust Company of Oklahoma
City N.A. and American Stock Transfer and Trust Company dated
December 23, 1997 (filed herewith)
4.6 Rights Agreement, dated as of May 10, 1999, between Registrant and
American Stock Transfer and Trust Company (incorporated by
reference to Exhibit 99.1 to Registrant's Form 8-K dated April 19,
1999)
10.1* 1991 Stock Option Plan, as amended (incorporated by reference to
Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998)
10.2* Directors Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998)
<PAGE>
10.3* 1994 Omnibus Stock Plan of Technology Service Group, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998)
10.4* 1995 Non-Employee Director Stock Option Plan of Technology Service
Group, Inc. (incorporated by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the year ended March
31, 1998)
10.5 Restated Loan Agreement between Registrant and NationsBank, N.A.
dated November 25, 1997 (incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997)
10.6 First Amendment to Loan and Security Agreement between Registrant
and NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.7 Promissory Note between Registrant and NationsBank, N.A. dated
March 29, 1999 (filed herewith)
10.8 First Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.9 Second Replacement Promissory Note between Registrant and
NationsBank, N.A. dated March 29, 1999 (filed herewith)
10.10 Mortgage Modification and Future Advance Agreement between
Registrant and NationsBank, N.A. November 26, 1997 (incorporated
by reference to Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997)
10.11* Amended and Restated Employment Agreement between Elcotel, Inc.
and Tracey L. Gray dated October 20, 1998 (incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998)
10.12* Amended and Restated Employment Agreement between Elcotel, Inc.
and C. Shelton James dated October 20, 1998 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998)
10.13* Employment Agreement between Elcotel, Inc. and David F. Hemmings
dated December 10, 1998 (incorporated by reference to Exhibit 10.3
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
2
<PAGE>
10.14* Employment Agreement between Elcotel, Inc. and William H. Thompson
dated December 10, 1998 (incorporated by reference to Exhibit 10.4
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.15* Employment Agreement between Elcotel, Inc. and Kenneth W. Noack
dated December 10, 1998 (incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.16* Employment Agreement between Elcotel, Inc. and Henry W. Swanson
dated December 10, 1998 (incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.17* Employment Agreement between Elcotel, Inc. and Darold R. Bartusek
dated December 10, 1998 (incorporated by reference to Exhibit 10.7
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.18* Employment Agreement between Elcotel, Inc. and Hugh H. Durden
dated December 10, 1998 (incorporated by reference to Exhibit 10.8
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.19* Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla
dated December 10, 1998 (incorporated by reference to Exhibit 10.9
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998)
10.20 Technology and Transfer Agreement between Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by
reference to Exhibit 2.2 to Registrant's Form 8-K dated September
30, 1997)
10.21 Patent License Agreement between Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by
reference to Exhibit 2.3 Registrant's Form 8-K dated September 30,
1997)
10.22 Stockholders' Agreement (incorporated by reference to Exhibit 2.3
to Registrant's Registration Statement on Form S-4, File No.
333-38439)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditor's Consent (filed herewith)
27 Financial Data Schedule (Edgar filing only)
* Management compensation agreements and plans.
3
EXHIBIT 4.4
SUPPLEMENTAL WARRANT AGREEMENT
This SUPPLEMENTAL WARRANT AGREEMENT is dated as of December 18, 1997 by
and between ELCOTEL, INC. ("Elcotel"), TECHNOLOGY SERVICE GROUP, INC. ("TSG"),
and BROOKEHILL EQUITIES, INC. (the "Representative").
WHEREAS, TSG and the Representative entered into a Representative's
Warrant Agreement, dated as of May 10, 1996 (the "Warrant Agreement");
WHEREAS, Elcotel, TSG and Elcotel Hospitality Services, Inc. ("EHS")
entered into an Agreement and Plan of Merger, dated August 13, 1997, as amended
(the "Merger Agreement") pursuant to which EHS, a wholly-owned subsidiary of
Elcotel, has merged on the date hereof with and into TSG and TSG has become a
wholly-owned subsidiary of Elcotel (the "Merger");
WHEREAS, each share of common stock, par value $.01 per share, of TSG
("TSG Common Stock") issued and outstanding immediately prior to the
consummation of the Merger has been converted into the right to receive 1.05
shares of common stock, par value $.01 per share, of Elcotel ("Elcotel Common
Stock");
WHEREAS, pursuant to Section 1.05(b) of the Merger Agreement, at the
effective time of the Merger, each of the warrants issued under the Warrant
Agreement (the "Warrants") will be adjusted as a result of the Merger.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto,
intending to be legally bound hereby, agree as follows:
1. The parties hereto agree that each Warrant outstanding
immediately prior to the effective time of the Merger shall be
adjusted as of the effective time of the Merger so as to
constitute, and shall become, a warrant to acquire, on
substantially the same terms and conditions as were applicable
to such Warrant under the Warrant Agreement, 1.05 shares of
Elcotel Common Stock for each share of TSG Common Stock for
which such Warrant could have been exercised immediately prior
to the effective time of the Merger.
<PAGE>
2. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but such counterparts
shall together constitute but one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Supplemental Warrant
Agreement as of the date first above written.
TECHNOLOGY SERVICE GROUP, INC. ELCOTEL, INC.
BY: /s/ Vincent C. Bisceglia By: /s/ Tracey L. Gray
---------------------------- ----------------------
Name: Vincent C. Bisceglia Name: Tracey L. Gray
Title: President Title: President
BROOKEHILL EQUITIES, INC.
By: ----------------------------
Name:
Title:
2
EXHIBIT 4.5
SUPPLEMENTAL WARRANT AGREEMENT
This SUPPLEMENTAL WARRANT AGREEMENT IS EFFECTIVE AS OF December 23,
1997 by and among ELCOTEL, INC. ("Elcotel"); TECHNOLOGY SERVICE GROUP, INC.
("TSG"); LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, N.A. ("Liberty"); and
AMERICAN STOCK TRANSFER AND TRUST COMPANY ("American").
WHEREAS, TSG and Liberty entered into a Warrant Agreement, dated as of
May 10, 1996 (the "Warrant Agreement") pursuant to which Liberty has acted as
Warrant Agent in connection with the issuance of 1,150,000 warrants to purchase
common stock of TSG (the "Warrants") pursuant to the Warrant Agreement;
WHEREAS, Elcotel, TSG and Elcotel Hospitality Services, Inc. ("EHS")
entered into an Agreement and Plan of Merger, dated August 13, 1997, as amended
(the "Merger Agreement") pursuant to which EHS, a wholly-owned subsidiary of
Elcotel, merged with and into TSG and TSG became a wholly-owned subsidiary of
Elcotel effective on December 18, 1997 (the "Merger"), and pursuant thereto each
share of common stock of TSG ("TSG Common Stock") issued and outstanding
immediately prior to the consummation of the Merger was converted into the right
to receive 1.05 shares of common stock of Elcotel ("Elcotel Common Stock);
WHEREAS, pursuant to the Merger Agreement, each Warrant outstanding
immediately prior to the effective time of the Merger was adjusted as of the
effective time of the Merger so as to constitute a warrant to acquire, on
substantially the same terms and conditions as were applicable to such Warrant
under the Warrant Agreement, 1.05 shares of Elcotel Common Stock for each share
of TSG Common Stock for which such Warrant could have been exercised immediately
prior to the effective time of the Merger;
WHEREAS, Liberty desires to resign as Transfer Agent and Warrant Agent,
and American, as a stock transfer company doing business in New York, New York,
desires to succeed Liberty as Transfer Agent and Warrant Agent under the Warrant
Agreement.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto,
intending to be legally bound hereby, agree as follows:
1. Liberty hereby resigns its duties pursuant to the Warrant Agreement
effective as of the date set forth above and Liberty shall be discharged from
all further rights, duties and liabilities under the Warrant Agreement (except
liabilities arising as a result of its gross negligence or willful misconduct
under the Warrant Agreement). TSG and Elcotel hereby appoint American as the new
Warrant Agent and Transfer Agent under the Warrant Agreement effective as of the
date set forth above and American accepts such appointment and hereby assumes
all rights and duties of the Transfer Agent and Warrant Agent under the Warrant
Agreement. American shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named in the Warrant Agreement as
the Transfer Agent and Warrant Agent, without any further assurance, conveyance,
act or deed.
