-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P1uWhGrjUNjHx8IezWB7A2dyFtvh4RH2YUMDByH6OFmZfbflUpXW7FQ2L8zBzGrD Ngu9BdkPGqh+4GK9TKNBvA== 0000801448-99-000001.txt : 19990217 0000801448-99-000001.hdr.sgml : 19990217 ACCESSION NUMBER: 0000801448-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELCOTEL INC CENTRAL INDEX KEY: 0000801448 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 592518405 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15205 FILM NUMBER: 99540385 BUSINESS ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9417580389 MAIL ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 10-Q 1 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, 1998 Commission File No. 0-15205 ELCOTEL, INC. (Exact name of registrant as specified in its charter) Delaware 59-2518405 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6428 Parkland Drive, Sarasota, Florida 34243 (Address of principal executive offices) (Zip Code) (941) 758-0389 (Registrant's telephone number, including area code) 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 --- --- The number of shares of the issuer's Common Stock outstanding as of February 8, 1999 was 13,539,880. ELCOTEL, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at December 31, 1998 (unaudited) and March 31, 1998 3 Unaudited Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 1998 and 1997 4 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ELCOTEL, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts )
December 31, March 31, 1998 1998 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 64 $ 1,655 Accounts and notes receivable, less allowance for doubtful accounts of $1,842 and $1,923 12,841 11,407 Inventories 15,635 9,088 Refundable income taxes 735 809 Deferred tax asset 3,732 4,141 Prepaid expenses and other current assets 1,322 1,024 ---------- ---------- Total current assets 34,329 28,124 Property, plant and equipment, net 5,079 4,779 Notes receivable, less allowance for doubtful accounts of $387 and $487 515 346 Goodwill, net of accumulated amortization of $687 and $190 23,409 23,906 Identified intangible assets, less accumulated amortization of $1,485 and $498 9,210 10,203 Other assets 387 80 ---------- ---------- $ 72,979 $ 67,438 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,548 $ 3,210 Accrued liabilities 3,783 4,609 Current portion of mortgage note payable 73 68 ---------- ---------- Total current liabilities 11,404 7,887 Borrowings under revolving credit agreement 7,792 7,645 Long-term portion of mortgage note payable 1,770 1,831 Deferred tax liability 151 415 ---------- ---------- 21,117 17,778 ---------- ---------- Commitments and contingencies -- -- Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized, 13,539,130 and 13,416,850 shares issued and outstanding 135 134 Additional paid-in capital 46,654 46,384 Retained earnings 5,200 3,319 Less - cost of 52,000 shares of common stock in treasury (177) (177) ---------- ---------- Total stockholders' equity 51,812 49,660 ---------- ---------- $ 72,929 $ 67,438 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
3 ELCOTEL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Three Months Ended Nine Months Ended December 31, December 31, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net sales $ 16,829 $ 13,592 $ 51,303 $ 27,975 -------- -------- -------- -------- Costs and expenses: Cost of goods sold 11,320 8,565 33,905 16,578 Selling, general and administrative expenses 2,255 2,481 8,020 6,200 Engineering, research and development expenses 1,312 1,253 4,424 2,795 Amortization 528 133 1,531 145 Interest expense (income) 207 61 432 (62) -------- -------- -------- -------- 15,622 12,493 48,312 25,656 -------- -------- -------- -------- Income before income tax expense 1,237 1,099 2,991 2,319 Income tax expense (458) (390) (1,110) (817) -------- -------- -------- -------- Net income $ 779 $ 709 $ 1,881 $ 1,502 ======== ======== ======== ======== Earnings per common and common equivalent share: Basic $ 0.06 $ 0.08 $ 0.14 $ 0.18 ======== ======== ======== ======== Diluted $ 0.06 $ 0.08 $ 0.14 $ 0.17 ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 13,474 8,932 13,445 8,433 ======== ======== ======== ======== Diluted 13,797 9,401 13,794 8,693 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
