UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6428 Parkland Drive, Sarasota, Florida 34243
(Address of principal executive offices) (Zip Code)
(941) 758-0389
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
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
As of February 11, 1999, there were 13,520,218 shares of the Registrant's Common
Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars, except per share amounts, in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,050 $ 16
Accounts and notes receivable, less allowance for credit
losses of $1,338 and $1,970 10,287 12,209
Inventories 9,706 13,978
Income taxes receivable 494 1,997
Deferred tax asset - current portion 2,242 2,215
Prepaid expenses and other current assets 716 912
-------- --------
Total current assets 24,495 31,327
Property, plant and equipment, net 5,786 5,064
Notes receivable, less allowance for credit losses
of $738 and $312 278 898
Identified intangible assets, net of accumulated amortization
of $2,390 and $1,541 6,885 7,734
Capitalized software, net of accumulated amortization
of $439 and $240 4,314 1,573
Goodwill, net of accumulated amortization
of $1,394 and $878 22,702 23,218
Deferred tax asset 2,831 948
Other assets 556 533
-------- --------
$ 67,847 $ 71,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 1,428
Accounts payable 5,167 4,186
Accrued expenses and other current liabilities 4,070 4,197
Notes and debt obligations payable within one year 11,717 823
-------- --------
Total current liabilities 20,954 10,634
Notes and debt obligations payable after one year 48 10,355
-------- --------
21,002 20,989
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 and 30,000,000
shares authorized, 13,571,693 and 13,551,693 shares
issued and outstanding 136 136
Additional paid-in capital 46,686 46,667
Retained earnings 272 3,680
Holding loss on marketable securities (72) --
Less - cost of 52,000 shares of common stock in treasury (177) (177)
-------- --------
Total stockholders' equity 46,845 50,306
-------- --------
$ 67,847 $ 71,295
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Revenues and net sales:
Product sales $ 7,984 $ 14,240 $ 27,284 $ 43,101
Services 4,685 2,619 11,594 8,202
-------- -------- -------- --------
12,669 16,859 38,878 51,303
-------- -------- -------- --------
Cost of revenues and sales:
Cost of products sold 5,685 8,991 19,735 26,468
Cost of services 3,489 2,257 9,013 7,199
-------- -------- -------- --------
9,174 11,248 28,748 33,667
-------- -------- -------- --------
Gross profit 3,495 5,611 10,130 17,636
-------- -------- -------- --------
Other costs and expenses:
Selling, general and administrative
expenses 2,554 2,126 7,888 8,020
Engineering, research and
development expenses 1,850 1,513 4,730 4,662
Restructuring charges 700 -- 700 --
Amortization 547 528 1,630 1,531
Interest expense, net 181 207 458 432
-------- -------- -------- --------
5,832 4,374 15,406 14,645
-------- -------- -------- --------
Income (loss) before income tax
(expense) benefit (2,337) 1,237 (5,276) 2,991
Income tax (expense) benefit 853 (458) 1,868 (1,110)
-------- -------- -------- --------
Net income (loss) (1,484) 779 (3,408) 1,881
Other comprehensive loss, net of tax:
Holding loss on marketable securities (23) -- (72) --
-------- -------- -------- --------
Comprehensive income (loss) $ (1,507) $ 779 $ (3,480) $ 1,881
======== ======== ======== ========
Income (loss) per common and common
equivalent share:
Basic $ (0.11) $ 0.06 $ (0.25) $ 0.14
======== ======== ======== ========
Diluted $ (0.11) $ 0.06 $ (0.25) $ 0.14
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Basic 13,509 13,474 13,503 13,445
======== ======== ======== ========
Diluted 13,509 13,797 13,503 13,794
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(3,408) $ 1,881
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 2,619 2,359
Provision for credit losses 373 48
Loss on impairment of assets 148 --
Provisions for obsolescence and warranty
expense 1,313 604
Stock option compensation 66 --
Deferred tax expense (benefit) (1,868) 145
Changes in operating assets and liabilities:
Accounts and notes receivable 1,882 (1,651)
Inventories 3,289 (6,548)
Income taxes receivable 1,503 (19)
Prepaid expenses and other current assets 369 (298)
Other assets (89) (149)
Accounts payable 981 4,338
Accrued expenses and other current liabilities (523) (1,336)
------- -------
Net cash provided by (used for) operating activities 6,655 (626)
------- -------
Cash flows from investing activities
Capital expenditures (1,719) (1,128)
Capitalized software (3,080) (199)
------- -------
Net cash used for investing activities (4,799) (1,327)
------- -------
Cash flows from financing activities
Net proceeds under revolving credit
lines 1,191 147
Decrease in bank overdraft (1,428) --
Principle payments on notes payable (604) (56)
Proceeds from exercise of common stock
options 19 271
------- -------
Net cash provided by financing activities (822) 362
------- -------
Increase (decrease) in cash 1,034 (1,591)
Cash, beginning of period 16 1,655
======= =======
Cash, end of period $ 1,050 $ 64
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, except per share amounts, in thousands)
1. GENERAL
The unaudited consolidated balance sheet at December 31, 1999 and the unaudited
consolidated statements of operations and other comprehensive income (loss) for
the three months and nine months ended December 31, 1999 and 1998 and of cash
flows for the nine months ended December 31, 1999 and 1998 have been prepared by
Elcotel, Inc. and subsidiaries (the "Company"), without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows of the Company at December 31, 1999, and for all periods presented,
have been made. The Company's unaudited consolidated financial statements for
the three months and nine months ended December 31, 1998 have been reclassified
to conform with the presentation at and for the three months and nine months
ended December 31, 1999.
The consolidated balance sheet at March 31, 1999 has been derived from the
Company's audited consolidated financial statements as of and for the year ended
March 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1999. The results of operations for the
three months and nine months ended December 31, 1999 are not necessarily
indicative of the results for the full fiscal year.
2. INVENTORIES
Inventories at December 31, 1999 and March 31, 1999 are summarized as follows:
December 31, March 31,
1999 1999
------------ -------------
Finished products $ 1,029 $ 1,875
Work-in-process 1,955 924
Purchased components 8,384 11,630
-------- --------
11,368 14,429
Reserve for obsolescence (1,662) (451)
======== ========
$ 9,706 $ 13,978
======== ========
3. NOTES AND DEBT OBLIGATIONS PAYABLE
The Company is in default of certain financial covenants contained in the loan
agreements (the "Loan Agreements") between the Company and its bank. As a result
of the default, the bank has the right to accelerate the maturity of outstanding
indebtedness under the Loan Agreements. Accordingly, outstanding debt under the
Loan Agreements in the aggregate amount of $11,653 at December 31, 1999 is
classified as a current liability.
5
<PAGE>
The Company and its bank have reached an agreement in principal to enter into a
forbearance and modification agreement (the "Forbearance Agreement") that would
modify the terms of the Loan Agreements. Pursuant to the terms of the proposed
Forbearance Agreement, the maturity date of indebtedness outstanding under the
Loan Agreements would be changed to May 31, 2000, the annual interest rate under
the Loan Agreements would be increased to one percentage point above the prime
interest rate, and the Company's ability to borrow additional funds under a
$2,000 export revolving credit line (none of which was borrowed as of such date)
and a $1,500 equipment credit line ($281 of which was borrowed as of such date)
would be cancelled. During the term of the proposed Forbearance Agreement, the
outstanding indebtedness under a $10,000 working capital revolving credit line
and a $4,000 installment note could not exceed the value of collateral
consisting of eligible accounts receivable and inventories.
The Company is attempting to secure alternative financing arrangements and/or
raise additional capital to refinance the outstanding indebtedness under the
Loan Agreements. The Company has received proposals with respect thereto and
believes that its efforts will be successful. However, there is no assurance
that the Company's efforts will be successful, or if successful, that such
financing would be on terms satisfactory to the Company.
4. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the nine months ended December 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
Holding
Additional Loss on
Common Paid-in Retained Marketable Treasury
Stock Capital Earnings Securities Stock Total
------- ---------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999 $ 136 $ 46,667 $ 3,680 $ -- $ (177) $ 50,306
Net income (loss) (3,408) (3,408)
Proceeds from exercise of
common stock options 19 19
Holding loss on marketable
securities (72) (72)
------- -------- ------- ------ ------ --------
Balance, December 31, 1999 $ 136 $ 46,686 $ 272 $ (72) $ (177) $ 46,845
======= ======== ======= ====== ====== ========
</TABLE>
On November 2, 1999, the stockholders of the Company approved an amendment to
the Company's certificate of incorporation to increase in the number of shares
of common stock authorized for issuance by 10,000,000 shares, from 30,000,000
shares to 40,000,000 shares. In addition, the stockholders of the Company
approved amendments to the Company's 1991 Stock Option Plan and Directors Stock
Option Plan to increase the number of shares of common stock reserved for
issuance under such plans by 500,000 shares and 75,000 shares, respectively, to
2,600,000 shares and 300,000 shares, respectively.
On October 15, 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan (the "1999 Plan"). The Compensation Committee (the
"Committee") appointed by the Board of Directors of the Company administers the
1999 Plan, including having the authority to grant non-qualified stock options
to senior executive officers of the Company. Non-qualified stock options to
purchase up to an aggregate of 539,988 shares of common stock may be granted
under the 1999 Plan at option exercise prices determined by the Committee. The
Committee has the authority to interpret the provisions of the 1999 Plan, to
determine the terms and provisions of options granted under the 1999 Plan and to
determine the number of shares subject to options granted and the vesting
periods thereof. The Committee's authority to grant options under the 1999 Plan
expires on October 15, 2004. Options granted under the 1999 Plan expire five
6
<PAGE>
years from the date of grant unless they are terminated prior thereto upon the
termination of employment of a grantee. Unvested options granted under the 1999
Plan expire immediately upon the termination of a grantee's employment by the
grantee for any reason or by the Company for cause. Upon the termination of a
grantee's employment by the Company without cause, options that would have
vested during the twelve months after such termination of employment or during
the remaining term of any employment agreement between the grantee and the
Company, whichever is less, immediately vest and are thereafter exercisable
until their expiration date, and any remaining unvested options expire as of the
termination date.
Pursuant to the terms of an employment agreement between the Company and its new
President and Chief Executive Officer dated October 15, 1999 (see Note 9), the
Company granted options under the 1999 Plan to purchase 539,988 shares of the
Company's common stock at an exercise price of $1.67 per share. Such options
vest and become exercisable ratably at the end of each month over the term of
the employment agreement, which expires on October 11, 2002.
5. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the nine
months ended December 31, 1999 and 1998 is as follows:
1999 1998
------- -------
Cash paid (refunded) during the period for:
Interest $ 698 $ 666
Income taxes (1,503) 867
Non-cash transactions:
Receipt of marketable securities to satisfy
accounts receivable resulting in an increase
in other current assets and a reduction in
accounts receivable 287 --
Unrealized loss on marketable securities
resulting in a reduction of stockholders' equity
and other current assets 114 --
Tax benefit from unrealized loss on marketable
securities resulting in an increase in current
deferred tax assets and stockholders' equity 42 --
6. RESTRUCTURING CHARGES
In November 1999, the Company announced a restructuring plan to consolidate
manufacturing operations, resize its core payphone business operations, reorient
its distribution strategy and begin to build operations required to introduce
its new public access Internet appliance products and back office management
systems to the marketplace. In connection with this restructuring, the Company
recognized restructuring charges of $700 during the three months ended December
31, 1999. These restructuring charges consisted of estimated employee
termination benefits under severance and benefit arrangements of $575 and future
lease payments of $125 related to the closure of leased facilities. The
restructuring charges do not include the recognition of impairment losses of
$148 related to closed facilities and the Company's decision to abandon a
software development project related to certain discontinued activities.
Impairment losses of $140 and $8 are classified as engineering, research and
development expenses and selling, general and administrative expenses,
respectively, during the three months and nine months ended December 31, 1999.