2. If for any reason it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, upon TSG's request, the
same shall be done at the expense of TSG and Liberty shall legally and validly
execute and deliver the same.
<PAGE>
3. The following addresses set forth in paragraph 12 of the Warrant
Agreement to which notices shall be sent is modified so that notices to the
Company shall be sent to Technology Service Group, Inc. 6428 Parkland Drive,
Sarasota, Florida 34243, Attention: President and to the Warrant Agent at its
Corporate Office at 40 Wall Street, New York, New York 10005.
4. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but such counterparts shall together constitute
but one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Supplemental Warrant
Agreement as of the date first above written.
TECHNOLOGY SERVICE GROUP, INC. ELCOTEL, INC.
By: /s/ William H. Thompson By: /s/ Tracey L. Gray
----------------------------------- -------------------------
William H. Thompson, Vice President Tracey L. Gray, President
LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, N.A.
By: /s/ Edith Schuler
-----------------------------
Name: Edith Schuler
Title: Assistant Vice President
AMERICAN STOCK TRANSFER AND TRUST COMPANY
By: /s/ Herbert J. Lemmer
-----------------------------
Name: Herbert J. Lemmer
Title: Vice President
2
EXHIBIT 10.6
FIRST AMENDMENT TO LOAN AGREEMENT
AND SECURITY AGREEMENT
THIS AMENDMENT to Loan Agreement and Security Agreement (this
"Amendment") is executed as of the 29th of March, 1999, by and between ELCOTEL,
INC., ELCOTEL DIRECT, INC., and TECHNOLOGY SERVICE GROUP, INC. (successor by
merger with ELCOTEL HOSPITALITY SERVICES, INC.), all Delaware corporations
(collectively "Borrower"),and NATIONSBANK, N.A., a National Banking Association
("Lender" or "Bank").
WITNESSETH:
WHEREAS, Borrower and Lender entered into that certain Restated Loan
Agreement dated as of November 25, 1997 (the "Loan Agreement") and that certain
Restated Security Agreement dated November 25, 1997 (the "Security Agreement";
the Loan Agreement and the Security Agreement are together referred to herein as
the "Agreements") in connection with a $15,000,000.00 loan; and
NOW THEREFORE, in consideration of this Amendment to the Loan
Agreements, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties mutually agree as
follows:
1. This Amendment is a modification only and not a novation. All terms,
covenants and conditions of said Agreements remain unchanged except as specified
below. This Amendment shall not waive any right or remedy afforded Lender under
said Agreements.
2. The term "note" or "promissory note", as referred to in the
Agreements, includes that certain First Replacement Note in the amount of
$10,000,000.00, that certain Second Replacement Note in the amount of
$4,000,000.00, and that certain Promissory Note in the principal amount of
$1,500,000.00, each of even date herewith, all executed by Borrower and
delivered to Lender. The term "Line of Credit Note" shall refer to the First
Replacement Note. The term "Loan ", as used in this Amendment and in the
Agreements shall include the indebtedness evidenced by the aforesaid First
Replacement Note, Second Replacement Note, and Promissory Note.
3. Borrower hereby warrants and covenants that it is in compliance with
all terms, covenants and conditions of the Note, Agreements as modified hereby,
and all other loan documents executed in connection therewith (the "Loan
Documents"). Borrower hereby ratifies and confirms all warranties and covenants
contained in the Note, Agreements and other Loan Documents as of the date of
this Amendment.
4. Disbursements under the $1,500,000.00 Promissory Note described in
paragraph 2 above shall be made by Lender to finance the purchase of new
equipment, approved by Lender in writing and used in connection with, and to be
located on, the real property described in the Agreements. Such disbursements
shall be limited to 75% of the purchase price of such equipment, excluding taxes
and fees, and shall be conditioned upon the delivery by Borrower to Lender of:
(a) a copy of the purchase order invoice(s) for the acquisition of the equipment
for which disbursement is being sought and (b) evidence satisfactory to Lender
that (1) such
<PAGE>
equipment is encumbered by a first perfected security interest for the benefit
of Lender, as evidenced by security agreements and UCC-1 Financing Statements
filed at Borrower's expense in the applicable office(s), and (2) all reasonable
requirements of Lender for similar transactions have been satisfied.
5. Subparagraph 1.F. of the Loan Agreement is deleted in its entirety
and replaced with the following:
"F. Debt Service Coverage Ratio. Debt Service Coverage Ratio means
Borrower's Net income ("NI") + Depreciation ("D") + Amortization ("AMORT") less
Dividends ("DIV"), all divided by Current Maturities of Long Term Debt ("CMLTD")
plus Current Maturities of Capital Leases ("CMCL") plus Interest Expense ("IE")
(i.e. NI + D + AMORT - DIV
--------------------
CMLTD + CMCL + IE)
6. Paragraph 4.A.iv is hereby deleted.
7. Paragraph 5A is hereby amended to increase the limitation from
$500,000.00 to $1,500,000.00.
8. For purposes of interpreting subparagraph 2G of the Loan Agreement,
the figure "$15,00,000.00" shall be changed to "$10,000,000.00".
9. Subparagraph 2D of the Loan Agreement is deleted in its entirety,
effective as of the date of this Amendment, and replaced by the following
provision:
"D. Borrowing Base. Borrowings under the Line of Credit Note will be
based on a Borrowing Base formula and at no time will the outstanding
principal balance of the Loan exceed the lesser of (1) $10,000,000.00
or (2) the sum of 80% of Eligible Domestic Accounts Receivable plus 40%
of Eligible Inventory (which inventory portion of the Loan will be
capped at $4,000,000.00) minus the aggregate face amount of all
outstanding Letters of Credit as hereinafter defined. Borrower, at its
expense shall deliver or cause to be delivered to Bank within 30 days
of written request by Bank throughout the term of the Loan, an Eligible
Inventory Report, in form satisfactory to Bank from Borrower or at
Bank's option, some other inspector chosen by Bank listing all of
Borrower's Eligible Inventory on hand. On the day of a draw request,
the Borrower shall submit to Bank a certification, in form satisfactory
to Bank, that Borrower is not in default under the Loan Agreement, the
Line of Credit Note, or other Loan Documents. Borrower on a
consolidated basis, will provide Borrowing Base Certificates and
accounts receivables aging lists monthly, or at any such time as
required by Bank, which Borrowing Base Certificate shall calculate the
availability under the full commitment of the Line, in form attached
hereto as Exhibit "A", or such other form as Bank determines to be
acceptable in its sole discretion. Included in the calculation shall be
any Letters of Credit which are being secured by the Loan. The monthly
Borrowing Base Certificate and accounts receivable aging list shall be
provided within 20 days of month end. If at any time the outstanding
balance of the Note exceeds the Borrowing Base, the Borrower shall have
30 days to cure such default."
2
<PAGE>
10. AS A MATERIAL INDUCEMENT FOR BANK TO EXECUTE THIS AMENDMENT,
BORROWER DOES HEREBY RELEASE, WAIVE, DISCHARGE, COVENANT NOT TO SUE, ACQUIT,
SATISFY AND FOREVER DISCHARGE BANK, ITS OFFICERS, DIRECTORS, EMPLOYEES, AND
AGENTS AND ITS AFFILIATES AND ASSIGNS FROM ANY AND ALL LIABILITY, CLAIMS,
COUNTERCLAIMS, DEFENSES, ACTIONS, CAUSES OF ACTION, SUITS, CONTROVERSIES,
AGREEMENTS, PROMISES AND DEMANDS WHATSOEVER IN LAW OR IN EQUITY WHICH BORROWER
EVER HAD, NOW HAVE, OR WHICH ANY PERSONAL REPRESENTATIVE, SUCCESSOR, HEIR OR
ASSIGN OF BORROWER HEREAFTER CAN, SHALL OR MAY HAVE AGAINST BANK, ITS OFFICERS,
DIRECTORS, EMPLOYEES, AND AGENTS, AND ITS AFFILIATES AND ASSIGNS, FOR, UPON OR
BY REASON OF ANY MATTER, CAUSE OR THING WHATSOEVER THROUGH THE DATE THEREOF.