4 ELCOTEL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended December 31, ---------------------- 1998 1997 --------- --------- Cash flows from operating activities Net income $ 1,881 $ 1,502 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 2,359 567 Provision for doubtful accounts receivable 48 108 Deferred tax expense (benefit) 145 42 Changes in operating assets and liabilities, net of acquisition of Technolgy Service Group, Inc.: (Increase) in accounts and notes receivable (1,651) (7,031) (Increase) in inventories (6,547) (2,947) Decrease in refundable income taxes 74 474 (Increase) in prepaid expenses and other current assets (298) (274) (Increase) in other indentifiable intangibles (41) (1,820) (Increase) decrease in other assets (307) 3 Increase (decrease) in accounts payable 4,338 (454) Increase (decrease) in accrued liabilities (826) 1,330 --------- --------- Net cash used for operating activities (825) (8,500) --------- --------- Cash flows from investing activities Capital expenditures (1,128) (1,104) Net cash used for acquisition of Technology Service Group, Inc. (428) --------- --------- Net cash used for investing activities (1,128) (1,532) --------- --------- Cash flows from financing activities Net proceeds (payments) under revolving credit agreement and refinanced debt agreements 147 7,790 Mortgage note net proceeds (payments) (56) 1,484 Proceeds from exercise of common stock options 271 60 --------- --------- Net cash provided by financing activities 362 9,334 --------- --------- Decrease in cash and cash equivalents (1,591) (698) Cash and cash equivalents, beginning of period 1,655 1,009 --------- --------- Cash and cash equivalents, end of period $ 64 $ 311 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
5 ELCOTEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 1. GENERAL The accompanying consolidated balance sheet at March 31, 1998 has been derived from the audited consolidated financial statements of Elcotel, Inc. (the "Company") included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. The accompanying unaudited consolidated balance sheet at December 31, 1998, unaudited consolidated statements of operations for the three months and nine months ended December 31, 1998 and 1997 and the unaudited consolidated statements of cash flows for the nine months ended December 31, 1998 and 1997 have been derived from the Company's books and records without audit and prepared in accordance with instructions to Form 10-Q. Accordingly, the financial information does not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals and adjustments, necessary for a fair presentation of the financial position of the Company at December 31, 1998 and its operations and its cash flows for the three months and nine months ended December 31, 1998 and 1997 have been made. For further information, refer to 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, 1998. Certain reclassifications have been made to prior year balances in order to conform with current year presentation. The results of operations for the three months and nine months ended December 31, 1998 are not necessarily indicative of the results for the full fiscal year ending March 31, 1999. 2. ACQUISITIONS On December 18, 1997, the Company acquired Technology Service Group, Inc. ("TSG") pursuant to a merger for a total purchase price of $35,605. On September 30, 1997, the Company acquired from Lucent Technologies Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing and component parts business (the "Lucent Assets") for a total purchase price of $5,821. These acquisitions have been accounted for as purchases and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The operating results are reflected in the Company's consolidated statement of operations from the respective acquisition dates. Summarized below are the Company's consolidated results of operations on an unaudited pro forma basis for the three months and nine months ended December 31, 1997 assuming these transactions had occurred on April 1, 1997. Three Months Nine Months Ended Ended December 31, December 31, 1997 1997 ------------ ------------ Net sales $ 20,595 $ 47,699 ============ ============ Net loss $ (301) $ (14) ============ ============ Basic loss per share $ (.02) $ - ============ ============ Diluted loss per share $ (.02) $ - ============ ============ 6 The above amounts are based on certain assumptions and estimates which the Company believes are reasonable, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent the consolidated results of operations that would have occurred if the transactions had, in fact, taken place on April 1, 1997, nor are they indicative of the consolidated results of operations for any future period. The pro forma results of operations for the three months ended December 31, 1997 include the unaudited operating results of TSG from September 27, 1997 to the acquisition date after giving effect to certain pro forma adjustments, including amortization of goodwill and identified intangible assets acquired, depreciation and related income tax effects. The pro forma results of operations for the nine months ended December 31, 1997 include the operating results of TSG from March 29, 1997 to the acquisition date after giving effect to certain pro forma adjustments, including amortization of goodwill and identified intangible assets acquired, depreciation and related income tax effects, and give effect to certain pro forma adjustments related to the acquisition of the Lucent Assets, including amortization of identified intangible assets acquired, depreciation, interest expense on the acquisition debt and related income tax effects. 