7
<PAGE>
Under the November 1999 restructuring plan, the Company will terminate the
employment of 56 employees by December 31, 2000, including 28 employees in
connection with the consolidation of manufacturing operations and the closure of
its manufacturing facility in Sarasota, Florida and 28 corporate employees in
all major functions. As of December 31, 1999, the Company had terminated the
employment of 26 corporate employees under the plan. The other reductions will
primarily take place during the three months ending March 31, 2000 upon the
closure of the Company's manufacturing facility. During the three months and
nine months ended December 31, 1999, the Company charged $97 of severance and
benefit payments against the restructuring liability.
Under the restructuring plan, the Company closed a leased office facility in
Alpharetta, Georgia and leased a larger facility to accommodate service
operations related to its new public access Internet appliance products and back
office management systems. The restructuring charges related to future lease
payments include a termination settlement of $27 under a lease termination
agreement with respect to the closed office facility and remaining lease
payments of $98 under the lease agreement related to the Company's manufacturing
facility. During the three months and nine months ended December 31, 1999,
payments of $27 related to the lease termination agreement were charged against
the restructuring liability.
During the three months and nine months ended December 31, 1999, the Company
charged $107 and $360 of severance and benefit payments against the
restructuring liability accrued in connection with a reorganization of its sales
and marketing organization during the three months ended March 31, 1999.
During the three months and nine months ended December 31, 1998, the Company
charged payments of $238 and $793, respectively, against restructuring
liabilities, consisting of the estimated cost of severance and benefit
arrangements and relocation costs, pursuant to a plan to exit certain activities
of Technology Service Group, Inc., which was acquired by the Company during the
year ended March 31, 1998.
7. EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires disclosure of basic earnings (loss) per share and diluted earnings
(loss) per share. Basic earnings (loss) per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding and
potential dilutive common shares outstanding during the period.
The weighted average number of shares of common stock outstanding used to
compute basic earnings (loss) per share for the three months and nine months
ended December 31, 1999 was 13,509,258 shares and 13,502,881 shares,
respectively. The weighted average number of shares of common stock outstanding
used to compute basic earnings (loss) per share for the three months and nine
months ended December 31, 1998 was 13,473,565 shares and 13,444,801 shares,
respectively. There were no potential dilutive common shares outstanding during
the three months and nine months ended December 31, 1999 for purposes of
computing diluted earnings (loss) per share. The weighted average number of
potential dilutive common shares outstanding used in the computation of diluted
earnings (loss) per share for the three and nine months ended December 31, 1998
was 323,637 shares and 349,396 shares, respectively.
8
<PAGE>
8. DISCLOSURE ABOUT SEGMENTS AND RELATED INFORMATION
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.
The sales revenue and gross profit of each reportable segment for the three
months ended December 31, 1999 and 1998 is set forth below:
1999 1998
-------------------- --------------------
Sales Profit Sales Profit
----- ------ ----- ------
Private $ 3,724 $ 1,687 $ 6,664 $ 2,940
Telephone company 7,415 2,141 7,893 2,724
International 1,530 443 2,302 623
------- ------- ------- -------
$12,669 $ 4,271 $16,859 $ 6,287
======= ======= ======= =======
The sales revenue and gross profit of each reportable segment for the nine
months ended December 31, 1999 and 1998 is set forth below:
1999 1998
-------------------- --------------------
Sales Profit Sales Profit
----- ------ ----- ------
Private $10,614 $ 4,836 $19,341 $ 9,342
Telephone company 22,808 6,787 26,502 7,979
International 5,456 1,564 5,460 1,786
------- ------- ------- -------
$38,878 $13,187 $51,303 $19,107
======= ======= ======= =======
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 for the three months and nine months ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total profit of reportable segments $ 4,271 $ 6,287 $ 13,187 $ 19,107
Unallocated cost of sales (776) (676) (3,057) (1,471)
Unallocated corporate expenses (5,832) (4,374) (15,406) (14,645)
-------- -------- -------- --------
Income (loss) before income taxes $ (2,337) $ 1,237 $ (5,276) $ 2,991
======== ======== ======== ========
</TABLE>
9
<PAGE>
Information with respect to sales of products and services during the three
months and nine months ended December 31, 1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Private segment:
Payphone terminals $ 1,405 $ 3,436 $ 4,469 $ 8,922
Printed circuit board control modules and kits 1,658 2,772 4,408 8,809
Components and other products 337 324 813 1,115
Services 324 132 924 495
------- ------- ------- -------
3,724 6,664 10,614 19,341
------- ------- ------- -------
Telephone company segment:
Payphone terminals 242 1,058 1,680 6,329
Printed circuit board control modules and kits 2,094 2,488 7,151 4,773
Components and other products 718 1,860 3,307 7,693
Repair, refurbishment and upgrade services 4,361 2,487 10,670 7,707
------- ------- ------- -------
7,415 7,893 22,808 26,502
------- ------- ------- -------
International segment:
Payphone terminals 1,378 1,729 4,885 3,419
Printed circuit board control modules and kits 28 3 164 120
Components and other products 124 570 407 1,921
------- ------- ------- -------
1,530 2,302 5,456 5,460
------- ------- ------- -------
$12,669 $16,859 $38,878 $51,303
======= ======= ======= =======
</TABLE>
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 three months and nine months ended December 31, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 11,139 $ 14,557 $ 33,422 $ 45,843
Canada 427 346 2,272 1,882
Latin America 1,088 1,518 2,707 3,115
Europe, Middle East and Africa -- 1 411 23
Asia Pacific 15 437 66 440
-------- -------- -------- --------
$ 12,669 $ 16,859 $ 38,878 $ 51,303
======== ======== ======== ========
</TABLE>
10
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
On October 15, 1999, the Company hired a new President and Chief Executive
Officer. The employment agreement between the Company and its new President and
Chief Executive Officer expires on October 11, 2002 and may be terminated
earlier by either party with 30 days prior written notice. The agreement
provides for minimum annual base compensation of $250 and incentive compensation
of up to 50% of base compensation at the discretion of the Board of Directors,
subject to a minimum of 25% of base compensation for the period beginning
October 15, 1999 and ending December 31, 2000. In addition, under the terms of
the agreement, the President and Chief Executive Officer is entitled to receive
benefits made available to other executives of the Company and reimbursement of
relocation expenses of $40. Further, the agreement provides for the payment of
severance compensation if the Company terminates the agreement without cause
equal to $250 unless the remaining term of the agreement is less than 12 months
in which event such amount is prorated over the remainder of the term. The
employment agreement also contains confidentiality and non-compete provisions.
Pursuant to the terms of the agreement, the Company granted options under the
1999 Plan to purchase 539,988 shares of the Company's common stock at an
exercise price of $1.67 per share (see Note 4).
----------
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All dollar amounts, except per share data, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are stated in
thousands.
Forward Looking Statements
The statements contained in this report which are not historical facts contain
forward looking information regarding the Company (which may be referred to
herein as we, us or our) and its 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 management. Such statements reflect
our current view with respect to future events and are subject to risks,
uncertainties and assumptions related to various factors that could cause our
actual results to differ materially from those expected by us, including
competitive factors, customer relations, the integration of operations resulting
from acquisitions, the risk of obsolescence of our products, relationships with
our suppliers, the risk of adverse regulatory action affecting our business or
the business of our 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
we are a party, and other uncertainties detailed in this report and in our other
filings with the Securities and Exchange Commission.
Results of Operations
We reported a net loss of $1,484, or $.11 per diluted share, for the three
months ended December 31, 1999 on net revenues and sales of $12,669 as compared
to net income of $779, or $.06 per diluted share, on net revenues and sales of
$16,859 for the three months ended December 31, 1998. For the nine months ended
December 31, 1999, we reported a net loss of $3,408, or $.25 per diluted share,
on revenues and net sales of $38,878 as compared to net income of $1,881, or
$.14 per diluted share, on revenues and net sales of $51,303 for the nine months
ended December 31, 1998. The losses for the three months and nine months ended
December 31, 1999 reflect substantial expenditures to develop our public access
Internet appliance products and related service operations, charges related to
the restructuring of our core payphone business of $700 and declines in revenues
and sales and gross profit margins as a result of industry conditions beyond our
control, including the contraction of the installed base of public access
terminals, the consolidation of domestic public communications providers, and
declining industry revenues resulting from increasing usage of wireless services
and increased volume of dial-around (toll free and access code) calls. As a
result of the prolonged continuance of these industry conditions, we do not
believe that revenues and net sales from our core payphone products and services
will improve significantly in the foreseeable future. However, we believe that
our revenues and sales may begin to grow as we launch our public access Internet
appliance products and related services, but that a certain period of growth
will be required before new sources of revenues from these products and services
support the related operations. Therefore, we expect to continue to report
operating losses for at least the next three quarters as we invest in the
development and launch of our new products and services.
Our public access Internet appliance products are designed to provide, among
others, advertising, sponsored information and content and e-commerce
capabilities in addition to traditional payphone capabilities. We believe, but
cannot assure, that the revenues that may be generated from these capabilities
will be substantially greater than the revenues generated from traditional
payphone services. We are developing the services to implement these
capabilities through a server network environment with a strategy to share the
new revenue streams of our customers. We believe, but cannot assure, that our
target customers will begin to deploy our new products and services over the
next two quarters after they complete the initial lab and market trials, which
began in January 2000. However, there is no assurance that our public access
Internet appliance
12
<PAGE>
products will be successfully introduced or accepted by the marketplace, or if
they are, that revenues from such products and related services and revenues
derived from advertising, sponsored content and other sources would have a
material favorable impact on the revenues of our customers or on our sales and
revenues in the foreseeable future or at all. Our ability to implement this
strategy and develop revenues and profits from the relatively new and evolving
market for Internet appliances, content and services is subject to substantial
risks. These risks include, but are not limited to the following:
o uncertain acceptance of our public access Internet appliance
products by our customers and the public;
o uncertain acceptance of our public access Internet appliance
products as a new advertising media;
o our ability and the ability of our customers to attract and retain
advertisers;
o our ability to develop, deliver, enhance, maintain and support the
technology;
o our ability to attract and retain content providers and the cost and
availability of content;
o an evolving and unpredictable business model;
o the overall level of demand for content and commerce services in a
public access setting;
o seasonal trends in advertising placements;
o the amount and timing of increased expenditures for expansion of
operations, including the hiring of personnel, capital expenditures
and related costs;
o the result of litigation that may be filed against us in the future;
o our ability to attract and retain qualified personnel;
o the introduction of new or enhanced products and services by
competitors; o technical difficulties, system downtime and system
failures;
o political or economic events and governmental actions affecting
Internet operations or content; and
o general economic conditions and economic conditions specific to the
Internet and advertising industries.
Three Months Ended December 31, 1999 Compared
to the Three Months Ended December 31, 1998
The following table shows certain line items in the Company's consolidated
statements of operations and other comprehensive income (loss) for the three
months ended December 31, 1999 and 1998 that are discussed below together with
amounts expressed as a percentage of sales.