BORROWER FURTHER EXPRESSLY AGREES THAT THE FOREGOING RELEASE AND WAIVER
AGREEMENT IS INTENDED TO BE AS BROAD AND INCLUSIVE AS PERMITTED BY THE LAWS OF
THE STATE OF FLORIDA. IN ADDITION TO, AND WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, AND IN CONSIDERATION OF BANK'S EXECUTION OF THIS AMENDMENT, BORROWER
COVENANTS WITH AND WARRANT UNTO BANK, AND ITS AFFILIATES AND ASSIGNS, THAT THERE
EXIST NO CLAIMS, COUNTERCLAIMS, DEFENSES, OBJECTIONS, OFFSETS OR CLAIMS OF
OFFSETS AGAINST BANK OR THE OBLIGATION OF BORROWER TO PAY THE LOAN TO BANK WHEN
AND AS THE SAME BECOMES DUE AND PAYABLE.
11. Notwithstanding any provision to the contrary contained in the
Agreements, the parties agree to add the following thereto:
"ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THE
AGREEMENTS OR THIS AMENDMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING
ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR
THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT
OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO
THIS AMENDMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING,
TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THE AGREEMENTS OR
THIS AMENDMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN BRADENTON,
FLORIDA, AND ADMINISTERED BY ENDISPUTE, INC., D/B/A J.A.M.S./ENDISPUTE WHO WILL
APPOINT AN ARBITRATOR; IF J.A.M.S./ENDISPUTE IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL
SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND
FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
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<PAGE>
B. RESERVATION OF RIGHTS. NOTHING IN THIS AMENDMENT SHALL BE DEEMED TO
(I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION
OR REPOSE AND ANY WAIVERS CONTAINED IN THE AGREEMENTS OR THIS AMENDMENT; OR (II)
BE A WAIVER BY THE LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91
OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE
LENDER HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO)
SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR
(C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT
LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A
RECEIVER. THE LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
AMENDMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR
MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES
SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN
ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING
RESORT TO SUCH REMEDIES."
12. Year 2000 Compliance. Borrower has (i) initiated a review and
assessment of all areas within its and each of its subsidiaries' business and
operations (including those affected by supplier and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by Borrower or any of its subsidiaries (or its suppliers and
vendors) may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem
on a timely basis, and (iii) to date, implemented that plan in accordance with
that timetable. Borrower reasonably believes that all computer applications
(including those of its suppliers and vendors) that are material to its or any
of its subsidiaries' business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after January
1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure
to do so could not reasonably be expected to have a material adverse effect on
Borrower or its subsidiaries. Borrower will promptly notify Lender in the event
Borrower discovers or determines that any computer application (including those
of its supplier and vendors) that is material to its or any of its subsidiaries'
business and operations will not be Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be expected to have
a material adverse effect on Borrower or its subsidiaries.
13. Nothing herein invalidates or shall impair or release any covenant,
condition, agreement, or stipulation in the Note, Loan Agreements and any other
Loan Documents, and the same, except as herein modified, shall continue in full
force and effect and the Borrower further covenants and agrees to perform and
comply with and abide by each and every of the covenants, agreements,
conditions, and stipulations of thereof which are not inconsistent herewith.
14. This Amendment shall be binding upon and shall inure to the benefit
of the heirs, executors, administrators and assigns, or successors and assigns
of the respective parties hereto.
4
<PAGE>
15. All pronouns and all variations thereof shall be construed so as to
refer to the masculine, feminine, neuter, singular, and plural form thereof as
required by the identity of the person or persons or the situation.
16. This instrument may be executed in one or more counterparts
(including telecopied counterpart(s)), each of which shall be deemed an original
and all of which taken together shall constitute one and the same instrument.
17. As amended hereby, the Agreements shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date and year first above written.
Signed, Sealed and Delivered NATIONSBANK, N.A.,
in the presence of: a National Banking Association
By: /s/ Nathan Coon
- --------------------------- -----------------
*-------------------------- Nathan Coon
*(Print Name of Witness) Vice President
Address: 1605 Main Street
Sarasota, FL 34236
- ---------------------------
*--------------------------
*(Print Name of Witness) (CORPORATE SEAL)
LENDER
ELCOTEL, INC., a
Delaware corporation
By: /s/ William H. Thompson
- --------------------------- -----------------------
*-------------------------- William Thompson, Senior Vice
*(Print Name of Witness) President
Address: 6428 Parkland Drive
Sarasota, FL 34243
(CORPORATE SEAL)
- ---------------------------
*--------------------------
*(Print Name of Witness)
5
<PAGE>
ELCOTEL DIRECT, INC., a
Delaware corporation
By: /s/ William H. Thompson
- --------------------------- ---------------------------
*-------------------------- William Thompson,
*(Print Name of Witness) Vice President
Address: 6428 Parkland Drive
Sarasota, FL 34243
(CORPORATE SEAL)
- ---------------------------
*--------------------------
*(Print Name of Witness)
TECHNOLOGY SERVICE GROUP, INC.
(successor by merger with ELCOTEL
HOSPITALITY SERVICES, INC.), a
Delaware corporation
By: /s/ William H. Thompson
- --------------------------- -----------------------
*-------------------------- William Thompson,
*(Print Name of Witness) Vice President
Address: 6428 Parkland Drive
Sarasota, FL 34243
- --------------------------- (CORPORATE SEAL)
*--------------------------
*(Print Name of Witness)
BORROWER
6
EXHIBIT 10.7
PROMISSORY NOTE
Date of Execution: March 29, 1999
Amount: $1,500,000.00
FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly
and severally, if more than one) promise(s) to pay to the order of NATIONSBANK,
N.A., a National Banking Association ("Bank"), Sarasota (Banking Center) without
setoff, at its offices at 1605 Main Street, Suite 101, Sarasota, Florida, 34236
or at such other place as may be designated by Bank, the principal amount of ONE
MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($1,500,000.00), or so much
thereof as may be advanced from time to time in immediately available funds,
together with interest computed daily on the outstanding principal balance
hereunder, at an annual interest rate, and in accordance with the payment
schedule, indicated below.
Rate
1. The interest rate ("Rate") due under the Note shall be one and
one-half percent (1.5%) in excess of the Eurodollar Rate, as hereinafter
defined, which interest rate shall adjust with each change in the Eurodollar
Rate.
2. a. The Eurodollar Rate shall mean the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page
3750 (or any successor page) as the London interbank offered rate for deposits
of United States Dollars at approximately 11:00 a.m. (Charlotte, North Carolina
time) on such day, or if such day is not a Domestic Business Day, on the
immediately preceding Domestic Business Day, for a one month term. If for any
reason such rate is not available for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) shall be the rate appearing
on Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (Charlotte, North Carolina time) on such
day, or if such day is not a Domestic Business Day, on the immediately preceding
Domestic Business Day, for a one month term; provided, however, if more than one
such rate is specified on the Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates. The rate shall be adjusted on a
daily basis to reflect changes in the rate determined in accordance with the
foregoing, effective on the date the change occurs.
b. "Domestic Business Day" means a day other than a Saturday,
Sunday or day on which commercial banks are authorized or permitted to close in
Charlotte, North Carolina.
c. The Borrower shall pay to Bank, from time to time and on
demand, any sum(s) required to compensate the Bank for any additional cost (such
as, but not limited to, a reserve requirement) incurred by the Bank at any time
which (i) is attributable to the Bank's obtaining a deposit or deposits to cover
the outstanding principal balance, (ii) decreases the effective spread or yield
represented by the 1.5% component, that would be earned by the Bank but for such
cost, and (iii) is caused or occasioned by any presently existing or
subsequently introduced law, rule, regulations or other requirement (or by any
change therein, changed effect or interpretation thereof or change in the Bank's
cost of complying therewith) imposed, interpreted, administered or enforced by
any federal, state or other governmental or monetary authority, which is imposed
on or applied to the Bank or any assets held by, deposits or accounts in or
with, or credits extended by the Bank. The Bank shall notify the Borrower
<PAGE>
from time to time of any such additional cost and such notice shall be binding
and conclusive evidence of the Borrower's obligation to pay the stated sum upon
receipt of the notice.
Notwithstanding any other provision contained in this Note, Bank does not intend
to charge and Borrower shall not be required to pay any amount of interest or
other fees or charges that is in excess of the maximum permitted by applicable
law. Any payment in excess of such maximum shall be refunded to Borrower or
credited against principal, at the option of Bank.