3. INVENTORIES Inventories at December 31, 1998 and March 31, 1998 are comprised of the following: December 31, March 31, 1998 1998 ------------ ------------ Finished products $ 989 $ 1,383 Work-in-process 2,189 1,545 Purchased components 12,457 6,160 ------------ ------------ $ 15,635 $ 9,088 ============ ============ 4. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the nine months ended December 31, 1998 are summarized as follows: Additional Common Paid-In Retained Treasury Stock Capital Earnings Stock Total ----- ------- -------- -------- ------- Balance at March 31, 1998 $134 $46,384 $3,319 ($177) $49,660 Issuance of 122,280 shares upon exercise of common stock options at prices between $.95 and $5.25 per share 1 270 271 Net income for the period 1,881 1,881 ---- ------- ------ ----- ------- Balance at September 30, 1998 $135 $46,654 $5,200 ($177) $51,812 ==== ======= ====== ===== ======= 7 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business during a period from transactions and events and circumstances from non-owner sources, and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company has no items of comprehensive income for the periods ended December 31, 1998 and 1997; therefore, statements of comprehensive income for such periods are not presented in the accompanying consolidated financial statements. 5. EARNINGS PER SHARE Earnings per common share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128") adopted by the Company during the three months ended December 31, 1997. SFAS 128 requires disclosure of basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings 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 following table represents the computation of basic and diluted earnings per common share as required by SFAS 128. Three months ended Nine months ended December 31, December 31, -------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic earnings per share computation: Net income applicable to common shares $ 779 $ 709 $1,881 $1,502 ------ ------ ------ ------ Weighted average number of common shares outstanding 13,474 8,932 13,445 8,433 ------ ------ ------ ------ Basic earnings per common share $ 0.06 $ 0.08 $ 0.14 $ 0.18 ====== ====== ====== ====== Diluted earnings per share computation: Net income applicable to common shares $ 779 $ 709 $1,881 $1,502 ------ ------ ------ ------ Weighted average number of common shares outstanding 13,474 8,932 13,445 8,433 Weighted average of common stock equivalents outstanding 999 999 918 664 Common shares acquired with proceeds from assumed exercise of common stock equivalents (676) (530) (569) (404) ------ ------ ------ ------ Weighted average of common and common equivalent shares outstanding 13,797 9,401 13,794 8,693 ------ ------ ------ ------ Diluted earnings per common share $ 0.06 $0.08 $0.14 $0.17 ====== ====== ====== ====== 8 6. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the nine months ended December 31, 1998 and 1997 consists of the following: Nine Months Ended ------------------------------ December 31, December 31, 1998 1997 ------------ ------------ Interest paid $ 666 $ 200 Income taxes paid 867 490 Acquisition of Technology Service Group, Inc.: Accounts and notes receivable - 3,703 Inventories - 6,490 Refundable income taxes - 469 Deferred tax asset, current - 3,446 Prepaid expenses and other current assets - 12 Property, plant and equipment - 782 Goodwill - 23,225 Identified intangible assets - 7,530 Other assets - 29 Accounts payable - (3,448) Acquisition costs payable - (325) Accrued expenses - (1,544) Borrowing under lines of credit - (3,970) Deferred tax liability, non current - (1,358) Common stock - (50) Additional paid-in capital - (34,991) 7. COMMITMENTS AND CONTINGENCIES Pursuant to the terms of a license agreement dated October 29, 1992 relating to certain software covered by a patent application, TSG agreed to pay license fees aggregating $200,000 in four annual installments of $50,000 each, commencing on the date of issuance of a patent with respect to the software licensed pursuant to the agreement. The license agreement also requires the payment of royalties with respect to sales of products incorporating the licensed software, which increase commencing on the date of issuance of the patent. TSG has not sold any products incorporating the licensed software and has not paid any royalties under the license agreement. In