Percent Percent
1999 of Sales 1998 of Sales
-------- -------- -------- --------
Revenues and net sales $ 12,669 100% $ 16,859 100%
Cost of revenues and sales 9,174 72 11,248 67
Gross profit 3,495 28 5,611 33
Selling, general and
administrative expenses 2,554 20 2,126 13
Engineering, research and
development expenses 1,850 15 1,513 9
Restructuring charges 700 6 -- --
Income tax expense (benefit) (853) (7) 458 3
13
<PAGE>
Revenues and net sales by market segment for the three months ended December 31,
1999 and 1998 together with the increase or decrease and with the increase or
decrease expressed as a percentage change are set forth below:
Increase Percentage
1999 1998 (Decrease) Change
-------- -------- --------- ----------
Private segment $ 3,724 $ 6,664 $ (2,940) (44%)
Telephone company segment 7,415 7,893 (478) (6)
International segment 1,530 2,302 (772) (34)
-------- -------- -------- --------
$ 12,669 $ 16,859 $ (4,190) (25%)
======== ======== ======== ========
Revenues and net sales of products and services for the three months ended
December 31, 1999 and 1998 together with the increase or decrease and with the
increase or decrease expressed as a percentage change are set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 3,025 $ 6,223 $ (3,198) (51%)
Printed circuit board control modules and kits 3,780 5,263 (1,483) (28)
Components and other products 1,179 2,754 (1,575) (57)
Services:
Repair, refurbishment and upgrade services 4,361 2,487 1,874 75
Other services 324 132 192 145
-------- -------- -------- --------
$ 12,669 $ 16,859 $ (4,190) (25%)
======== ======== ======== ========
</TABLE>
The decrease in revenues and net sales to the private and telephone company
segments is primarily attributable to a decrease in volume of product sales
partially offset by an increase in the usage of repair, refurbishment and
upgrade services by the telephone company segment. We believe that these
fluctuations are primarily attributable to a contraction of the installed base
of payphone terminals in the domestic market and to declining revenues of
payphone service providers caused by increasing usage of wireless services and a
higher volume of dial-around calls. In addition, continuing downward pricing
pressures contributed to the decline in revenues and net sales in these domestic
market segments. The decrease in revenues and net sales to the international
segment is primarily attributable to a decrease in export volume of payphone
terminals to customers in Latin America and Asia.
Cost of sales and gross profit as a percentage of net sales approximated 72% and
28%, respectively, for the three months ended December 31, 1999 as compared to
67% and 33%, respectively, for the three months ended December 31, 1998. The
decline in the gross profit percentage between such periods is principally
attributable to (i) the increase in the percentage of sales to telephone
companies at margins lower than those achieved from the private segment, (ii)
downward pricing pressures in the private segment, and (iii) the increase in low
margin repair, refurbishment and upgrade services.
The increase in selling, general and administrative expenses is primarily
attributable to an increase in the estimated reserve for credit losses of $216,
recruiting expenses and stock option compensation related to our new president
and chief executive officer of $69 and fluctuations in accrued performance-based
compensation. As a result of the restructuring discussed below, we have begun to
shift our marketing and
14
<PAGE>
selling resources to the introduction of our public access Internet appliance
products rather than increasing overall spending. Also, the cost and expense
reductions from the restructuring discussed below were not significant during
the three months ended December 31, 1999.
We continued to make significant investments in the development of our public
access Internet appliance products and back office management software which
resulted in an increase in engineering, research and development expenditures,
including capitalized software development costs, of $1,374, or approximately
84%, to $3,004 versus $1,630 for the three months ended December 31, 1998.
Capitalized software expenditures approximated $1,154 during the three months
ended December 31, 1999 as compared to $157 during the three months ended
December 31, 1998. During the three months ended December 31, 1999, we abandoned
a software development project related to certain activities discontinued as
part of the restructuring discussed below, and recognized an impairment loss of
$140. The impairment loss is included in engineering, research and development
expenses for the three months ended December 31, 1999.
During the three months ended December 31, 1999, we implemented a restructuring
plan to close our Sarasota, Florida manufacturing facility and consolidate
manufacturing operations, resize our core payphone business operations, reorient
our distribution strategy and begin to build support operations to introduce our
public access Internet appliance products to the market and provide the services
related thereto. In connection with this restructuring, we recognized
restructuring charges of $700 during the three months ended December 31, 1999.
These restructuring charges consisted of estimated employee termination benefits
under severance and benefit arrangements of $575 and future lease payments of
$125 related to the closure of leased facilities. The restructuring charges do
not include the recognition of impairment losses of $148 related to closed
facilities and the Company's decision to abandon a software development project
related to certain discontinued activities. Impairment losses of $140 and $8 are
classified as engineering, research and development expenses and selling,
general and administrative expenses, respectively, during the three months and
nine months ended December 31, 1999. We believe, but cannot assure, that the
restructuring will have the impact of reducing costs and expenses in all
functional areas of the business by approximately $2,000 annually, net of
increases in expenses to support our new business strategy to generate
advertising, sponsored content and other new sources of revenue from our public
access Internet appliance products. We do not expect to realize the full impact
of the anticipated cost and expense reductions from the restructuring until the
quarter ending June 30, 2000.
The Company's effective tax rate approximated 36.5% of pre-tax income (loss) for
the three months ended December 31, 1999 as compared to 37% for the three months
ended December 31, 1998. The change in our effective tax rate is primarily due
to fluctuations in non-deductible expenses and research and development tax
credits. We believe that it is more likely than not that we will be able to
realize our deferred tax assets, and have not established a valuation allowance
related thereto.
15
<PAGE>
Nine Months Ended December 31, 1999 Compared
to the Nine Months Ended December 31, 1998
The following table shows certain line items in the Company's consolidated
statements of operations and other comprehensive income (loss) for the nine
months ended December 31, 1999 and 1998 that are discussed below together with
amounts expressed as a percentage of sales.
Percent Percent
1999 of Sales 1998 of Sales
-------- -------- -------- --------
Revenues and net sales $ 38,878 100% $ 51,303 100%
Cost of revenues and sales 28,748 74 33,667 66
Gross profit 10,130 26 17,636 34
Selling, general and
administrative expenses 7,888 20 8,020 16
Engineering, research and
development expenses 4,730 12 4,662 9
Restructuring charges 700 2 -- --
Income tax expense (benefit) (1,868) (5) 1,110 2
Revenues and net sales by market segment for the nine months ended December 31,
1999 and 1998 together with the increase or decrease and with the increase or
decrease expressed as a percentage change are set forth below:
Increase Percentage
1999 1998 (Decrease) Change
-------- -------- --------- ----------
Private segment $ 10,614 $ 19,341 $ (8,727) (45%)
Telephone company segment 22,808 26,502 (3,694) (14)
International segment 5,456 5,460 (4) --
======== ======== ======== ========
$ 38,878 $ 51,303 $(12,425) (24%)
======== ======== ======== ========
Revenues and net sales of products and services for the nine months ended
December 31, 1999 and 1998 together with the increase or decrease and with the
increase or decrease expressed as a percentage change are set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 11,034 $ 18,670 $ (7,636) (41%)
Printed circuit board control modules and kits 11,723 13,702 (1,979) (14)
Components and other products 4,527 10,729 (6,202) (58)
Services:
Repair, refurbishment and upgrade services 10,670 7,707 2,963 38
Other services 924 495 429 86
======== ======== ======== ========
$ 38,878 $ 51,303 $(12,425) (24%)
======== ======== ======== ========
</TABLE>
The same industry conditions and factors that influenced our revenue and sales
performance for the three months ended December 31, 1999 affected our
performance for the nine-month period. However, these
16
<PAGE>
conditions and factors began to influence the telephone company segment during
the later half of last year. Therefore, we experienced a greater percentage
decline in net sales and revenues from the telephone company segment for the
nine months ended December 31, 1999. Also, we realized 63% of the increase in
revenues from repair, refurbishment and upgrade services during the last three
months. In the international segment, an increase in export sales to customers
in Canada and Africa offset a decline to customers in Latin America and the Asia
Pacific region.
Cost of sales and gross profit as a percentage of net sales approximated 74% and
26%, respectively, for the nine months ended December 31, 1999 as compared to
66% and 34%, respectively, for the nine months ended December 31, 1998. The same
factors that affected our gross profit percentage for the three months ended
December 31, 1999 affected our gross profit percentage for the nine-month
period. In addition, we increased our inventory reserves by $982 to reflect the
estimated net realizable value of certain slow moving inventories as a result of
the continued weakness in the domestic market.
The decrease in selling, general and administrative expenses is primarily
attributable to a reduction in personnel and other operating expenses as a
result of the reorganization of selling and marketing activities at the end of
fiscal 1999, a decline in variable selling expenses related to the decline in
sales offset by an increase in the estimated reserve for credit losses of $325,
the estimated cost of severance and benefits of $184 payable to the Company's
former chief executive officer under an agreement dated June 11, 1999,
recruiting expenses and stock option compensation related to our new president
and chief executive officer of $165 and an increase in expenses related to the
launch of our public access Internet appliance products. In addition, as a
result of the restructuring discussed above, we have begun to shift significant
marketing and selling resources to the introduction of our public access
Internet appliance products. Also, the cost and expense reductions from the
restructuring were not significant during the nine months ended December 31,
1999.
Total engineering, research and development expenditures, including capitalized
software, during the nine months ended December 31, 1999 increased by $2,991, or
approximately 62%, to $7,810 versus $4,819 for the same period last year.
Capitalized software related to the development of the Company's public access
Internet appliance products and back office management software approximated
$3,080 during the nine months ended December 31, 1999 as compared to $157 during
the nine months ended December 31, 1998.
The Company's effective tax rate declined to approximately 35% of pre-tax income
(loss) for the nine months ended December 31, 1999 as compared to 37% for the
nine month ended December 31, 1998 primarily due to fluctuations in
non-deductible expenses and research and development tax credits.
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.
Liquidity and Capital Resources
Liquidity. We are in default of certain financial covenants contained in the
loan agreements (the "Loan Agreements") with our bank. As a result of the
default, the bank has the right to accelerate the maturity of outstanding
indebtedness under the Loan Agreements. Accordingly, outstanding debt in the
aggregate amount of $11,653 at December 31, 1999 is classified as a current
liability.
17
<PAGE>
We have reached an agreement in principal to enter into a forbearance and
modification agreement (the "Forbearance Agreement") with our bank that would
modify the terms of the Loan Agreements. Pursuant to the terms of the proposed
Forbearance Agreement, the maturity date of indebtedness outstanding under the
Loan Agreements would be changed to May 31, 2000, the annual interest rate under
the Loan Agreements would be increased to one percentage point above the prime
interest rate, and our ability to borrow additional funds under a $2,000 export
revolving credit line (none of which was borrowed as of such date) and a $1,500
equipment credit line ($281 of which was borrowed as of such date) would be
cancelled. During the term of the proposed Forbearance Agreement, the
outstanding indebtedness under a $10,000 working capital revolving credit line
and a $4,000 installment note could not exceed the value of collateral
consisting of eligible accounts receivable and inventories.
We are attempting to secure an asset based financing line and additional equity
capital or other sources of funding to refinance the outstanding indebtedness
under the Loan Agreements. We have received proposals with respect thereto and
believe that our efforts will be successful. However, there is no assurance that
our efforts will be successful, or if successful, that such financing would be
available on favorable terms. In addition, there is no assurance that any such
financing would provide the funding required to refinance outstanding
indebtedness and fund continued net operating losses and other liquidity
requirements. If our efforts to secure additional capital or other sources of
financing are not successful, we may be forced to reduce our product development
efforts, slow down the launch of our public access Internet appliance products
and take other actions to achieve profitability that may adversely affect our
growth potential and future prospects. Further, if our efforts to raise
additional capital and/or other sources of financing are not successful, we
could experience difficulties meeting our obligations as they become due.
Accordingly, there is no assurance that our cash resources will be sufficient to
meet our anticipated cash needs for operations, working capital and capital
expenditures for the next twelve months unless we are able to successfully raise
additional capital and/or financing on satisfactory terms.
Financing Activities. We fund our operations, working capital requirements and
capital expenditures from internally generated cash flows and funds available
under bank credit lines. We borrow funds under our bank 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. We also use the financing available under bank credit
lines to fund operations and payments on long-term debt when necessary. We
measure our liquidity based upon the amount of funds we are able to borrow under
our bank credit lines, which varies based upon operating performance and the
value of collateral.
Indebtedness outstanding under our bank credit lines cannot exceed the value of
eligible collateral (as defined in the Loan Agreements and in the proposed
Forbearance Agreement discussed above) consisting of accounts receivable and
inventories.