Accrual Method
Interest at the Rate set forth above, unless otherwise indicated, will be
calculated on the basis of the 365/360 method, which computes a daily amount of
interest for a hypothetical year of 360 days, then multiplies such amount by the
actual number of days elapsed in an interest calculation period.
Rate Change Date
Any Rate based on a fluctuating index or base rate will change, unless otherwise
provided, each time and as of the date that the index or base rate changes.
Payment Schedule
All payments received hereunder shall be applied first to the payment of any
expense or charges payable hereunder or under any other documents executed in
connection with this Note ("Loan Documents"), then to interest due and payable,
with the balance being applied to principal, or in such other order as Bank
shall determine at its option.
1. Commencing April 28, 1999, and on the same day of each month
thereafter, except for months containing less than 30 days in which
case payment shall be made on the last day of such months through July
31, 2000, payments of all accrued and unpaid interest shall be made
until maturity as set forth below.
2. The entire principal balance, together with all accrued and unpaid
interest shall be due and payable in full on July 31, 2000.
Revolving Feature
Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the
principal amount of this Note; provided, however, that Borrower is not
in default under any provision of this Note, any Loan Document, or any
other obligation of Borrower to Bank, and provided that the borrowings
hereunder do not exceed any borrowing base or other limitations on
borrowings by Borrower. Bank shall have no liability for its refusal to
advance funds based upon its determination that any conditions of such
further advances have not been met. Bank records of the amounts
borrowed from time to time shall be conclusive proof thereof.
Automatic Payment
Borrower has elected to authorize Bank to effect payment of sums due
under this Note by means of debiting Borrower's account number
____________________________________. This authorization shall not
affect the obligation of Borrower to pay such sums when due, without
notice, if there are insufficient funds in such account to make such
payment in full on the due date thereof, or if Bank fails to debit the
account.
2
<PAGE>
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by all terms and
conditions of this Note, including the Additional Terms and Conditions set forth
in the Addendum attached hereto and made a part hereof, and hereby executes this
Note under seal.
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: /s/ William H. Thompson
-----------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: /s/ William H. Thompson
-------------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC.(ELCOTEL HOSPITALITY
SERVICES, INC.), a Delaware corporation
By: /s/ William H. Thompson
---------------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
3
<PAGE>
ADDENDUM
OF
ADDITIONAL TERMS AND CONDITIONS
1. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor
hereof or any other party hereto (collectively "Obligors") and each of
them jointly and severally: (a) waive presentment, demand, notice of
demand, notice of intent to accelerate, and notice of acceleration of
maturity, protest, notice of protest, notice of non-payment, notice of
dishonor, and any other notice required to be given under the law to
any of Obligors, in connection with the delivery, acceptance,
performance, default or enforcement of this Note, of any indorsement or
guaranty of this Note or of any Loan Documents; (b) consent to any and
all delays, extensions, renewals or other modifications of this Note or
the Loan Documents, or waivers of any term hereof or of the Loan
Documents, or releases or discharge by Bank of any of Obligors or
release, substitution, or exchange of any security for the payment
hereof, or the failure to act on the part of Bank or any indulgence
shown by Bank, from time to time and in one or more instances (without
notice to or further assent from any of Obligors) and agree that no
such action, failure to act or failure to exercise any right or remedy
on the part of Bank shall in any way affect or impair the obligations
of any Obligors or be construed as a waiver by Bank of, or otherwise
affect, any of Bank's rights under this Note, under any indorsement or
guaranty of this Note or under any of the Loan Documents; and (c) agree
to pay, on demand, all costs and expenses of collection of this Note or
of any indorsement or guaranty hereof and/or the enforcement of Bank's
rights with respect to, or the administration, supervision,
preservation, protection of, or realization upon, any property securing
payment hereof, including without limitation, reasonable attorneys'
fees, including fees related to any trial, arbitration, bankruptcy,
appeal or other proceeding.
2. Indemnification. Obligors agree to promptly pay, indemnify and hold
Bank harmless from all state and federal taxes of any kind and other
liabilities with respect to or resulting from advances made pursuant to
this Note; provided however this shall not apply to income taxes,
Federal, State or otherwise, of the Bank. If this Note has a revolving
feature and is secured by a mortgage, Obligors expressly consent to the
deduction of any applicable taxes from each taxable advance extended by
Bank.
3. Prepayments. Prepayment may be made in whole or in part at any time.
All prepayments of principal shall be applied in the inverse order of
maturity, or in such other order as Bank shall determine in its sole
discretion.
4. Events of Default. The following are events of default hereunder: (a)
the failure to make any payment due under this Note within ten (10)
days after the due date or the failure to pay or perform any
obligation, liability or indebtedness of any Obligor to Bank, or to any
affiliate of Bank, whether under this Note or any other agreement, note
or instrument now or hereafter existing, as and when due (whether upon
demand, at maturity or by acceleration); (b) the failure to pay or
perform any other obligation, liability or indebtedness of any of
Obligors whether to Bank or some other party, the security for which
constitutes an encumbrance on the security for this Note; (c) death of
any Obligor (if an individual), or a proceeding being filed or
commenced against any Obligor for dissolution or liquidation, or any
Obligor voluntarily or involuntarily
<PAGE>
terminating or dissolving or being terminated or dissolved; (d)
insolvency of, business failure of, the appointment of a custodian,
trustee, liquidator or receiver for or for any other property of, or an
assignment for the benefit of creditors by, or the filing of a petition
under bankruptcy, insolvency or debtor's relief law or for any
adjustment of indebtedness, composition or extension by or against any
Obligor; (e) any lien or additional security interest being placed upon
any of the property which is security for this Note; (f) acquisition at
any time or from time to time of title to the whole of or any part of
the property which is security for this Note by any person,
partnership, corporation or other entity; (g) Bank determining that any
representation or warranty made by any Obligor in any Loan Documents or
otherwise to Bank is, or was, untrue or materially misleading; (h)
failure of any Obligor to timely deliver such financial statements,
including tax returns, and other statements of condition or other
information as Bank shall request from time to time; (i) any default
under any Loan Documents; (j) entry of a judgment against any Obligor
which Bank deems to be of a material nature, in Bank's sole discretion;
(k) the seizure or forfeiture of, or the issuance of any writ of
possession, garnishment or attachment, or any turnover order for any
property of any Obligor; (l) the determination by Bank that a material
adverse change has occurred in the financial condition of any Obligor;
or, (m) the failure to comply with any law or regulation regulating the
operation of Borrower's business which has a material effect on
Borrower's business.
5. Remedies Upon Default. Whenever there is a default under this Note, (a)
the entire balance outstanding and all other obligations of Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank,
become immediately due and payable, and/or (b) to the extent permitted
by law, the Rate of interest on the unpaid principal shall, at the
option of Bank, be increased at Bank's discretion up to the maximum
rate allowed by law, or if none, twenty-five percent (25%) per annum
(the "Default Rate"); and/or (c) to the extent permitted by law, a
delinquency charge may be imposed in an amount not to exceed five
percent (5%) of any payment in default for more than fifteen (15) days.
The provisions herein for a Default Rate or a delinquency charge shall
not be deemed to extend the time for any payment hereunder or to
constitute a "grace period" giving the Obligors a right to cure any
default. At Bank's option, any accrued and unpaid interest, fees or
charges may, for purposes of computing and accruing interest on a daily
basis after the due date of the Note or any installment thereof, be
deemed to be a part of the principal balance, and interest shall accrue
on a daily compounded basis after such date at the rate provided in
this Note until the entire outstanding balance of principal and
interest is paid in full. Bank is hereby authorized at any time to
setoff and charge against any deposit accounts of any Obligor, as well
as any other property of such party at or under the control of Bank,
without notice or demand, any and all obligations due hereunder.
6. Non-waiver. The failure at any time of Bank to exercise any of its
options or any other rights hereunder shall not constitute a waiver
thereof, nor shall it be a bar to the exercise of any of its options or
rights at a later date. All rights and remedies of Bank shall be
cumulative and may be pursued singly, successively or together, at the
option of Bank. The acceptance by Bank of any partial payment shall not
constitute a waiver of any default or of any of Bank's rights under
this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by
Bank unless the same shall be in writing, duly signed on behalf of
Bank; and each such wavier, if any, shall apply only with respect to
the specific instance involved, and
2
<PAGE>
shall in no way impair the rights of Bank or the obligations of Obligor
to Bank in any other respect at any other time.