addition, upon issuance of the patent, the license agreement requires the payment of minimum royalties ranging between $125,000 and $500,000 annually in order to maintain exclusivity of the license. During the three months ended December 31, 1998, the licensor notified TSG that a patent with respect to the licensed software had been issued. The Company has notified the licensor that the Company believes the patent is invalid and thus is not obligated to pay license fees or royalties under the terms of the license agreement. Accordingly, the Company has not recorded any liability with respect to the license agreement in the accompanying unaudited consolidated financial statements. Should the licensor seek to require TSG to pay any amounts under the license agreement, the Company intends to defend its position vigorously. The Company believes the ultimate outcome of this matter will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts, except per share data, in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are stated in thousands. Forward Looking Statements This report contains certain forward looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those expected by the Company, including the risk of adverse regulatory action affecting the Company's business or the business of the Company's customers, the integration of operations acquired in fiscal 1998, competition, the risk of obsolescence of the Company's products, changes in the international business climate, general economic conditions, seasonality, changes in industry practices, the outcome of litigation, and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. Results of Operations On December 18, 1997, the Company acquired Technology Service Group, Inc. ("TSG") pursuant to a merger for a total purchase price of $35,605, and on September 30, 1997, the Company acquired from Lucent Technologies Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing and component parts business (the "Lucent Assets") for a total purchase price of $5,821 (the "fiscal 1998 acquisitions"). The accompanying unaudited consolidated statements of operations for the three months and nine months ended December 31, 1998 reflect the operating results of TSG and the operating results from the Lucent Assets. The accompanying unaudited consolidated statements of operations for the three months and nine months ended December 31, 1997 reflect the operating results of TSG and the operating results from the Lucent Assets from the respective dates of acquisition. For the three months ended December 31, 1998, net income increased by 10%, to $779 ($.06 per diluted share) from $709 ($.08 per diluted share) for the corresponding period of fiscal 1998. For the nine months ended December 31, 1998, net income increased by 25%, to $1881 ($.14 per diluted share) from $1,502 ($.17 per diluted share) for the corresponding period of fiscal 1998. These results for the three months and nine months ended December 31, 1998 reflect increases in sales of 24% and 83%, respectively, versus increases in cost of goods sold of 32% and 105%, respectively, and lower operating expenses in relation to sales, as compared to the corresponding periods of fiscal 1998. In addition, these results were influenced by the effects of the fiscal 1998 acquisitions. Earnings before interest, taxes, depreciation and amortization increased by 51% to $2,279 for the three months ended December 31, 1998 from $1,508 for the three months ended December 31, 1997, and by 105% to $5,782 for the nine months ended December 31, 1998 from $2,824 for the nine months ended December 31, 1997. 10 Three Months Ended December 31, 1998 Compared to the Three Months Ended December 31, 1997 The following table shows certain line items in the Company's unaudited consolidated statements of operations for the three months ended December 31, 1998 and 1997 that are discussed below together with amounts expressed as a percentage of sales and with the change in the line item from period to period expressed as a percentage increase or (decrease). Three Three Months Months Ended Percent Ended Percent Percentage December 31, of December 31, of Increase 1998 Sales 1997 Sales (Decrease) ------------ ------- ------------ ------- ---------- Net sales $ 16,859 100% $ 13,592 100% 24% Cost of goods sold 11,320 67 8,565 63 32 Selling, general and administrative expenses 2,255 13 2,481 18 (9) Engineering, research and development expenses 1,312 8 1,253 9 5 Amortization 528 3 133 1 297 Interest expense 207 1 61 1 239 Income tax expense 458 3 390 3 17 Net sales for the three months ended December 31, 1998 increased by $3,267, or 24%, over the comparable period of fiscal 1998. Sales to independent private payphone operators ("IPPs") increased by $2,116, or approximately 48%, from $4,386 for the three months ended December 31, 1997 ("third quarter of fiscal 1998") to $6,502 for the three months ended December 31, 1998 ("third quarter of fiscal 1999") primarily due to an increase in volume. The Company believes the increase in sales volume in the IPP market is related to the increased dial around compensation to payphone operators resulting from the Telecommunications Act of 1996. Sales to telephone companies increased by $1,855, or approximately 31%, from $6,026 for the third quarter of fiscal 1998 to $7,881 for the third quarter of fiscal 1999 as a result of the acquisition of TSG on December 18, 1997. International sales decreased by $331, or approximately 13%, from $2,633, for the third quarter of fiscal 1998 to $2,302 for the third quarter of fiscal 1999 primarily due to a reduction in volume. Revenues from other miscellaneous sources decreased by $373, or approximately 68%, from $547 for the third quarter of fiscal 1998 to $174 for the third quarter of fiscal 1999. Sales to IPPs, telephone companies and international customers accounted for approximately 38%, 47% and 14%, respectively, of net sales for the third quarter of 1999 as compared to approximately 32%, 44% and 20%, respectively, for the third quarter of fiscal 1998. Revenues from other revenue sources accounted for approximately 1% of net sales for the third quarter of 1999 as compared to approximately 4% for the third quarter of fiscal 1998. Cost of sales as a percentage of net sales increased to 67% for the third quarter of fiscal 1999 from 63% for the third quarter of fiscal 1998 as a result of several factors, including promotions and increased price discounts, the introduction of the Company's new product, the "Eclipse payphone," at initial margins lower than the Company's other payphone products, manufacturing variances and increased sales to telephone companies at margins lower than those traditionally experienced in the IPP market. The Company is in the process of implementing programs to reduce the cost of its Eclipse payphone and other products. 11 Selling, general and administrative expenses for the third quarter of fiscal 1999 decreased by $226, or approximately 9% and represented 13% of sales versus 18% of sales for the same period of fiscal 1998. The decrease is principally attributable to a decrease in the Company's allowance for doubtful accounts as a result of the collection of certain international accounts, a decrease in accrued incentive based compensation and a restructuring of certain selling and marketing activities, partially offset by an increase in sales commissions attributable to the increased sales and a full quarter of expenses in fiscal 1999 related to the TSG acquisition as compared to a partial quarter in fiscal 1998. Engineering, research and development expenses for the third quarter of fiscal 1999 increased by $59, or approximately 5%, and represented 8% of sales as compared to 9% of sales for the third quarter of fiscal 1998. The increase is primarily due to the acquisition of TSG, partially offset by cost reductions from the integration of TSG's research and development activities with those of the Company. In addition, the Company capitalized $157 of software development costs during the third quarter of fiscal 1999. Amortization expense for the third quarter of fiscal 1999 increased by $395 to 3% of sales versus 1% of sales for the same period of fiscal 1998. The increase is attributable to amortization of goodwill and identifiable intangible assets recorded in connection with the acquisition of TSG for an entire quarter as compared to a partial quarter in fiscal 1998. The increase in net interest expense of $146 is attributable to an increase in average outstanding indebtedness as a result of the fiscal 1998 acquisitions, an increase in working capital of $2,688, and capital additions of $1,128. The effective tax rate increased from 35% for the third quarter of fiscal 1998 to 37% for the third quarter of fiscal 1999 due primarily to non deductible amortization of goodwill in connection with the TSG acquisition offset by expected research and development tax credits. 