At December 31, 1999 and March 31, 1999, outstanding debt under our working
capital line was $6,095 and $5,185, respectively, and outstanding debt under our
$4,000 installment note was $3,497 and $4,000, respectively. As of December 31,
1999, our bank would not permit us to borrow additional funds under our credit
lines as a result of our default on certain financial covenants. As a result, we
retained cash that would have customarily been used to repay outstanding
indebtedness. Based on the value of collateral including the retained cash, we
would have been able to borrow additional funds aggregating $1,420 under the
terms of the expected Forbearance Agreement as of December 31, 1999. The
indebtedness outstanding under the capital line amounted to $281 at December 31,
1999. At December 31, 1999, the Company had not used the $2,000 export line.
Outstanding indebtedness under our bank mortgage note was $1,780 and $1,833 at
December
18
<PAGE>
31, 1999 and March 31, 1999, respectively. All of the outstanding bank debt is
classified as a current liability at December 31, 1999.
During the nine months ended December 31, 1999 and 1998, net proceeds under our
bank lines aggregated $1,191 and $147, respectively. Principal payments under
bank mortgage and installment notes and other notes payable during the nine
months ended December 31, 1999 and 1998 amounted to $604 and $56, respectively.
Bank overdrafts related to outstanding drafts declined by $1,428 during the nine
months ended December 31, 1999.
Operating Activities. Cash flows from operating activities for the nine months
ended December 31, 1999 and 1998 are summarized as follows:
1999 1998
------- -------
Net income (loss) $(3,408) $ 1,881
Non-cash charges and credits, net 2,651 3,156
------- -------
(757) 5,037
Changes in operating assets and liabilities:
Accounts and notes receivable 1,882 (1,651)
Inventories 3,289 (6,548)
Accounts payable, accrued expenses and
other current liabilities 458 3,002
Other 1,783 (466)
------- -------
$ 6,655 $ (626)
======= =======
Our operating cash flow is primarily dependent upon operating results, sales
levels and related credit terms extended to customers and inventory purchases,
and the changes in operating assets and liabilities related thereto. During the
nine months ended December 31, 1999, we used $757 in cash to fund operating
losses net of non-cash charges and credits. During the same period last year, we
generated $5,037 in cash from operations net of non-cash charges and credits.
However, during the nine months ended December 31, 1999, we generated $7,412 of
cash from changes in operating assets and liabilities as compared to the nine
months ended December 31, 1998 when we used $5,663 of cash to fund changes in
operating assets and liabilities.
Our operating assets and liabilities are comprised principally of accounts and
notes receivable, inventories, accounts payable, accrued expenses and other
current liabilities. During the nine months ended December 31, 1999, we
generated $1,882 and $3,289 of cash through reductions in accounts and notes
receivable and inventories, respectively. We also generated $458 and $1,783 of
cash from increases in accounts payable, accrued expenses and other current
liabilities and from reductions in refundable income taxes and other operating
assets, respectively. In comparison, during the nine months ended December 31,
1998, we used $1,651 and $6,548 of cash to fund increases in accounts and notes
receivable and inventories, respectively, and generated $2,536 of cash from
increases in accounts payable, accrued expenses and other current liabilities,
net of increases in other operating assets.
Our current ratio declined to 1.17 to 1 at December 31, 1999 as compared to 2.95
to 1 at March 31, 1999 primarily due to the net loss for nine months ended
December 31, 1999, the classification of outstanding bank indebtedness as a
current liability, and the capital asset and software expenditures discussed
below. During the nine months ended December 31, 1999, our current assets
decreased by $6,832 (22%) and current liabilities increased by $10,320 (97%).
Working capital decreased to $3,541 at December 31, 1999 from $20,693 at March
31, 1999. Extension of credit to customers and inventory purchases represent our
principal working capital requirements, and material increases in accounts and
notes receivable and/or
19
<PAGE>
inventories could have a significant effect on our liquidity. Accounts and notes
receivable and inventories represented in the aggregate 84% of current assets at
December 31, 1999 and March 31, 1999. We experience varying accounts receivable
collection periods from our three customer segments, and believe that credit
losses will not have a significant effect on future liquidity as a significant
portion of our accounts and notes receivable are due from customers with
substantial financial resources. The level of our inventories is dependent on a
number of factors, including delivery requirements of customers, availability
and lead-time of components and our ability to estimate and plan the volume of
our business.
Investing Activities. Net cash used for investing activities during the nine
months ended December 31, 1999 and 1998 amounted to $4,799 and $1,327,
respectively. Our investing activities include capital expenditures consisting
primarily of manufacturing tooling and equipment, computer equipment and
building improvements required to support operations and capitalized software,
including new product software development costs. Cash used for capital
expenditures during the nine months ended December 31, 1999 and 1998 aggregated
$1,719 and $1,128, respectively. During the nine months ended December 31, 1999
and 1998, cash used to acquire software and capitalized software development
costs aggregated $3,080 and $199, respectively. At December 31, 1999, we have no
significant outstanding commitments for the purchase of capital assets. However,
we are continuing to invest in the development of the back office software
systems to provide advertising and content to our public access Internet
appliance products.
Year 2000 Discussion
We have completed our efforts to assess the risks and impact of Year 2000 on our
business and address Year 2000 issues resulting from computer programs designed
to use two-digit date codes rather than four digits to define the applicable
year. We assessed Year 2000 compliance of products and systems that we presently
sell and support, performed appropriate compliance testing and modified and/or
upgraded non-compliant product software related to such products and systems .
In some cases, we identified that certain of our products and systems were Year
2000 compliant with issues, which means that they will operate properly if
programmed and configured in accordance with our published guidelines. We also
assessed Year 2000 compliance of our business and management information systems
and related computer equipment, performed compliance testing and upgraded
non-compliant software and equipment where necessary. In addition, we assessed
the readiness of third parties, particularly critical suppliers and other third
parties that have material relationships with us, to identify and mitigate the
risks to our business and operations in the event they experienced Year 2000
problems and difficulties.
Based on Year 2000 inquiries that we have received from our customers after
December 31, 1999 and our investigations thereof, we are not aware of any
significant Year 2000 noncompliance issues related to the products and systems
that we presently sell and support. In addition, based on our Year 2000
compliance testing and remediation activities, the only products that we have
historically sold that are not Year 2000 compliant or compliant with issues are
products that we have discontinued to manufacture and that are no longer
supported by the Company. We have previously notified our customers that we do
not intend to bring these discontinued, non-compliant products into compliance
and that they should upgraded accordingly. We do not believe that we have an
obligation to bring these discontinued products into compliance or an obligation
to replace these products under our warranties since they were last sold more
than five years ago. Accordingly, we have not recorded any liability related to
these products in our financial statements.
The risks associated with the failure of our products to be Year 2000 compliant
include: (1) loss of data or an adverse impact on the reliability of data
generated by our products; (2) loss of functionality; (3) failure to communicate
with other applications used by our customers that may not be Year 2000
compliant; and (4) potential litigation by customers with respect to products
and services no longer supported by us. However, based on Year 2000 inquiries
received from our customers after to December 31, 1999 and our investigations
20
<PAGE>
thereof, we do not believe that these risks are significant or that Year 2000
issues related to our products and systems will have a material adverse impact
on our business or operating results.
We have not experienced any material interruptions or operational problems as a
result of Year 2000 issues related to our business and management information
systems or from the failure of third parties, including critical suppliers and
other third parties that have material relationships with us, to be Year 2000
compliant.
Principally, our existing engineering and information technology personnel
undertook our Year 2000 efforts. We have not separately tracked the costs
incurred for such efforts, but such costs consisted primarily of compensation
costs for the personnel assessing and mitigating the risk of Year 2000 on our
business. In addition, the costs incurred to upgrade or acquire new Year 2000
compliant software and equipment have not been material, and we do not believe
that any increases in administrative costs related to Year 2000 issues will be
material in the future. Further, we believe, but cannot assure, that we will not
incur any significant costs and expenses related to future Year 2000 remediation
activities or claims that may be filed against us related to Year 2000
noncompliance issues.
New Accounting Pronouncements
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, 2000. 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.
During the nine months ended December 31, 1999, the Company adopted Statement of
Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1") issued by the American Institute of Certified
Public Accountants (the "AICPA"). 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. The adoption of SOP 98-1 did not have a material impact on the
Company's results of operations, financial position or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes with regards to quantitative and qualitative
disclosures about market risks from that set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
----------
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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 and the appeal is pending. The Company disputes
liability and intends to defend this matter vigorously, although the Company
cannot predict the ultimate outcome of this litigation.
Item 3. Defaults by the Company on its Senior Securities
The Company is in default of certain financial covenants contained in the loan
agreements between the Company and its bank. As a result thereof, the bank has
the right to accelerate the maturity of debt outstanding under the loan
agreements in the aggregate principal amount of $11.653 million at December 31,
1999. We have reached an agreement in principal to enter into a forbearance and
modification agreement (the "Forbearance Agreement") with our bank that would
modify the terms of the Loan Agreements. Pursuant to the terms of the proposed
Forbearance Agreement, the maturity date of indebtedness outstanding under the
Loan Agreements would be changed to May 31, 2000, the annual interest rate under
the Loan Agreements would be increased to one percentage point above the prime
interest rate, and our ability to borrow additional funds under a $2,000 export
revolving credit line (none of which was borrowed as of such date) and a $1,500
equipment credit line ($281 of which was borrowed as of such date) would be
cancelled. During the term of the proposed Forbearance Agreement, the
outstanding indebtedness under a $10,000 working capital revolving credit line
and a $4,000 installment note could not exceed the value of collateral
consisting of eligible accounts receivable and inventories.
We are attempting to secure an asset based financing line and additional equity
capital or other sources of funding to refinance the outstanding indebtedness
under the Loan Agreements. However, there is no assurance that our efforts will
be successful, or if successful, that such financing would be available on
favorable terms. In addition, there is no assurance that any such financing
would provide the funding required to refinance outstanding indebtedness and
fund continued net operating losses and other liquidity requirements. If our
efforts to secure additional capital or other sources of financing were not
successful, we may be forced to reduce our product development efforts, slow
down the launch of our public access Internet appliance products and take other
actions to achieve profitability that may adversely affect our growth potential
and future prospects. Further, if our efforts to raise additional capital and/or
other sources of financing were not successful, we could experience difficulties
meeting our obligations as they become due. Accordingly, there is no assurance
that our cash resources will be sufficient to meet our anticipated cash needs
for operations, working capital and capital expenditures for the next twelve
months unless we are able to successfully raise additional capital and/or
financing on satisfactory terms.
22
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On November 2, 1999, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, Company's stockholders voted upon the following
matters:
1. The election of a Board of Directors consisting of five directors,
with each director to serve until the next annual meeting of
stockholders or until the election and qualification of his
respective successor;
2. The approval of an amendment to the Company's Certificate of
Incorporation to increase the number of shares of common stock, $.01
par value (the "Common Stock"), authorized for issuance by
10,000,000 shares, from 30,000,000 shares to 40,000,000 shares;
3. The approval of an amendment to the 1991 Stock Option Plan (the
"1991 Plan") to increase the number of shares reserved for issuance
under the 1991 Plan by 500,000 shares, from 2,100,000 shares to
2,600,000 shares;
4. The approval of an amendment to the Directors Stock Option Plan (the
"Directors Plan") to increase the number of shares reserved for
issuance under the Directors Plan by 75,000 shares, from 225,000
shares to 300,000 shares; and
5. The ratification of the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the fiscal year ending
March 31, 2000.
All of the nominees for director recommended by the Board of Directors were
elected and the results of the voting were as follows:
Votes
Name Votes For Withheld
- --------------------------------------------------------------------------------
Joseph M. Jacobs 11,368,692 661,095
C. Shelton James 11,342,274 687,513
Charles H. Moore 11,490,126 539,661
Thomas E. Patton 11,497,336 532,451
Mark L. Plaumann 11,491,336 538,451
The stockholders approved the amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock authorized for
issuance by 10,000,000 shares, from 30,000,000 shares to 40,000,000 shares. The
results of the voting were: 11,122,850 For; 875,993 Against; and 31,004
Abstentions.
The stockholders approved the amendment to the 1991 Plan to increase the number
of shares reserved for issuance under the 1991 Plan by 500,000 shares, from
2,100,000 shares to 2,600,000 shares. The results of the voting were: 11,032,878
For; 887,528 Against; and 42,304 Abstentions.