7. Applicable Law. This Note shall be construed under the internal laws
and judicial decisions of the State of Florida, and the laws of the
United States as the same may be applicable.
8. Partial Invalidity. The unenforceability or invalidity of any provision
of this Note shall not affect the enforceability or the validity of any
other provision herein and the invalidity or unenforceability of any
provision of this Note or of the Loan Documents to any person or
circumstance shall not affect the enforceability or validity of such
provision as it may apply to other persons or circumstances.
9. Jurisdiction and Venue. In any litigation in connection with or to
enforce this Note or any indorsement or guaranty of this Note or any
Loan Documents, Obligors, and each of them, irrevocably consent to and
confer personal jurisdiction on the courts of the State of Florida or
the United States courts located within the State of Florida, and
expressly waive any objections as to venue in any such courts, and
agree that service of process may be made on Obligors by mailing a copy
of the summons and complaint by registered or certified mail, return
receipt requested, to their respective addresses. Nothing contained
herein shall, however, prevent Bank from bringing any action or
exercising any rights within any other state or jurisdiction or from
obtaining personal jurisdiction by any other means available by
applicable law.
10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO
THIS NOTE OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM
BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR
IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL
ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL
RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED
IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THE NOTICE MAY BRING AN
ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN
ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
1. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION
ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED
WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
3
<PAGE>
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL
SIXTY (60) DAYS.
2. RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I)
LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATIONS OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II)
BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C.
ss.91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS
(BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE AGAINST ANY REAL OR
PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL
OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF,
WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY
EXERCISE SUCH SELF HELP RIGHTS, FORECLOSURE UPON SUCH PROPERTY, OR
OBTAIN SUCH PROVISIONALLY OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER
THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
NOTE. NEITHER THE EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR
MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONALLY OR ANCILLARY
REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING
THE CLAIMANT IN SUCH
ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING
RESORT TO SUCH REMEDIES.
11. Binding Effect. This Note shall be binding upon and inure to the
benefit of Borrower, Obligors and Bank and their respective successors,
assigns, heirs and personal representatives; provided, however, that no
obligations of the Borrower or the Obligor hereunder can be assigned
without prior written consent of Bank.
12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
13. Year 2000 Representations, Covenants and Warranties. (1) Borrower has
(i) begun analyzing the operations of Borrower and its subsidiaries and
affiliates that could be adversely affected by failure to become Year
2000 compliant (that is, that computer applications, imbedded
microchips and other systems will be able to perform date-sensitive
functions prior to and after December 31, 1999) and; (ii) developed a
plan for becoming Year 2000 compliant in a timely manner, the
implementation of which is on schedule in all material respects.
Borrower reasonably believes that it will become Year 2000 compliant
for its operations and those of its subsidiaries and affiliates on a
timely basis except to the extent that a failure to do so could not
reasonably be expected to have a material adverse effect upon the
financial condition of Borrower. (2) Borrower reasonably believes any
suppliers and vendors that are material to the operations of Borrower
or its subsidiaries and affiliates will be Year 2000 compliant for
their own computer applications except to the extent that a failure to
do so could not reasonably be
4
<PAGE>
expected to have a material adverse effect upon the financial condition
of Borrower. (3) Borrower will promptly notify Bank in the event
Borrower determines that any computer application which is material to
the operations of Borrower, its subsidiaries or any of its material
vendors or suppliers will not be fully Year 2000 compliant on a timely
basis, except to the extent that such failure could not reasonably be
expected to have a material adverse effect upon the financial condition
of Borrower."
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: s/s William H. Thompson
----------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: s/s William H. Thompson
----------------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC.(ELCOTEL HOSPITALITY
SERVICES, INC.), a Delaware corporation
By: s/s William H. Thompson
----------------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
5
EXHIBIT 10.8
THIS NOTE REPLACES A PORTION OF THAT NOTE DATED NOVEMBER 25, 1997 IN THE
PRINCIPAL SUM OF $15,000,000.00
FIRST REPLACEMENT
PROMISSORY NOTE
Date of Execution: March 29, 1999
Amount: $10,000,000.00
FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly
and severally, if more than one) promise(s) to pay to the order of NATIONSBANK,
N.A., a National Banking Association ("Bank"), Sarasota (Banking Center) without
setoff, at its offices at 1605 Main Street, Suite 101, Sarasota, Florida, 34236
or at such other place as may be designated by Bank, the principal amount of TEN
MILLION AND NO/100 DOLLARS ($10,000,000.00), or so much thereof as may be
advanced from time to time in immediately available funds, together with
interest computed daily on the outstanding principal balance hereunder, at an
annual interest rate, and in accordance with the payment schedule, indicated
below.
Rate
1. The interest rate ("Rate") due under the Note shall be one and
one-half percent (1.5%) in excess of the Eurodollar Rate, as hereinafter
defined, which interest rate shall adjust with each change in the Eurodollar
Rate.
2. a. The Eurodollar Rate shall mean the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page
3750 (or any successor page) as the London interbank offered rate for deposits
of United States Dollars at approximately 11:00 a.m. (Charlotte, North Carolina
time) on such day, or if such day is not a Domestic Business Day, on the
immediately preceding Domestic Business Day, for a one month term. If for any
reason such rate is not available for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) shall be the rate appearing
on Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (Charlotte, North Carolina time) on such
day, or if such day is not a Domestic Business Day, on the immediately preceding
Domestic Business Day, for a one month term; provided, however, if more than one
such rate is specified on the Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates. The rate shall be adjusted on a
daily basis to reflect changes in the rate determined in accordance with the
foregoing, effective on the date the change occurs.
b. "Domestic Business Day" means a day other than a Saturday,
Sunday or day on which commercial banks are authorized or permitted to close in
Charlotte, North Carolina.
c. The Borrower shall pay to Bank, from time to time and on
demand, any sum(s) required to compensate the Bank for any additional cost (such
as, but not limited to, a reserve requirement) incurred by the Bank at any time
which (i) is attributable to the Bank's obtaining a deposit or deposits to cover
the outstanding principal balance, (ii) decreases the effective spread or yield
represented by the 1.5% component, that would be earned by the Bank but for such
cost, and (iii) is caused or occasioned by any presently existing or
subsequently introduced law, rule, regulations or other requirement (or by any
change
<PAGE>
therein, changed effect or interpretation thereof or change in the Bank's cost
of complying therewith) imposed, interpreted, administered or enforced by any
federal, state or other governmental or monetary authority, which is imposed on
or applied to the Bank or any assets held by, deposits or accounts in or with,
or credits extended by the Bank. The Bank shall notify the Borrower from time to
time of any such additional cost and such notice shall be binding and conclusive
evidence of the Borrower's obligation to pay the stated sum upon receipt of the
notice.
Notwithstanding any other provision contained in this Note, Bank does not intend
to charge and Borrower shall not be required to pay any amount of interest or
other fees or charges that is in excess of the maximum permitted by applicable
law. Any payment in excess of such maximum shall be refunded to Borrower or
credited against principal, at the option of Bank.
Accrual Method
Interest at the Rate set forth above, unless otherwise indicated, will be
calculated on the basis of the 365/360 method, which computes a daily amount of
interest for a hypothetical year of 360 days, then multiplies such amount by the
actual number of days elapsed in an interest calculation period.
Rate Change Date
Any Rate based on a fluctuating index or base rate will change, unless otherwise
provided, each time and as of the date that the index or base rate changes.
Payment Schedule
All payments received hereunder shall be applied first to the payment of any
expense or charges payable hereunder or under any other documents executed in
connection with this Note ("Loan Documents"), then to interest due and payable,
with the balance being applied to principal, or in such other order as Bank
shall determine at its option.
1. Commencing April 29, 1999, and on the same day of each month
thereafter, except for months containing less than 30 days in which
case payment shall be made on the last day of such months through
November 29, 2002, payments of all accrued and unpaid interest shall be
made until maturity as set forth below.