12 Nine Months Ended December 31, 1998 Compared to the Nine Months Ended December 31, 1997 The following table shows certain line items in the Company's unaudited consolidated statements of operations for the nine months ended December 31, 1998 and 1997 that are discussed below together with amounts expressed as a percentage of sales and with the change in the line item from period to period expressed as a percentage increase or (decrease). Nine Nine Months Months Ended Percent Ended Percent Percentage December 31, of December 31, of Increase 1998 Sales 1997 Sales (Decrease) ------------ ------- ------------ ------- ---------- Net sales $ 51,303 100% $ 27,975 100% 83% Cost of goods sold 33,905 66 16,578 59 105 Selling, general and administrative expenses 8,020 16 6,200 22 29 Engineering, research and development expenses 4,424 9 2,795 10 58 Amortization 1,531 3 145 1 955 Interest expense 432 1 (62) -- 797 Income tax expense 1,110 2 817 3 36 Net sales for the nine months ended December 31, 1998 increased by $23,328, or 83%, over the comparable period of fiscal 1998. Sales to independent private payphone operators ("IPPs") increased by $4,179, or approximately 29%, from $14,409 for the nine months ended December 31, 1997 ("first nine months of fiscal 1998") to $18,588 for the nine months ended December 31, 1998 ("first nine months of fiscal 1999") primarily due to an increase in volume. Sales to telephone companies increased by $19,390, or approximately 273%, from $7,101 for the first nine months of fiscal 1998 to $26,491 for the first nine months of fiscal 1999 primarily due to the fiscal 1998 acquisitions. International sales increased by $243, or approximately 5%, from $5,219 for the first nine months of fiscal 1998 to $5,462 for the first nine months of fiscal 1999 primarily due to an increase in volume. Revenues from other miscellaneous sources decreased by $484, or approximately 39%, from $1,246 for the first nine months of fiscal 1998 to $762 for the first nine months of fiscal 1999. Sales to IPPs, telephone companies and international customers accounted for approximately 36%, 52% and 11%, respectively, of net sales for the first nine months of fiscal 1999 as compared to approximately 52%, 25% and 19%, respectively, for the first nine months of fiscal 1998. Cost of sales as a percentage of net sales increased to 66% for the first nine months of 1999 from 59% for the first nine months of 1998 primarily as a result of the increased sales to telephone companies at margins lower than traditionally experienced in the IPP market. The Company is in the process of implementing programs to reduce the cost of its products. Selling, general and administrative expenses for the first nine months of fiscal 1999 increased by $1,820, or approximately 29%, and represented 16% of sales versus 22% for the same period of fiscal 1998. The increase is principally attributable to the fiscal 1998 acquisitions and an increase in sales commissions attributable to the increased sales. 13 Engineering, research and development expenses for the first nine months of fiscal 1999 increased by $1,629, or approximately 58%, and represented 9% of sales as compared to 10% of sales for the first nine months of fiscal 1998. The increase is primarily due to the expansion of resources to support development and engineering activities related to technology and products acquired from Lucent and the acquisition of TSG, offset by cost reductions from the integration of TSG's research and development activities with those of the Company. Amortization expense for the first nine months of fiscal 1999 increased by $1,386 to 3% of sales versus 1% of sales for the same period last year. The increase is attributable to amortization of goodwill and identifiable intangible assets recorded in connection with the fiscal 1998 acquisitions for the entire period as compared to partial periods in fiscal 1998. The increase in net interest expense of $494 is principally attributable to an increase in average outstanding indebtedness as a result of the fiscal 1998 acquisitions and related increase in working capital requirements. The effective tax rate increased from 35% for the first nine months of fiscal 1998 to 37% for the first nine months of fiscal 1999 due primarily to non deductible amortization of goodwill in connection with the TSG acquisition offset by expected research and development tax credits. Liquidity and Capital Resources The Company finances its operations, working capital requirements and capital expenditures from internally generated cash flows and financing available under a revolving line of credit between the Company and its bank. The Company believes that its anticipated cash flow from operations and borrowings against its bank line of credit will be sufficient to fund its working capital requirements, its capital expenditures and its long term debt obligations through December 31, 1999. Financing Activities. On November 25, 1997, the Company entered into a restated loan agreement (the "Loan Agreement") with its bank. Under the terms of the Loan Agreement, the Company is able to borrow a maximum of $15,000 based on the value of eligible collateral under a revolving line of credit that matures on November 25, 2002. Indebtedness outstanding under the Loan Agreement is collateralized by substantially all of the assets of the Company and its subsidiaries. Interest on amounts borrowed under the line of