The stockholders approved the amendment to the Directors Plan to increase the
number of shares reserved for issuance under the Directors Plan by 75,000
shares, from 225,000 shares to 300,000 shares. The results of the voting were:
11,190,233 For; 730,348 Against; and 42,129 Abstentions.
The stockholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the fiscal year ending March 31,
2000. The results of the voting were: 11,946,731 For; 61,547 Against; and 21,509
Abstentions.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith as part of this
report:
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation as Amended
10.1 1991 Stock Option Plan as Amended
10.2 Directors Stock Option Plan as Amended
10.3 1999 Stock Option Plan
27 Financial Data Schedule (Edgar Filing only)
(b) Reports on Form 8-K:
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Elcotel, Inc.
-------------
(Registrant)
Date: February 11, 2000 By: /s/ William H. Thompson
----------------------------
William H. Thompson
Senior Vice President,
Administration and Finance
(Principal Financial Officer)
By: /s/ Scott M. Klein
--------------------------------
Scott M. Klein
Controller (Principal Accounting
Officer)
25
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
ELCOTEL, INC.
(As amended thru December 3, 1999)
FIRST - The name of this Corporation is Elcotel, Inc.
SECOND - Its registered office in the State of Delaware is to be
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The Registered Agent in charge thereof is
Corporation Trust Company.
THIRD - The nature of business and, the objects and purposes
proposed to be transacted, promoted and carried on, are to do any or all the
things therein mentioned, as fully and to the same extent as natural persons
might or could do, and in any part of the world, viz:
"The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware."
FOURTH - The amount of total authorized capital stock of this
Corporation is Forty Million (40,000,000) shares of Common Stock, par value $.01
per share."
FIFTH - The name and mailing address of the incorporator is as
follows:
Name Mailing Address
---- ---------------
Mary Loughlin Suite 3600
1600 Market Street
Philadelphia, PA 19103
SIXTH - The Directors shall have power to adopt, amend or repeal the
Bylaws; to fix the amount to be reserved as working capital, and to authorize
and cause to be executed, mortgages and liens without limit as to the amount,
upon the property and franchise of this Corporation.
With the consent in writing, and pursuant to a vote of the holders
of a majority of the capital stock issued and outstanding, the Directors shall
have authority to dispose, in any manner, of the whole property of this
Corporation.
<PAGE>
The stockholders and Directors of this Corporation shall have the
right to inspect the books and records of this Corporation in accordance with
the Delaware General Corporation Law.
The stockholders and Directors shall have power to hold their
meetings and keep the books, documents and papers of this Corporation outside
the State of Delaware, at such places as may be from time to time designated by
the Bylaws or by resolution of the stockholders or Directors, except as
otherwise required by the laws of Delaware.
SEVENTH - A Director of this Corporation shall not be personally
liable to this Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability to the extent provided by
applicable law (i) for any breach of the Director's duty of loyalty to this
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the Director derived any improper personal benefit. If the Delaware
General Corporation Law is hereafter amended to authorize the further limitation
or elimination of the liability of a Director, then the liability of a Director
of this Corporation shall be limited or eliminated to the fullest extent
permitted by the amended Delaware General Corporation Law.
Any modification or repeal of the foregoing paragraph by the
stockholders of this Corporation shall not adversely affect any right or
protection of a Director of this Corporation existing at the time of such repeal
or modification.
2
EXHIBIT 10.1
ELCOTEL, INC.
1991 STOCK OPTION PLAN
1. Definitions
As used in this Plan, the following definitions apply to the terms
indicated below:
1. "Board" means the Board of Directors of the Company.
2. A Change of Control means the occurrence of any one or more of
the following events: (i) if any transaction occurs whereby a substantial
portion of the assets of the Company are transferred, exchanged or sold to a
non-affiliated third party other than in the ordinary course of business; (ii)
if a merger or consolidation involving the Company occurs and the stockholders
of the Company immediately before such merger or consolidation do not own
immediately after such merger or consolidation at least fifty percent (50%) of
the outstanding common stock of the surviving entity or the entity into which
the common stock of the Company is converted; or (iii) if any person (including
without limitation any individual, partnership or corporation) becomes the
owner, directly or indirectly, of securities of the Company or its successor (or
a parent company thereof) representing thirty-five percent (35%) or more of the
combined voting power of the Company's or its successor's (or a parent's, as the
case may be) securities then outstanding.
3. "Committee" means the Compensation and Stock Option Committee
appointed by the Board from time to time to administer the Plan. The Committee
shall consist of at least two persons, who shall be directors of the Company and
who shall not be or have been granted or awarded, while serving on the Committee
or within one year prior thereto, stock, stock options, or stock appreciation
rights pursuant to any plan of the Company or any of its affiliates except a
plan that provides for formula grants or awards.
4. "Company" means Elcotel, Inc., a Delaware corporation.
5. "Fair Market Value" of a Share on a given day means, if the
Shares are traded in a public market, the mean between the highest and lowest
quoted selling prices of a Share as reported on the principal securities
exchange on which the Shares are then listed or admitted to trading, or if not
so reported, the mean between the highest and lowest quoted selling prices of a
Share, or the mean between the highest asked price and the lowest bid price as
the case may be, as reported on the National Association of Securities Dealers
Automated Quotation System. If the Shares shall not be so traded, the Fair
Market Value shall be determined by the Committee taking into account all
relevant facts and circumstances.
<PAGE>
6. "Grantee" means a person who is either an Optionee or an
Optionee-Shareholder.
7. "Incentive Stock Option" means an option, whether granted under
this Plan or otherwise, that qualifies as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code.
8. "Option" means a right to purchase Shares under the terms and
conditions of this Plan as evidenced by an option certificate or agreement for
Shares in such form, not inconsistent with this Plan, as the Committee may adopt
for general use or for specific cases from time to time.
9. "Optionee" means a person other than an Optionee-Shareholder to
whom an option is granted under this Plan.
10. "Optionee-Shareholder" means a person to whom an option is
granted under this Plan and who at the time such option is granted owns,
actually or constructively, stock of the Company or of a Parent or Subsidiary
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of such Parent or Subsidiary.
11. "Nonqualified Option" means an Option that is not an Incentive
Stock Option.
12. "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the Company) owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in the chain.
13. "Plan" means this Elcotel, Inc. 1991 Stock Option Plan,
including any amendments to the Plan.
14. "Share" means a share of the Company's common stock, par value
$.01 per share, either now or hereafter owned by the Company as treasury stock
or authorized but unissued.
15. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the last corporation in the chain) owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.
16. Options shall be deemed "granted" under this Plan on the date on
which the Committee, by appropriate action, approves the grant of an Option
hereunder or on such subsequent date as the Committee may designate.
17. As used herein, the masculine includes the feminine, the plural
includes the singular, and the singular includes the plural.
2
<PAGE>
2. Purpose
The purposes of the Plan are as follows.
1. To secure for the Company and its shareholders the benefits
arising from share ownership by those officers and key employees of the Company
and its Subsidiaries who will be responsible for the Company's future growth and
continued success. The Plan is intended to provide an incentive to officers and
key employees by providing them with an opportunity to acquire an equity
interest or increase an existing equity interest in the Company, thereby
increasing their personal stake in its continued success and progress.
2. To enable the Company and its Subsidiaries to obtain and retain
the services of key employees, by providing such key employees with an
opportunity to acquire Shares under the terms and conditions and in the manner
contemplated by this Plan.
3. Plan Adoption and Term
1. This Plan shall become effective upon its adoption by the Board,
and Options may be issued upon such adoption and from time to time thereafter;
provided, however, that the Plan shall be submitted to the Company's
shareholders for their approval at the next annual meeting of shareholders, or
prior thereto at a special meeting of shareholders expressly called for such
purpose; and provided further, that the approval of the Company's shareholders
shall be obtained within 12 months of the date of adoption of the Plan. If the
Plan is not approved by the affirmative vote of the holders of a majority of all
shares present in person or by proxy, at a duly called shareholders' meeting at
which a quorum representing a majority of all voting stock is present in person
or by proxy and voting on this Plan, then this Plan and all Options then
outstanding under it shall forthwith automatically terminate and be of no force
and effect.
2. Subject to the provisions hereinafter contained relating to
amendment or discontinuance, this Plan shall continue to be in effect for ten
(10) years from the date of adoption of this Plan by the Board. No Options may
be granted hereunder except within such period of ten (10) years.
4. Administration of Plan
1. This Plan shall be administered by the Committee. Except as
otherwise expressly provided in this Plan, the Committee shall have authority to
interpret the provisions of the Plan, to construe the terms of any Option, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of Options granted hereunder, and to make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan. Without limiting the foregoing, the Committee
shall, to the extent and in the manner contemplated herein, exercise the
discretion granted to it to determine to whom Incentive Stock Options and
Non-qualified Options shall be granted, how many Shares shall be subject to each
such Option, whether a Grantee shall be required to surrender for cancellation
an outstanding Option
3
<PAGE>
as a condition to the grant of a new Option, and the prices at which Shares
shall be sold to Grantees. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any Option in the
manner and to the extent it shall deem expedient to carry the Plan into effect
and shall be the sole and final judge of such expediency.
2. No member of the Committee shall be liable for any action taken
or omitted or any determination made by him in good faith relating to the Plan,
and the Company shall indemnify and hold harmless each member of the Committee
and each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Committee) arising
out of any act or omission in connection with the Plan, unless arising out of
such person's own fault or bad faith.
3. Any power granted to the Committee either in this Plan or by the
Board, may at any time be exercised by the Board, and any determination by the
Committee shall be subject to review and approval or reversal or modification by
the Board.
5. Eligibility
Officers and key employees of the Company and its Subsidiaries shall
be eligible for selection by the Committee to be granted Options. An employee
who has been granted an Option may, if he or she is otherwise eligible, be
granted an additional Option or Options if the Committee shall so determine.
6. Options
1. Subject to adjustment as provided in Paragraph 13 hereof, Options
may be granted pursuant to the Plan for the purchase of not more than 2,600,000
Shares; provided, however, that if prior to the termination of the Plan, an
Option shall expire or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be available for the
purposes of the Plan.
2. The aggregate fair market value (determined as of the time
Options are granted) of the stock with respect to which Incentive Stock Options
may be or become exercisable for the first time by a Grantee during any calendar
year (whether granted under this Plan or any other plan of the Company or any
Parent or Subsidiary corporation) shall not exceed $100,000. To the extent an
Incentive Stock Option may be or become exercisable in violation of this
limitation, it shall be deemed to be a Nonqualified Option.
7. Option Price
The purchase price per Share deliverable upon the exercise of an
Option shall be determined by the Committee, but shall not be less than the
greater of:
4
<PAGE>
(1) 100% of the Fair Market Value of such Share on the date
the Option is granted (110% of the Fair Market Value of such Share on the date
an Incentive Stock Option is granted to an Optionee-Shareholder), and
(2) $0.75.
8. Duration of Options
Each Option and all rights thereunder shall expire and the Option
shall no longer be exercisable on a date not later than five (5) years from the
date on which the Option was granted. Options may expire and cease to be
exercisable on such earlier date as the Committee may determine at the time of
grant. Options shall be subject to termination before their expiration date as
provided herein.
9. Conditions Relating to Exercise of Options
1. The Shares subject to any Option may be purchased at any time
during the term of the Option, unless, at the time an Option is granted, the
Committee shall have fixed a specific period or periods in which exercise must
take place. To the extent an Option is not exercised when it becomes initially
exercisable, or is exercised only in part, the Option or remaining part thereof
shall not expire but shall be carried forward and shall be exercisable until the
expiration or termination of the Option. Partial exercise as to whole Shares is
permitted from time to time, provided that no partial exercise of an Option
shall be for a number of Shares having a purchase price of less than $100.