2. The entire principal balance, together with all accrued and unpaid
interest shall be due and payable in full on November 29, 2002.
Revolving Feature
Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the
principal amount of this Note; provided, however, that Borrower is not
in default under any provision of this Note, any Loan Document, or any
other obligation of Borrower to Bank, and provided that the borrowings
hereunder do not exceed any borrowing base or other limitations on
borrowings by Borrower. Bank shall have no liability for its refusal to
advance funds based upon its determination that any conditions of such
further advances have not been met. Bank records of the amounts
borrowed from time to time shall be conclusive proof thereof.
2
<PAGE>
Automatic Payment
Borrower has elected to authorize Bank to effect payment of sums due
under this Note by means of debiting Borrower's account number
____________________________________. This authorization shall not
affect the obligation of Borrower to pay such sums when due, without
notice, if there are insufficient funds in such account to make such
payment in full on the due date thereof, or if Bank fails to debit the
account.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by all terms and
conditions of this Note, including the Additional Terms and Conditions set forth
in the Addendum attached hereto and made a part hereof, and hereby executes this
Note under seal.
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: s/s William H. Thompson
---------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: s/s William H. Thompson
--------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC. (successor by merger with
ELCOTEL HOSPITALITY SERVICES, INC.), a Delaware corporation
By: s/s William H. Thompson
--------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
3
<PAGE>
ADDENDUM
OF
ADDITIONAL TERMS AND CONDITIONS
1. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor
hereof or any other party hereto (collectively "Obligors") and each of
them jointly and severally: (a) waive presentment, demand, notice of
demand, notice of intent to accelerate, and notice of acceleration of
maturity, protest, notice of protest, notice of non-payment, notice of
dishonor, and any other notice required to be given under the law to any
of Obligors, in connection with the delivery, acceptance, performance,
default or enforcement of this Note, of any indorsement or guaranty of
this Note or of any Loan Documents; (b) consent to any and all delays,
extensions, renewals or other modifications of this Note or the Loan
Documents, or waivers of any term hereof or of the Loan Documents, or
releases or discharge by Bank of any of Obligors or release, substitution,
or exchange of any security for the payment hereof, or the failure to act
on the part of Bank or any indulgence shown by Bank, from time to time and
in one or more instances (without notice to or further assent from any of
Obligors) and agree that no such action, failure to act or failure to
exercise any right or remedy on the part of Bank shall in any way affect
or impair the obligations of any Obligors or be construed as a waiver by
Bank of, or otherwise affect, any of Bank's rights under this Note, under
any indorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agree to pay, on demand, all costs and expenses of
collection of this Note or of any indorsement or guaranty hereof and/or
the enforcement of Bank's rights with respect to, or the administration,
supervision, preservation, protection of, or realization upon, any
property securing payment hereof, including without limitation, reasonable
attorneys' fees, including fees related to any trial, arbitration,
bankruptcy, appeal or other proceeding.
2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank
harmless from all state and federal taxes of any kind and other
liabilities with respect to or resulting from advances made pursuant to
this Note; provided however this shall not apply to income taxes, Federal,
State or otherwise, of the Bank. If this Note has a revolving feature and
is secured by a mortgage, Obligors expressly consent to the deduction of
any applicable taxes from each taxable advance extended by Bank.
3. Prepayments. Prepayment may be made in whole or in part at any time. All
prepayments of principal shall be applied in the inverse order of
maturity, or in such other order as Bank shall determine in its sole
discretion.
4. Events of Default. The following are events of default hereunder: (a) the
failure to make any payment due under this Note within ten (10) days after
the due date or the failure to pay or perform any obligation, liability or
indebtedness of any Obligor to Bank, or to any affiliate of Bank, whether
under this Note or any other agreement, note or instrument now or
hereafter existing, as and when due (whether upon demand, at maturity or
by acceleration); (b) the failure to pay or perform any other obligation,
liability or indebtedness of any of Obligors whether to Bank or some other
party, the security for which constitutes an encumbrance on the security
for this Note; (c) death of any Obligor (if an individual), or a
proceeding being filed or commenced against any Obligor for dissolution or
liquidation, or any Obligor voluntarily or involuntarily terminating or
dissolving or being terminated or dissolved; (d) insolvency of, business
failure of, the appointment of a custodian, trustee, liquidator or
receiver for or for any other property of, or an assignment for
<PAGE>
the benefit of creditors by, or the filing of a petition under bankruptcy,
insolvency or debtor's relief law or for any adjustment of indebtedness,
composition or extension by or against any Obligor; (e) any lien or
additional security interest being placed upon any of the property which
is security for this Note; (f) acquisition at any time or from time to
time of title to the whole of or any part of the property which is
security for this Note by any person, partnership, corporation or other
entity; (g) Bank determining that any representation or warranty made by
any Obligor in any Loan Documents or otherwise to Bank is, or was, untrue
or materially misleading; (h) failure of any Obligor to timely deliver
such financial statements, including tax returns, and other statements of
condition or other information as Bank shall request from time to time;(i)
any default under any Loan Documents; (j) entry of a judgment against any
Obligor which Bank deems to be of a material nature, in Bank's sole
discretion; (k) the seizure or forfeiture of, or the issuance of any writ
of possession, garnishment or attachment, or any turnover order for any
property of any Obligor; (l) the determination by Bank that a material
adverse change has occurred in the financial condition of any Obligor; or,
(m) the failure to comply with any law or regulation regulating the
operation of Borrower's business which has a material effect on Borrower's
business.
5. Remedies Upon Default. Whenever there is a default under this Note, (a)
the entire balance outstanding and all other obligations of Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable, and/or (b) to the extent permitted by law,
the Rate of interest on the unpaid principal shall, at the option of Bank,
be increased at Bank's discretion up to the maximum rate allowed by law,
or if none, twenty-five percent (25%) per annum (the "Default Rate");
and/or (c) to the extent permitted by law, a delinquency charge may be
imposed in an amount not to exceed five percent (5%) of any payment in
default for more than fifteen (15) days. The provisions herein for a
Default Rate or a delinquency charge shall not be deemed to extend the
time for any payment hereunder or to constitute a "grace period" giving
the Obligors a right to cure any default. At Bank's option, any accrued
and unpaid interest, fees or charges may, for purposes of computing and
accruing interest on a daily basis after the due date of the Note or any
installment thereof, be deemed to be a part of the principal balance, and
interest shall accrue on a daily compounded basis after such date at the
rate provided in this Note until the entire outstanding balance of
principal and interest is paid in full. Bank is hereby authorized at any
time to setoff and charge against any deposit accounts of any Obligor, as
well as any other property of such party at or under the control of Bank,
without notice or demand, any and all obligations due hereunder.
6. Non-waiver. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor
shall it be a bar to the exercise of any of its options or rights at a
later date. All rights and remedies of Bank shall be cumulative and may be
pursued singly, successively or together, at the option of Bank. The
acceptance by Bank of any partial payment shall not constitute a waiver of
any default or of any of Bank's rights under this Note. No waiver of any
of its rights hereunder, and no modification or amendment of this Note,
shall be deemed to be made by Bank unless the same shall be in writing,
duly signed on behalf of Bank; and each such wavier, if any, shall apply
only with respect to the specific instance involved, and shall in no way
impair the rights of Bank or the obligations of Obligor to Bank in any
other respect at any other time.
7. Applicable Law. This Note shall be construed under the internal laws and
judicial decisions of the State of Florida, and the laws of the United
States as the same may be applicable.
2
<PAGE>
8. Partial Invalidity. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or the validity of any other
provision herein and the invalidity or unenforceability of any provision
of this Note or of the Loan Documents to any person or circumstance shall
not affect the enforceability or validity of such provision as it may
apply to other persons or circumstances.
9. Jurisdiction and Venue. In any litigation in connection with or to enforce
this Note or any indorsement or guaranty of this Note or any Loan
Documents, Obligors, and each of them, irrevocably consent to and confer
personal jurisdiction on the courts of the State of Florida or the United
States courts located within the State of Florida, and expressly waive any
objections as to venue in any such courts, and agree that service of
process may be made on Obligors by mailing a copy of the summons and
complaint by registered or certified mail, return receipt requested, to
their respective addresses. Nothing contained herein shall, however,
prevent Bank from bringing any action or exercising any rights within any
other state or jurisdiction or from obtaining personal jurisdiction by any
other means available by applicable law.