credit is payable monthly at the bank's floating 30 day Libor rate plus 1.5% (6.875% at December 31, 1998). On November 25, 1997, financing available under the Loan Agreement was used to refinance and retire the Company's then outstanding debt under a $2,000 working capital line of credit, a $3,350 installment note due on October 2, 2004 and term notes of $3,800 that were due on March 31, 1998. In addition, on December 18, 1997, the Company retired TSG's outstanding bank indebtedness of $3,970 from proceeds drawn under the Loan Agreement. Net proceeds under the revolving credit agreement and the refinanced debt agreements during the nine months ended December 31, 1998 and 1997 amounted to $147 and $7,790, respectively. Indebtedness outstanding under the Loan Agreement was $7,792 and $7,645 at December 31, 1998 and March 31, 1998 respectively. At December 31, 1998, the Company was able to borrow up to $12,541 based on the value of eligible collateral. On November 26, 1997, the Company borrowed $1,920 pursuant to the terms of a mortgage note and retired its then outstanding mortgage note with an outstanding principal balance of $315 and a maturity date of May 23, 1999. The November 26, 1997 mortgage note bears interest at a rate of 8.5% per annum and is payable in fifty-nine equal monthly installments of $19 and a final installment of $1,533 due on November 26, 2002. Net proceeds received pursuant to the mortgage note during the nine months ended December 31, 1997 amounted to $1,484 as compared to net payments of $56 during the nine months ended December 31, 1998. 14 During the nine months ended December 31, 1998 and 1997, the Company generated net proceeds of $271 and $60, respectively, from exercise of common stock options. Operating Activities. Cash used for operating activities amounted to $825 for the first nine months of fiscal 1999 compared to $8,500 used for operating activities for the first nine months of fiscal 1998. Cash flow from operations before changes in operating assets and liabilities increased from $2,219 in the first nine months of fiscal 1998 to $4,433 in the first nine months of fiscal 1999. This increase primarily resulted from the growth in income before depreciation and amortization and other non-cash charges. The Company's investment in working capital and other operating assets and liabilities has significantly reduced cash flows provided by operations, particularly as a result of the fiscal 1998 acquisitions, growth in accounts and notes receivable and inventories and changes in accounts payable and accrued liabilities. During the first nine months of fiscal 1998, cash used for operating activities included $3,399 of cash to acquire inventories and $1,541 of cash to acquire intangible assets in connection with the acquisition of the Lucent Assets. The increase in accounts and notes receivable during the first nine months of fiscal 1999 and 1998 and inventories during the first nine months of fiscal 1999 is related to increases, or anticipated increases, in sales, principally as a result of the fiscal 1998 acquisitions. Extension of credit to customers and inventory purchases represent the principal working capital requirements of the Company. The loan agreement between the Company and its bank limits outstanding revolving credit indebtedness collateralized by eligible inventory to $5,000 and limits aggregate indebtedness collateralized by accounts receivable and inventories to $15,000. The Company's current assets increased by $6,205, or approximately 22%, from $28,124 at March 31, 1998 to $34,329 at December 31, 1998, predominantly from an increase in accounts and notes receivable of $1,434 and an increase of $6,547 in inventory. Current liabilities increased by $3,517, or approximately 45%, from $7,887 at March 31, 1998 to $11,404 at December 31, 1998 predominantly from an increase in accounts payable. The Company experiences varying accounts receivable collection periods from its three primary customer markets. The Company believes that uncollectible accounts receivable will not have a significant effect on future liquidity, as a significant portion of its accounts receivable are due from customers with substantial financial resources. The level of inventory maintained by the Company is dependent on a number of factors, including delivery requirements of its customers, availability and lead time of components and the ability of the Company to estimate and plan the volume of its business. The Company markets a wide range of services and products and the requirements of its customers may vary significantly from period to period. Accordingly, inventory levels may vary significantly. Investing Activities. Net cash used for investing activities during the nine months ended December 31, 1998 and 1997 amounted