2. No Option shall be transferable by the Grantee thereof other than
by will or by the laws of descent and distribution, and Options shall be
exercisable during the lifetime of a Grantee only by such Grantee or, to the
extent that such exercise would not prevent an Option from qualifying as an
Incentive Stock Option under the Internal Revenue Code, by his or her guardian
or legal representative.
3. Certificates for Shares purchased upon exercise of Options shall
be issued either in the name of the Grantee or in the name of the Grantee and
another person jointly with the right of survivorship. Such certificates shall
be delivered as soon as practical following the date the Option is exercised.
4. An Option shall be exercised by the delivery to the Company at
its principal office, to the attention of its Secretary, of written notice of
the number of Shares with respect to which the Option is being exercised, and of
the name or names in which the certificate for the Shares is to be issued, and
by paying the purchase price for the Shares. The purchase price shall be paid in
cash or by certified check or bank cashier's check. Alternatively, to the extent
permitted by the Committee and in its sole discretion, the purchase price may be
paid by delivering to the Company:
5
<PAGE>
(1) Shares (in proper form for transfer and accompanied by all
requisite stock transfer tax stamps or cash in lieu thereof) owned by the
Grantee having a Fair Market Value equal to the purchase price; or
(2) a notarized statement attesting to ownership of the number
of Shares which are intended to be used at Fair Market Value to pay the purchase
price, with the certificate number(s) thereof, and requesting that only the
incremental number of Shares as to which the Option is being exercised be issued
by the Company.
5. Notwithstanding any other provision in this Plan, no Option may
be exercised unless and until (i) this Plan has been approved by the
shareholders of the Company, and (ii) the Shares to be issued upon the exercise
thereof have been registered under the Securities Act of 1933 and applicable
state securities laws, or are, in the opinion of counsel to the Company, exempt
from such registration. The Company shall not be under any obligation to
register under applicable Federal or state securities laws any Shares to be
issued upon the exercise of an Option granted hereunder, or to comply with an
appropriate exemption from registration under such laws in order to permit the
exercise of an Option or the issuance and sale of Shares subject to such Option.
If the Company chooses to comply with such an exemption from registration, the
certificates for Shares issued under the Plan, may, at the direction of the
Committee, bear an appropriate restrictive legend restricting the transfer or
pledge of the Shares represented thereby, and the Committee may also give
appropriate stop-transfer instructions to the transfer agent of the Company.
6. Any person exercising an Option or transferring or receiving
Shares shall comply with all regulations and requirements of any governmental
authority having jurisdiction over the issuance, transfer or sale of securities
of the Company or over the extension of credit for the purposes of purchasing or
carrying any margin securities, or the requirements of any stock exchange on
which the Shares may be listed, and as a condition to receiving any Shares,
shall execute all such instruments as the Committee in its sole discretion may
deem necessary or advisable.
7. Each Option shall be subject to the requirement that if the
Committee shall determine that the listing, registration or qualification of the
Shares subject to such Option upon any securities exchange or under any state or
Federal law, or the consent or approval of any governmental or regulatory body,
is necessary or desirable as a condition of, or in connection with, the granting
of such Option or the issuance or purchase of Shares thereunder, such Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effective or obtained free of
any conditions not acceptable to the Committee.
10. Effect of Termination of Employment or Death
1. In the event of termination of a Grantee's employment by reason
of such Grantee's death, disability, or retirement with the consent of the Board
or in accordance with an applicable retirement plan, any outstanding Option held
by such Grantee shall, notwithstanding the extent to which such Option was
exercisable prior to termination of employment, immediately become exercisable
as to the total number of Shares purchasable thereunder. Any such Option shall
remain so
6
<PAGE>
exercisable at any time prior to its expiration date or, if earlier, the first
anniversary of termination of the Grantee's employment.
2. In the event of termination of a Grantee's employment for any
reason other than death, disability, or retirement with the consent of the Board
or in accordance with an applicable retirement plan, all rights of any kind
under any outstanding Option held by such Grantee shall immediately lapse and
terminate; provided, however, that the Committee may, in its discretion, elect
to permit exercise for a period ending on the earlier of the expiration date of
the Option absent any such termination of employment and a date thirty days
after the termination of employment as to the total number of Shares purchasable
under the Option as of the date of such termination; and provided further, that
the Committee may, in its discretion, elect to permit exercise until a date
determined by the Committee but not later than the expiration date of the Option
absent any such termination of employment as to the total number of Shares
purchasable under the Option as of the date of such termination, subject to any
further conditions that the Committee may determine.
3. Whether an authorized leave of absence or absence in military or
government service shall constitute termination of employment shall be
determined by the Committee. Transfer of employment between the Company and a
Subsidiary corporation or between one Subsidiary corporation and another shall
not constitute termination of employment.
11. No Special Employment Rights
Nothing contained in the Plan or in any Option shall confer upon any
Grantee any right with respect to the continuation of his or her employment by
the Company or a Subsidiary or interfere in any way with the right of the
Company or a Subsidiary, subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Grantee from the rate in existence
at the time of the grant of an Option.
12. Rights as a Shareholder
The Grantee of an Option shall have no rights as a shareholder with
respect to any Shares covered by an Option until the date of issuance of a
certificate to him for such Shares. Except as otherwise expressly provided in
the Plan, no adjustment shall be made for dividends or other rights for which
the record date occurs prior to the date of issuance of such certificate.
13. Anti-dilution Provision
1. In case the Company shall (i) declare a dividend or dividends on
its Shares payable in shares of its capital stock, (ii) subdivide its
outstanding Shares, (iii) combine its outstanding Shares into a smaller number
of Shares, or (iv) issue any shares of capital stock by reclassification of its
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), the number of
Shares authorized under the Plan will be adjusted proportionately. Similarly, in
any such event, there will be a proportionate adjustment in the
7
<PAGE>
number of Shares subject to unexercised Options (but without adjustment to the
aggregate option price).
2. The Committee may provide, either before or at or about the time
of the occurrence of a Change of Control, in any outstanding or newly issued
Option that a Grantee's right to exercise any such Option shall accelerate as a
consequence of or in connection with a Change of Control. In addition, the
Committee may provide in any outstanding or newly issued Option that a Grantee's
right to exercise any such Option shall accelerate in the event of a termination
of employment of such Grantee without cause pursuant to the terms of a written
agreement between the Company and the Grantee which has been approved by the
Committee.
14. Withholding Taxes
Whenever an Option is to be exercised under the Plan, the Company
shall have the right to require the Grantee, as a condition of exercise of the
Option, to remit to the Company an amount sufficient to satisfy the Company's
(or a Subsidiary's) Federal, state and local withholding tax obligation, if any,
that will, in the sole opinion of the Committee, result from the exercise. In
addition, the Company shall have the right, at the sole discretion of the
Committee, to satisfy any such withholding tax obligation by retention of Shares
issuable upon such exercise having a Fair Market Value on the date of exercise
equal to the amount to be withheld.
15. Amendment of the Plan
The Board may at any time and from time to time terminate or modify
or amend the Plan in any respect, except that, without shareholder approval, the
Board may not (a) increase the number of Shares which may be issued under the
Plan, or (b) modify the requirements as to eligibility for participation under
the Plan. The termination or modification or amendment of the Plan shall not,
without the consent of a Grantee, affect his rights under an Option previously
granted to him or her. With the consent of the Grantee, the Board may amend
outstanding Options in a manner not inconsistent with the Plan.
16. Miscellaneous
1. It is expressly understood that this Plan grants powers to the
Committee but does not require their exercise; nor shall any person, by reason
of the adoption of this Plan, be deemed to be entitled to the grant of any
Option; nor shall any rights begin to accrue under the Plan except as Options
may be granted hereunder.
2. All expenses of the Plan, including the cost of maintaining
records, shall be borne by the Company.
17. Governing Law
This Plan and all rights hereunder shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
8
EXHIBIT 10.2
ELCOTEL, INC.
DIRECTORS STOCK OPTION PLAN
1. Definitions
As used in this Plan, the following definitions apply to the terms
indicated below:
A. "Board" means the Board of Directors of the Company.
B. A Change of Control means the occurrence of any one or more of
the following events: (i) if any transaction occurs whereby a substantial
portion of the assets of the Company are transferred, exchanged or sold to a
non-affiliated third party other than in the ordinary course of business; (ii)
if a merger or consolidation involving the Company occurs and the stockholders
of the Company immediately before such merger or consolidation do not own
immediately after such merger or consolidation at least fifty percent (50%) of
the outstanding common stock of the surviving entity or the entity into which
the common stock of the Company is converted; or (iii) if any person (including
without limitation any individual, partnership or corporation) becomes the
owner, directly or indirectly, of securities of the Company or its successor (or
a parent company thereof) representing thirty-five percent (35%) or more of the
combined voting power of the Company's or its successor's (or a parent's, as the
case may be) securities then outstanding.
C. "Committee" means the Compensation and Stock Option Committee
appointed by the Board from time to time to administer the Plan. The Committee
shall consist of at least two persons, who shall be directors of the Company.
D. "Company" means Elcotel, Inc., a Delaware corporation.
E. "Director" means a member of the Board who is not an employee of
the Company.
F. "Fair Market Value" of a Share on a given day means, if the
Shares are traded in a public market, the mean between the highest and lowest
quoted selling prices of a Share as reported on the principal securities
exchange on which the Shares are then listed or admitted to trading, or if not
so reported, the mean between the highest and lowest quoted selling prices of a
Share, or the mean between the highest asked price and the lowest bid price as
the case may be, as reported on the National Association of Securities Dealers
Automated Quotation System. If the Shares shall not be so traded, the Fair
Market Value shall be determined by the Committee taking into account all
relevant facts and circumstances.
<PAGE>
G. "Grantee" means a person to whom an Option is granted.
H. "Option" means a right to purchase Shares under the terms and
conditions of this Plan as evidenced by an option certificate or agreement for
Shares in such form, not inconsistent with this Plan, as the Committee may adopt
for general use or for specific cases from time to time.
I. "Plan" means this Elcotel, Inc. Directors Stock Option Plan,
including any amendments to the Plan.
J. "Share" means a share of the Company's common stock, par value
$.01 per share, either now or hereafter owned by the Company as treasury stock
or authorized but unissued.
K. As used herein, the masculine includes the feminine, the plural
includes the singular, and the singular includes the plural.
2. Purpose
The purposes of the Plan are as follows.
A. To secure for the Company and its shareholders the benefits
arising from share ownership by Directors. The Plan is intended to provide an
incentive to Directors by providing them with an opportunity to acquire an
equity interest or increase an existing equity interest in the Company, thereby
increasing their personal stake in its continued success and progress.
B. To enable the Company and its Subsidiaries to obtain and retain
the services of Directors, by providing Directors with an opportunity to acquire
Shares under the terms and conditions and in the manner contemplated by this
Plan.
3. Plan Adoption and Term
A. This Plan shall become effective upon its adoption by the Board,
and Options shall be issued from time to time thereafter; provided, however,
that the Plan shall be submitted to the Company's shareholders for their
approval at the next annual meeting of shareholders, or prior thereto at a
special meeting of shareholders expressly called for such purpose; and provided
further, that the approval of the Company's shareholders shall be obtained
within 12 months of the date of adoption of the Plan. If the Plan is not
approved by the affirmative vote of the holders of a majority of all shares
present in person or by proxy, at a duly called shareholders' meeting at which a
quorum representing a majority of all voting stock is present in person or by
proxy and voting on this Plan, then this Plan and all Options then outstanding
under it shall forthwith automatically terminate and be of no force and effect.
B. Subject to the provisions hereinafter contained relating to
amendment or discontinuance, this Plan shall continue to be in effect for ten
(10) years from the date of adoption of
2
<PAGE>
this Plan by the Board. No Options may be granted hereunder except within such
period of ten (10) years.