10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS NOTE
OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR
ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION
IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE
ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE
EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY
PARTY TO THE NOTICE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH
THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
1. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING
THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE
DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING
OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN
ADDITIONAL SIXTY (60) DAYS.
2. RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I)
LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATIONS OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A
WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. ss.91 OR
ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE
BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR
3
<PAGE>
(B) TO FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR
(C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT
NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSURE
UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONALLY OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS NOTE. NEITHER THE EXERCISE OF SELF HELP REMEDIES NOR THE
INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONALLY
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
11. Binding Effect. This Note shall be binding upon and inure to the benefit
of Borrower, Obligors and Bank and their respective successors, assigns,
heirs and personal representatives; provided, however, that no obligations
of the Borrower or the Obligor hereunder can be assigned without prior
written consent of Bank.
12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
13. Year 2000 Representations, Covenants and Warranties. (1) Borrower has (i)
begun analyzing the operations of Borrower and its subsidiaries and
affiliates that could be adversely affected by failure to become Year 2000
compliant (that is, that computer applications, imbedded microchips and
other systems will be able to perform date-sensitive functions prior to
and after December 31, 1999) and; (ii) developed a plan for becoming Year
2000 compliant in a timely manner, the implementation of which is on
schedule in all material respects. Borrower reasonably believes that it
will become Year 2000 compliant for its operations and those of its
subsidiaries and affiliates on a timely basis except to the extent that a
failure to do so could not reasonably be expected to have a material
adverse effect upon the financial condition of Borrower. (2) Borrower
reasonably believes any suppliers and vendors that are material to the
operations of Borrower or its subsidiaries and affiliates will be Year
2000 compliant for their own computer applications except to the extent
that a failure to do so could not reasonably be expected to have a
material adverse effect upon the financial condition of Borrower. (3)
Borrower will promptly notify Bank in the event Borrower determines that
any computer application which is material to the operations of Borrower,
its subsidiaries or any of its material vendors or suppliers will not be
fully Year 2000 compliant on a timely basis, except to the extent that
such failure could not reasonably be expected to have a material adverse
effect upon the financial condition of Borrower."
4
<PAGE>
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: /s/ William H. Thompson
---------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: /s/ William H. Thompson
----------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC. (successor by merger with
ELCOTEL HOSPITALITY SERVICES, INC.), a Delaware corporation
By: /s/ William H. Thompson
----------------------------
William Thompson, Vice President
(CORPORATE SEAL)
5
EXHIBIT 10.9
THIS NOTE REPLACES A PORTION OF THAT NOTE DATED NOVEMBER 25, 1997 IN THE
PRINCIPAL SUM OF $15,000,000.00.
SECOND REPLACEMENT
PROMISSORY NOTE
Date of Execution: March 29, 1999
Amount: $4,000,000.00
FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly
and severally, if more than one) promise(s) to pay to the order of NATIONSBANK,
N.A., a National Banking Association ("Bank"), Sarasota (Banking Center) without
setoff, at its offices at 1605 Main Street, Suite 101, Sarasota, Florida, 34236
or at such other place as may be designated by Bank, the principal amount of
FOUR MILLION AND 00/100 DOLLARS ($4,000,000.00), or so much thereof as may be
advanced from time to time in immediately available funds, together with
interest computed daily on the outstanding principal balance hereunder, at an
annual interest rate, and in accordance with the payment schedule, indicated
below.
Rate
The Rate shall be 7.55% per annum throughout the term of this Note.
Notwithstanding any other provision contained in this Note, Bank does not intend
to charge and Borrower shall not be required to pay any amount of interest or
other fees or charges that is in excess of the maximum permitted by applicable
law. Any payment in excess of such maximum shall be refunded to Borrower or
credited against principal, at the option of Bank.
Accrual Method
Interest at the Rate set forth above, unless otherwise indicated, will be
calculated on the basis of the 365/360 method, which computes a daily amount of
interest for a hypothetical year of 360 days, then multiplies such amount by the
actual number of days elapsed in an interest calculation period.
Payment Schedule
All payments received hereunder shall be applied first to the payment of any
expense or charges payable hereunder or under any other documents executed in
connection with this Note ("Loan Documents"), then to interest due and payable,
with the balance being applied to principal, or in such other order as Bank
shall determine at its option.
1. Commencing April 29, 1999, and on the same day of each month thereafter,
except for months containing less than 30 days in which case payment shall
be made on the last day of such months, through March 29, 2004, monthly
principal and interest payments of $80,246.87 shall be made until maturity
as set forth below.
1
<PAGE>
2. The entire principal balance, together with all accrued and unpaid
interest shall be due and payable in full on March 29, 2004.
Automatic Payment
Borrower has elected to authorize Bank to effect payment of sums due under
this Note by means of debiting Borrower's account number
____________________________________. This authorization shall not affect
the obligation of Borrower to pay such sums when due, without notice, if
there are insufficient funds in such account to make such payment in full
on the due date thereof, or if Bank fails to debit the account.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by all terms and
conditions of this Note, including the Additional Terms and Conditions set forth
in the Addendum attached hereto and made a part hereof, and hereby executes this
Note under seal.
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: /s/ William H. Thompson
---------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: /s/ William H. Thompson
--------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC. (successor by merger with
ELCOTEL HOSPITALITY SERVICES, INC.), a Delaware
corporation
By: /s/ William H. Thompson
------------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
2
<PAGE>
ADDENDUM
OF
ADDITIONAL TERMS AND CONDITIONS
1. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor
hereof or any other party hereto (collectively "Obligors") and each of
them jointly and severally: (a) waive presentment, demand, notice of
demand, notice of intent to accelerate, and notice of acceleration of
maturity, protest, notice of protest, notice of non-payment, notice of
dishonor, and any other notice required to be given under the law to any
of Obligors, in connection with the delivery, acceptance, performance,
default or enforcement of this Note, of any indorsement or guaranty of
this Note or of any Loan Documents; (b) consent to any and all delays,
extensions, renewals or other modifications of this Note or the Loan
Documents, or waivers of any term hereof or of the Loan Documents, or
releases or discharge by Bank of any of Obligors or release, substitution,
or exchange of any security for the payment hereof, or the failure to act
on the part of Bank or any indulgence shown by Bank, from time to time and
in one or more instances (without notice to or further assent from any of
Obligors) and agree that no such action, failure to act or failure to
exercise any right or remedy on the part of Bank shall in any way affect
or impair the obligations of any Obligors or be construed as a waiver by
Bank of, or otherwise affect, any of Bank's rights under this Note, under
any indorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agree to pay, on demand, all costs and expenses of
collection of this Note or of any indorsement or guaranty hereof and/or
the enforcement of Bank's rights with respect to, or the administration,
supervision, preservation, protection of, or realization upon, any
property securing payment hereof, including without limitation, reasonable
attorneys' fees, including fees related to any trial, arbitration,
bankruptcy, appeal or other proceeding.
2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank
harmless from all state and federal taxes of any kind and other
liabilities with respect to or resulting from advances made pursuant to
this Note; provided however this shall not apply to income taxes, Federal,
State or otherwise, of the Bank. If this Note has a revolving feature and
is secured by a mortgage, Obligors expressly consent to the deduction of
any applicable taxes from each taxable advance extended by Bank.
3. Prepayments. Prepayment may be made in whole or in part at any time. All
prepayments of principal shall be applied in the inverse order of
maturity, or in such other order as Bank shall determine in its sole
discretion.