4. Administration of Plan
A. This Plan shall be administered by the Committee. Except as
otherwise expressly provided in this Plan, the Committee shall have authority to
interpret the provisions of the Plan, to construe the terms of any Option, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of Options granted hereunder, and to make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan. Without limiting the foregoing, the Committee
shall, to the extent and in the manner contemplated herein, exercise the
discretion granted to it to determine how many Shares shall be subject to each
discretionary Option, whether a Grantee shall be required to surrender for
cancellation an outstanding Option as a condition to the grant of a new Option,
and the prices at which Shares shall be sold to Grantees. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any Option in the manner and to the extent it shall deem expedient to
carry the Plan into effect and shall be the sole and final judge of such
expediency.
B. No member of the Committee shall be liable for any action taken
or omitted or any determination made by him in good faith relating to the Plan,
and the Company shall indemnify and hold harmless each member of the Committee
and each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Committee) arising
out of any act or omission in connection with the Plan, unless arising out of
such person's own fault or bad faith.
C. Any power granted to the Committee may at any time be exercised
by the Board, and any determination by the Committee shall be subject to review
and reversal or modification by the Board on its own motion.
5. Options
A. Subject to adjustment as provided in Paragraph 12 hereof, an
Option shall be granted to each Director on the last business day of each fiscal
year of the Company for the purchase of (i) 1,000 Shares for each committee on
which such Director is then serving; and (ii) 1,000 Shares for each committee of
which such Director is then the chairperson. Subject to adjustment as provided
in Paragraph 12 hereof, a new Director shall receive a one-time automatic grant
of an option to purchase 4,000 Shares at the time such Director is either
elected by the shareholders to serve on the Board or appointed by the Board to
fill a vacancy. In addition to the grants of Options mandated by the foregoing
sentences of this Paragraph 5A and subject to adjustment as provided in
Paragraph 12 hereof, a Director may be granted discretionary Options as the
Committee shall determine.
3
<PAGE>
B. Subject to adjustment as provided in Paragraph 12 hereof, Options
may be granted pursuant to the Plan for the purchase of not more than 300,000
Shares; provided, however, that if prior to the termination of the Plan, an
Option shall expire or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be available for the
purposes of the Plan.
6. Option Price
The purchase price per Share deliverable upon the exercise of an
Option shall be determined by the Committee but shall not be less than the
greater of:
(1) 100% of the Fair Market Value of such Share on the date the
Option is granted, and
(2) $2.00.
7. Duration of Options
Each Option and all rights thereunder shall expire and the
Option shall no longer be exercisable on a date five (5) years from the date on
which the Option was granted. Options may expire and cease to be exercisable on
such earlier date as the Committee may determine at the time of grant. Options
shall be subject to termination before their expiration date as provided herein.
8. Conditions Relating to Exercise of Options
A. The Shares subject to any Option may be purchased at any time
during the term of the Option beginning on the first anniversary date of the
date of the grant of such Option. To the extent an Option is not exercised when
it becomes initially exercisable, or is exercised only in part, the Option or
remaining part thereof shall not expire but shall be carried forward and shall
be exercisable until the expiration or termination of the Option. Partial
exercise as to whole Shares is permitted from time to time, provided that no
partial exercise of an Option shall be for a number of Shares having a purchase
price of less than $1,000.
B. No Option shall be transferable by the Grantee thereof other than
by will or by the laws of descent and distribution, and Options shall be
exercisable during the lifetime of a Grantee only by such Grantee or by his or
her guardian or legal representative.
C. Certificates for Shares purchased upon exercise of Options shall
be issued either in the name of the Grantee or in the name of the Grantee and
another person jointly with the right of survivorship. Such certificates shall
be delivered as soon as practical following the date the Option is exercised.
D. An Option shall be exercised by the delivery to the Company at
its principal office, to the attention of its Secretary, of written notice of
the number of Shares with respect to
4
<PAGE>
which the Option is being exercised, and of the name or names in which the
certificate for the Shares is to be issued, and by paying the purchase price for
the Shares. The purchase price shall be paid in cash or by certified check or
bank cashier's check. Alternatively, to the extent permitted by the Committee
and in its sole discretion, the purchase price may be paid by delivering to the
Company:
(1) Shares (in proper form for transfer and accompanied by all
requisite stock transfer tax stamps or cash in lieu thereof) owned by the
Grantee having a Fair Market Value equal to the purchase price; or
(2) a notarized statement attesting to ownership of the number
of Shares which are intended to be used at Fair Market Value to pay the purchase
price, with the certificate number(s) thereof, and requesting that only the
incremental number of Shares as to which the Option is being exercised be issued
by the Company.
E. Notwithstanding any other provision in this Plan, no Option may
be exercised unless and until (i) this Plan has been approved by the
shareholders of the Company, and (ii) the Shares to be issued upon the exercise
thereof have been registered under the Securities Act of 1933 and applicable
state securities laws, or are, in the opinion of counsel to the Company, exempt
from such registration. The Company shall not be under any obligation to
register under applicable Federal or state securities laws any Shares to be
issued upon the exercise of an Option granted hereunder, or to comply with an
appropriate exemption from registration under such laws in order to permit the
exercise of an Option or the issuance and sale of Shares subject to such Option.
If the Company chooses to comply with such an exemption from registration, the
certificates for Shares issued under the Plan, may, at the direction of the
Committee, bear an appropriate restrictive legend restricting the transfer or
pledge of the Shares represented thereby, and the Committee may also give
appropriate stop-transfer instructions to the transfer agent of the Company.
F. Any person exercising an Option or transferring or receiving
Shares shall comply with all regulations and requirements of any governmental
authority having jurisdiction over the issuance, transfer or sale of securities
of the Company or over the extension of credit for the purposes of purchasing or
carrying any margin securities, or the requirements of any stock exchange on
which the Shares may be listed, and as a condition to receiving any Shares,
shall execute all such instruments as the Committee in its sole discretion may
deem necessary or advisable.
G. Each Option shall be subject to the requirement that if the
Committee shall determine that the listing, registration or qualification of the
Shares subject to such Option upon any securities exchange or under any state or
Federal law, or the consent or approval of any governmental or regulatory body,
is necessary or desirable as a condition of, or in connection with, the granting
of such Option or the issuance or purchase of Shares thereunder, such Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effective or obtained free of
any conditions not acceptable to the Committee.
5
<PAGE>
9. Effect of Termination of Directorship or Death
A. In the event of termination of a Grantee's status as a Director
by reason of such Grantee's death or disability, any outstanding Option held by
such Grantee shall, notwithstanding the extent to which such Option was
exercisable prior to such termination, immediately become exercisable as to the
total number of Shares purchasable thereunder. Any such Option shall remain so
exercisable at any time prior to its expiration date or, if earlier, only until
the first anniversary of termination of the Grantee's status as a Director.
B. In the event of termination of a Grantee's status as a Director
for any reason other than death or disability, any outstanding Option held by
such Grantee shall remain exercisable at any time prior to the expiration date
of such Option absent termination of Director status or, if earlier, only until
the date thirty days after the termination of Director status; provided,
however, that if such termination of Director status (other than by resignation)
occurs within one year after a Change of Control, any outstanding Option held by
such Grantee shall remain exercisable at any time prior to the expiration date
of such Option absent such termination of Director status; and provided,
further, however, that the Board may permit any outstanding Option to remain
exercisable at any time prior to the expiration date of such Option absent such
termination of Director status to the extent that such Option is or was vested
as the date of termination of a Grantee's status as a Director for any reason
other than death or disability.
C. Whether an authorized leave of absence or absence in military or
government service shall constitute termination of status as a Director shall be
determined by the Committee.
10. No Special Rights
Nothing contained in the Plan or in any Option shall confer upon any
Grantee any right with respect to the continuation of his or her status as a
Director or interfere in any way with the right of the Company at any time to
terminate such status or to increase or decrease the compensation of the Grantee
from the rate in existence at the time of the grant of an Option.
11. Rights as a Shareholder
The Grantee of an Option shall have no rights as a shareholder with
respect to any Shares covered by an Option until the date of issuance of a
certificate to him for such Shares. Except as otherwise expressly provided in
the Plan, no adjustment shall be made for dividends or other rights for which
the record date occurs prior to the date of issuance of such certificate.
6
<PAGE>
12. Anti-dilution Provision
A. In case the Company shall (i) declare a dividend or dividends on
its Shares payable in shares of its capital stock, (ii) subdivide its
outstanding Shares, (iii) combine its outstanding Shares into a smaller number
of Shares, or (iv) issue any shares of capital stock by reclassification of its
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), the number of
Shares authorized under the Plan will be adjusted proportionately. Similarly, in
any such event, there will be a proportionate adjustment in the number of Shares
subject to unexercised Options (but without adjustment to the aggregate option
price).
B. The Committee may provide, either before or at or about the time
of the occurrence of a Change of Control, in any outstanding or newly issued
Option that a Grantee's right to exercise any such Option shall accelerate as a
consequence of or in connection with a Change of Control.
13. Amendment of the Plan
The Board may at any time and from time to time terminate or modify
or amend the Plan in any respect, except that
(1) without shareholder approval, the Board may not (a) materially
increase the number of securities which may be issued under the Plan or (b)
materially modify the requirements as to eligibility for participation under the
Plan; and
(2) the Plan provisions governing the amounts and purchase prices of
Shares and the requirements as to eligibility for participation may not be
amended more than once every six (6) months, other than to comport with changes
in the Internal Revenue Code or the rules thereunder.
The termination or modification or amendment of the Plan shall not, without the
consent of a Grantee, affect his rights under an Option previously granted to
him or her.
14. Miscellaneous
A. It is expressly understood that this Plan grants powers to the
Committee but does not require their exercise; nor shall any rights begin to
accrue under the Plan except as Options may be granted hereunder.
B. All expenses of the Plan, including the cost of maintaining
records, shall be borne by the Company.
15. Governing Law
This Plan and all rights hereunder shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
7
EXHIBIT 10.3
ELCOTEL, INC.
1999 STOCK OPTION PLAN
1. Definitions
As used in this Plan, the following definitions apply to the terms
indicated below:
1. "Board" means the Board of Directors of the Company.
2. "Change of Control" means the occurrence of any one or more of
the following events: (i) if any transaction occurs whereby substantially all of
the assets of the Company are transferred, exchanged or sold to a non-affiliated
third party other than in the ordinary course of business; (ii) if a merger or
consolidation involving the Company occurs and the stockholders of the Company
immediately before such merger or consolidation do not own immediately after
such merger or consolidation at least fifty percent (50%) of the outstanding
common stock of the surviving entity or the entity into which the common stock
of the Company is converted; or (iii) if any person (including without
limitation any individual, partnership or corporation), other than Fundamental
Management Corporation and its affiliates or other than Wexford Management LLC
and its affiliates, becomes the owner, directly or indirectly, of securities of
the Company or its successor (or a parent company thereof) representing
thirty-five percent (35%) or more of the combined voting power of the Company's
or its successor's (or a parent's, as the case may be) securities then
outstanding.
3. "Committee" means the Compensation and Stock Option Committee
appointed by the Board from time to time to administer the Plan. The Committee
shall consist of at least two persons, who shall be directors of the Company
and, while the Company has any class of equity securities registered pursuant to
the Securities Exchange Act of 1934 (the "Exchange Act"), who shall satisfy the
requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission
under the Exchange Act, or any successor rule or regulation adopted by the
Securities and Exchange Commission which exempts certain transactions from
Section 16(b) of the Exchange Act.
4. "Company" means Elcotel, Inc., a Delaware corporation.
5. "Fair Market Value" of a Share on a given day means: (i) if the
Shares are listed or admitted to trading on a national securities exchange or
the National Association of Securities Dealers Automated Quotation System
National Market System ("NMS"), then the closing sale price on such exchange or
NMS on such date, or, if no trading occurred on such date, then on the closest
preceding date on which the Shares were traded; (ii) if the Shares are not so
listed or admitted but are reported by the National Association of Securities
Dealers Automated Quotation System, the mean between the highest asked price and
the lowest bid price, as reported on the National Association of Securities
Dealers Automated Quotation System on such date; or (iii) if the
<PAGE>
Shares are not so listed or admitted, the Fair Market Value shall be determined
by the Committee taking into account all relevant facts and circumstances.