4. Events of Default. The following are events of default hereunder: (a) the
failure to make any payment due under this Note within ten (10) days after
the due date or the failure to pay or perform any obligation, liability or
indebtedness of any Obligor to Bank, or to any affiliate of Bank, whether
under this Note or any other agreement, note or instrument now or
hereafter existing, as and when due (whether upon demand, at maturity or
by acceleration); (b) the failure to pay or perform any other obligation,
liability or indebtedness of any of Obligors whether to Bank or some other
party, the security for which constitutes an encumbrance on the security
for this Note; (c) death of any Obligor (if an individual), or a
proceeding being filed or commenced against any Obligor for dissolution or
liquidation, or any Obligor voluntarily or involuntarily
<PAGE>
terminating or dissolving or being terminated or dissolved; (d) insolvency
of, business failure of, the appointment of a custodian, trustee,
liquidator or receiver for or for any other property of, or an assignment
for the benefit of creditors by, or the filing of a petition under
bankruptcy, insolvency or debtor's relief law or for any adjustment of
indebtedness, composition or extension by or against any Obligor; (e) any
lien or additional security interest being placed upon any of the property
which is security for this Note; (f) acquisition at any time or from time
to time of title to the whole of or any part of the property which is
security for this Note by any person, partnership, corporation or other
entity; (g) Bank determining that any representation or warranty made by
any Obligor in any Loan Documents or otherwise to Bank is, or was, untrue
or materially misleading; (h) failure of any Obligor to timely deliver
such financial statements, including tax returns, and other statements of
condition or other information as Bank shall request from time to time;(i)
any default under any Loan Documents; (j) entry of a judgment against any
Obligor which Bank deems to be of a material nature, in Bank's sole
discretion; (k) the seizure or forfeiture of, or the issuance of any writ
of possession, garnishment or attachment, or any turnover order for any
property of any Obligor; (l) the determination by Bank that a material
adverse change has occurred in the financial condition of any Obligor; or,
(m) the failure to comply with any law or regulation regulating the
operation of Borrower's business which has a material effect on Borrower's
business.
5. Remedies Upon Default. Whenever there is a default under this Note, (a)
the entire balance outstanding and all other obligations of Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable, and/or (b) to the extent permitted by law,
the Rate of interest on the unpaid principal shall, at the option of Bank,
be increased at Bank's discretion up to the maximum rate allowed by law,
or if none, twenty-five percent (25%) per annum (the "Default Rate");
and/or (c) to the extent permitted by law, a delinquency charge may be
imposed in an amount not to exceed five percent (5%) of any payment in
default for more than fifteen (15) days. The provisions herein for a
Default Rate or a delinquency charge shall not be deemed to extend the
time for any payment hereunder or to constitute a "grace period" giving
the Obligors a right to cure any default. At Bank's option, any accrued
and unpaid interest, fees or charges may, for purposes of computing and
accruing interest on a daily basis after the due date of the Note or any
installment thereof, be deemed to be a part of the principal balance, and
interest shall accrue on a daily compounded basis after such date at the
rate provided in this Note until the entire outstanding balance of
principal and interest is paid in full. Bank is hereby authorized at any
time to setoff and charge against any deposit accounts of any Obligor, as
well as any other property of such party at or under the control of Bank,
without notice or demand, any and all obligations due hereunder.
6. Non-waiver. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor
shall it be a bar to the exercise of any of its options or rights at a
later date. All rights and remedies of Bank shall be cumulative and may be
pursued singly, successively or together, at the option of Bank. The
acceptance by Bank of any partial payment shall not constitute a waiver of
any default or of any of Bank's rights under this Note. No waiver of any
of its rights hereunder, and no modification or amendment of this Note,
shall be deemed to be made by Bank unless the same shall be in writing,
duly signed on behalf of Bank; and each such wavier, if any, shall apply
only with respect to the specific instance involved, and shall in no way
impair the rights of Bank or the obligations of Obligor to Bank in any
other respect at any other time.
2
<PAGE>
7. Applicable Law. This Note shall be construed under the internal laws and
judicial decisions of the State of Florida, and the laws of the United
States as the same may be applicable.
8. Partial Invalidity. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or the validity of any other
provision herein and the invalidity or unenforceability of any provision
of this Note or of the Loan Documents to any person or circumstance shall
not affect the enforceability or validity of such provision as it may
apply to other persons or circumstances.
9. Jurisdiction and Venue. In any litigation in connection with or to enforce
this Note or any indorsement or guaranty of this Note or any Loan
Documents, Obligors, and each of them, irrevocably consent to and confer
personal jurisdiction on the courts of the State of Florida or the United
States courts located within the State of Florida, and expressly waive any
objections as to venue in any such courts, and agree that service of
process may be made on Obligors by mailing a copy of the summons and
complaint by registered or certified mail, return receipt requested, to
their respective addresses. Nothing contained herein shall, however,
prevent Bank from bringing any action or exercising any rights within any
other state or jurisdiction or from obtaining personal jurisdiction by any
other means available by applicable law.
10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS NOTE
OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR
ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION
IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE
ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE
EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY
PARTY TO THE NOTICE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH
THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION
ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED
WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO
EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60)
DAYS.
3
<PAGE>
(B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I)
LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATIONS OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR
(II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. s.91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP
REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN
FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT
LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSURE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONALLY OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY
ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER THE
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF
AN ACTION FOR FORECLOSURE OR PROVISIONALLY OR ANCILLARY REMEDIES
SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE
CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY
OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
11. Binding Effect. This Note shall be binding upon and inure to the benefit
of Borrower, Obligors and Bank and their respective successors, assigns,
heirs and personal representatives; provided, however, that no obligations
of the Borrower or the Obligor hereunder can be assigned without prior
written consent of Bank.
12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
13. Year 2000 Representations, Covenants and Warranties. (1) Borrower has (i)
begun analyzing the operations of Borrower and its subsidiaries and
affiliates that could be adversely affected by failure to become Year 2000
compliant (that is, that computer applications, imbedded microchips and
other systems will be able to perform date-sensitive functions prior to
and after December 31, 1999) and; (ii) developed a plan for becoming Year
2000 compliant in a timely manner, the implementation of which is on
schedule in all material respects. Borrower reasonably believes that it
will become Year 2000 compliant for its operations and those of its
subsidiaries and affiliates on a timely basis except to the extent that a
failure to do so could not reasonably be expected to have a material
adverse effect upon the financial condition of Borrower. (2) Borrower
reasonably believes any suppliers and vendors that are material to the
operations of Borrower or its subsidiaries and affiliates will be Year
2000 compliant for their own
4
<PAGE>
computer applications except to the extent that a failure to do so could
not reasonably be expected to have a material adverse effect upon the
financial condition of Borrower. (3) Borrower will promptly notify Bank in
the event Borrower determines that any computer application which is
material to the operations of Borrower, its subsidiaries or any of its
material vendors or suppliers will not be fully Year 2000 compliant on a
timely basis, except to the extent that such failure could not reasonably
be expected to have a material adverse effect upon the financial condition
of Borrower."
BORROWER:
ELCOTEL, INC., a Delaware
corporation
By: /s/ William H. Thompson
---------------------------------------
William Thompson, Senior Vice President
(CORPORATE SEAL)
ELCOTEL DIRECT, INC., a Delaware
corporation
By: /s/ William H. Thompson
--------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
TECHNOLOGY SERVICE GROUP, INC. (successor by merger with
ELCOTEL HOSPITALITY SERVICES, INC.), a Delaware
corporation
By: /s/ William H. Thompson
--------------------------------
William Thompson, Vice President
(CORPORATE SEAL)
5
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
- ---- ----------------------
Technology Service Group, Inc. Delaware
Elcotel Direct, Inc. Delaware
Public Communication - I Corporation Delaware
International Service Technologies, Inc. (a
subsidiary of Technology Service Group, Inc.) Delaware
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, 33-62631and 33-62633
of Elcotel, Inc. on Forms S-8, of our report dated June 11, 1999, appearing in
the Annual Report on Form 10-K of Elcotel, Inc. and subsidiaries for the year
ended March 31, 1999.
DELOITTE & TOUCHE
Tampa, Florida
June 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN
THOUSANDS EXCEPT PER SHARE DATA.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 14,179
<ALLOWANCES> 1,970
<INVENTORY> 13,978
<CURRENT-ASSETS> 31,327
<PP&E> 9,346
<DEPRECIATION> 4,282
<TOTAL-ASSETS> 71,295
<CURRENT-LIABILITIES> 10,634
<BONDS> 10,355
0
0
<COMMON> 136
<OTHER-SE> 50,170
<TOTAL-LIABILITY-AND-EQUITY> 71,295
<SALES> 54,748
<TOTAL-REVENUES> 65,263
<CGS> 34,755
<TOTAL-COSTS> 43,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 117
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> 574
<INCOME-TAX> 213
<INCOME-CONTINUING> 361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