6. "Grantee" means a person to whom an Option is granted under this
Plan.
7. "Option" means a right to purchase Shares under the terms and
conditions of this Plan as evidenced by an option certificate or agreement for
Shares in such form, not inconsistent with this Plan, as the Committee may adopt
for general use or for specific cases from time to time.
8. "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the Company) owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in the chain.
9. "Plan" means this Elcotel, Inc. 1999 Stock Option Plan, including
any amendments to the Plan.
10. "Share" means a share of the Company's common stock, par value
$.01 per share.
11. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the last corporation in the chain) owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.
12. Options shall be deemed "granted" under this Plan on the date on
which the Committee, by appropriate action, approves the grant of an Option
hereunder or on such subsequent date as the Committee may designate.
13. As used herein, the masculine includes the feminine, the plural
includes the singular, and the singular includes the plural.
2. Purpose
The purposes of the Plan are as follows.
1. To secure for the Company and its stockholders the benefits
arising from share ownership by those senior executive officers of the Company
and its Subsidiaries who will be responsible for the Company's future growth and
continued success. The Plan is intended to provide an incentive to senior
executive officers by providing them with an opportunity to acquire an equity
interest or increase an existing equity interest in the Company, thereby
increasing their personal stake in its continued success and progress.
2
<PAGE>
2. To enable the Company and its Subsidiaries to obtain and retain
the services of senior executive officers, by providing such senior executive
officers with an opportunity to acquire Shares under the terms and conditions
and in the manner contemplated by this Plan.
3. Plan Adoption and Term
1. This Plan shall become effective upon its adoption by the Board,
and Options may be issued upon such adoption and from time to time thereafter.
2. Subject to the provisions hereinafter contained relating to
amendment or discontinuance, this Plan shall continue to be in effect for five
(5) years from the date of adoption of this Plan by the Board. No Options may be
granted hereunder except within such period of five (5) years.
4. Administration of Plan
1. This Plan shall be administered by the Committee. Except as
otherwise expressly provided in this Plan, the Committee shall have authority to
interpret the provisions of the Plan, to construe the terms of any Option, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of Options granted hereunder, and to make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan. Without limiting the foregoing, the Committee
shall, to the extent and in the manner contemplated herein, exercise the
discretion granted to it to determine to whom Options shall be granted, how many
Shares shall be subject to each such Option, whether a Grantee shall be required
to surrender for cancellation an outstanding Option as a condition to the grant
of a new Option, and the prices at which Shares shall be sold to Grantees. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option in the manner and to the extent it
shall deem expedient to carry the Plan into effect and shall be the sole and
final judge of such expediency.
2. No member of the Committee shall be liable for any action taken
or omitted or any determination made by him in good faith relating to the Plan,
and the Company shall indemnify and hold harmless each member of the Committee
and each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Committee) arising
out of any act or omission in connection with the Plan, unless arising out of
such person's own fault or bad faith.
3. Any power granted to the Committee either in this Plan or by the
Board, may at any time be exercised by the Board, and any determination by the
Committee shall be subject to review and approval or reversal or modification by
the Board.
3
<PAGE>
5. Eligibility
Senior executive officers of the Company and its Subsidiaries shall
be eligible for selection by the Committee to be granted Options. A senior
executive officer who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options if the Committee shall so
determine.
6. Options
1. Subject to adjustment as provided in Paragraph 13 hereof, Options
may be granted pursuant to the Plan for the purchase of not more than 539,988
Shares; provided, however, that if prior to the termination of the Plan, an
Option shall expire or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be available for the
purposes of the Plan. Options to purchase not more than 539,988 Shares may be
granted to one Grantee.
2. All Options granted under this Plan shall be non-qualified
options.
7. Option Price
The purchase price per Share deliverable upon the exercise of an
Option shall be determined by the Committee.
8. Duration of Options
Each Option and all rights thereunder shall expire and the Option
shall no longer be exercisable on that date five (5) years from the date on
which the Option was granted. Options may expire and cease to be exercisable on
such earlier date as the Committee may determine at the time of grant. Options
shall be subject to termination before their expiration date as provided herein.
9. Conditions Relating to Exercise of Options
1. The Shares subject to any Option may be purchased at any time
during the term of the Option, unless, at the time an Option is granted, the
Committee shall have fixed a specific period or periods in which exercise must
take place. To the extent an Option is not exercised when it becomes initially
exercisable, or is exercised only in part, the Option or remaining part thereof
shall not expire but shall be carried forward and shall be exercisable until the
expiration or termination of the Option. Partial exercise as to whole Shares is
permitted from time to time, provided that no partial exercise of an Option
shall be for a number of Shares having a purchase price of less than $100.
2. No Option shall be transferable by the Grantee thereof other than
by will or by the laws of descent and distribution, and Options shall be
exercisable during the lifetime of a Grantee only by such Grantee or by his or
her guardian or legal representative.
4
<PAGE>
3. Certificates for Shares purchased upon exercise of Options shall
be issued either in the name of the Grantee or in the name of the Grantee and
another person jointly with the right of survivorship. Such certificates shall
be delivered as soon as practical following the date the Option is exercised.
4. An Option shall be exercised by the delivery to the Company at
its principal office, to the attention of its Secretary, of written notice of
the number of Shares with respect to which the Option is being exercised, and of
the name or names in which the certificate for the Shares is to be issued, and
by paying the purchase price for the Shares. The purchase price shall be paid in
cash or by certified check or bank cashier's check. Alternatively, the purchase
price may be paid by delivering to the Company:
(1) Shares (in proper form for transfer and accompanied by all
requisite stock transfer tax stamps or cash in lieu thereof) owned by the
Grantee having a Fair Market Value equal to the purchase price; or
(2) a notarized statement attesting to ownership of the number
of Shares which are intended to be used at Fair Market Value to pay the purchase
price, with the certificate number(s) thereof, and requesting that only the
incremental number of Shares as to which the Option is being exercised be issued
by the Company.
5. Notwithstanding any other provision in this Plan, no Option may
be exercised unless and until the Shares to be issued upon the exercise thereof
have been registered under the Securities Act of 1933 and applicable state
securities laws, or are, in the opinion of counsel to the Company, exempt from
such registration. The Company shall not be under any obligation to register
under applicable Federal or state securities laws any Shares to be issued upon
the exercise of an Option granted hereunder, or to comply with an appropriate
exemption from registration under such laws in order to permit the exercise of
an Option or the issuance and sale of Shares subject to such Option. If the
Company chooses to comply with such an exemption from registration, the
certificates for Shares issued under the Plan, may, at the direction of the
Committee, bear an appropriate restrictive legend restricting the transfer or
pledge of the Shares represented thereby, and the Committee may also give
appropriate stop-transfer instructions to the transfer agent of the Company.
6. Any person exercising an Option or transferring or receiving
Shares shall comply with all regulations and requirements of any governmental
authority having jurisdiction over the issuance, transfer or sale of securities
of the Company or over the extension of credit for the purposes of purchasing or
carrying any margin securities, or the requirements of any stock exchange on
which the Shares may be listed, and as a condition to receiving any Shares,
shall execute all such instruments as the Committee in its sole discretion may
deem necessary or advisable.
7. Each Option shall be subject to the requirement that if the
Committee shall determine that the listing, registration or qualification of the
Shares subject to such Option upon any securities exchange or under any state or
Federal law, or the consent or approval of any governmental or regulatory body,
is necessary or desirable as a condition of, or in connection with, the granting
of such Option or the issuance or purchase of Shares thereunder, such Option may
not be exercised in
5
<PAGE>
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effective or obtained free of any conditions not
acceptable to the Committee.
10. Effect of Termination of Employment
1. In the event a Grantee's employment is (i) terminated by the
Company For Cause (as defined in any employment agreement between the Company
and the Grantee), or (ii) terminated by the Grantee for any reason, the Options
shall cease vesting as of the date that the Company or the Grantee provides
notice of such termination, and any unvested Options as of such date shall
immediately terminate and become void.
2. In the event the Grantee's employment is terminated by the
Company other than for Cause (as defined in any employment agreement between the
Company and the Grantee), any Options held by the Grantee that would have
vested, if the Grantee's employment had not been terminated, during the (12)
twelve months after such termination or such lesser period through the end of
the term of any employment agreement between the Grantee and the Company shall
immediately vest.
3. Whether an authorized leave of absence or absence in military or
government service shall constitute termination of employment shall be
determined by the Committee. Transfer of employment between the Company and a
Subsidiary corporation or between one Subsidiary corporation and another shall
not constitute termination of employment.
11. No Special Employment Rights
Nothing contained in the Plan or in any Option shall confer upon any
Grantee any right with respect to the continuation of his or her employment by
the Company or a Subsidiary or interfere in any way with the right of the
Company or a Subsidiary, subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Grantee from the rate in existence
at the time of the grant of an Option.
12. Rights as a Stockholder
The Grantee of an Option shall have no rights as a stockholder with
respect to any Shares covered by an Option until the date of issuance of a
certificate to him for such Shares. Except as otherwise expressly provided in
the Plan, no adjustment shall be made for dividends or other rights for which
the record date occurs prior to the date of issuance of such certificate.
6
<PAGE>
13. Anti-dilution Provision
1. In case the Company shall, by stock dividend, stock split,
combination, reclassification or exchange, or through merger, consolidation or
otherwise, change its shares of Common Stock into a different number, kind or
class of shares or other securities or property, then the Board shall arrange
for the successor or surviving corporation, if any, to grant replacement
options, or to adjust appropriately the number of shares covered by the Options
and the price of each share. The determination of the Board shall be conclusive.
2. Upon the occurrence of a Change of Control, all unvested Options
shall become immediately exercisable in their entirety.
14. Withholding Taxes
Whenever an Option is to be exercised under the Plan, the Company
shall have the right to require the Grantee, as a condition of exercise of the
Option, to remit to the Company an amount sufficient to satisfy the Company's
(or a Subsidiary's) Federal, state and local withholding tax obligation, if any,
that will, in the sole opinion of the Committee, result from the exercise. In
addition, the Company shall have the right, at the sole discretion of the
Committee, to satisfy any such withholding tax obligation by retention of Shares
issuable upon such exercise having a Fair Market Value on the date of exercise
equal to the amount to be withheld.
15. Amendment of the Plan
The Board may at any time and from time to time terminate or modify
or amend the Plan in any respect except to the extent that stockholder approval
of such amendment is required by applicable law or the rules of any national
securities exchange or any automated quotation system. The termination or
modification or amendment of the Plan shall not, without the consent of a
Grantee, affect his rights under an Option previously granted to him or her.
With the consent of the Grantee, the Board may amend outstanding Options in a
manner not inconsistent with the Plan.
16. Miscellaneous
1. It is expressly understood that this Plan grants powers to the
Committee but does not require their exercise; nor shall any person, by reason
of the adoption of this Plan, be deemed to be entitled to the grant of any
Option; nor shall any rights begin to accrue under the Plan except as Options
may be granted hereunder.
2. All expenses of the Plan, including the cost of maintaining
records, shall be borne by Company.
17. Governing Law
This Plan and all rights hereunder shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS
ENDED DECEMBER 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> 3-Mos
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-START> Oct-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 1,050
<SECURITIES> 0
<RECEIVABLES> 11,625
<ALLOWANCES> 1,338
<INVENTORY> 9,706
<CURRENT-ASSETS> 24,495
<PP&E> 11,047
<DEPRECIATION> 5,261
<TOTAL-ASSETS> 67,847
<CURRENT-LIABILITIES> 20,954
<BONDS> 48
0
0
<COMMON> 136
<OTHER-SE> 46,709
<TOTAL-LIABILITY-AND-EQUITY> 67,847
<SALES> 27,284
<TOTAL-REVENUES> 38,878
<CGS> 19,735
<TOTAL-COSTS> 28,748
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 373
<INTEREST-EXPENSE> 458
<INCOME-PRETAX> (2,337)
<INCOME-TAX> (853)
<INCOME-CONTINUING> (1,484)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,484)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