to $1,128 and $1,532, respectively, including $428 of net cash used for the acquisition of TSG and $500 of cash used for capital expenditures in connection with the acquisition of the Lucent Assets with respect to the nine months ended December 31, 1997. The Company's capital expenditures consist primarily of manufacturing equipment, computer equipment and building improvements required to support operations. The Company has not entered into any significant commitments for the purchase of capital assets. Year 2000 Discussion The Company is currently assessing the impact of Year 2000 issues on the Company. The Year 2000 issue is the result of computer programs designed to use two digit date codes rather than four to define the applicable year. The risk is that programs with time-sensitive software may recognize a year using "00" as the year 1900 rather than the year 2000, resulting in system miscalculations or system failures. 15 The Company has identified several general areas in which Year 2000 concerns may be material if not resolved before January 1, 2000. These areas include 1) products and services of the Company, 2) management information systems and other systems within the Company, and 3) third parties that provide materials and services (including utilities) to the Company. The Company has established a "Validation Test Plan" to assess Year 2000 compliance of all products and services currently supported by the Company. This test plan is designed to identify such products and services, features of such products and services to be assessed, and the approach and resources to be used. The test plan is also designed to assess the Year 2000 compliance of those items in order of relative importance to the Company. To date, approximately 51% of such products and services have passed Year 2000 compliance testing, less than 11% have been determined not to be compliant and the balance have not yet been tested. The Company believes that its assessment of the Year 2000 compliance of all products and services currently supported will be completed by the end of the third quarter of calendar 1999. For those products and services determined not to be Year 2000 compliant, the Company attempts to remedy such noncompliance. Depending upon the level of such products and services determined not to be compliant, the Company believes that such products and services can be brought into compliance by December 31, 1999. The process of remediating all of the tested products and services to make them Year 2000 compliant will involve additional development costs (which cannot be quantified at this point but which may be material) and will delay current development projects that otherwise would be undertaken. The risks associated with the failure of the Company's products and services to be Year 2000 compliant include: 1) loss of data from or an adverse impact on the reliability of data generated by the Company's products and services; 2) loss of functionality; 3) failure to communicate with other non-Company user applications of its customers that may not be Year 2000 compliant; and 4) potential litigation by customers with respect to products and services no longer supported. The Company purchased new software in June 1997 and based on representations received from the vendor, the Company believes that its management information system is Year 2000 compliant. Based on the Company's internal testing, the Company believes that substantially all of the Company's related operating systems are also Year 2000 compliant with the exception of certain items which the Company does not believe are material. The Company is in the preliminary stages of assessing the Year 2000 compliance of its other internal systems such as shipping, payroll and EDI systems. The Company believes it will complete 90% of such assessment by the end of the first calendar quarter of 1999, and the balance by the end of the second calendar quarter of 1999. The risks associated with failure of such systems to be Year 2000 compliant are primarily the increase in administrative related functions and increased costs associated with such functions. If deficiencies within these systems are deemed to be critical, the Company would consider upgrading existing systems or acquiring new systems. The costs related to such upgrade or acquisition could be material. The Company believes that all critical internal systems will be assessed and remediated by the third calendar quarter of 1999 at a cost that has not yet been determined but which could be material. The Company has relationships with various third parties in the ordinary course of business. The Company is presently assessing the readiness of third parties, especially critical suppliers and others who have material relationships with the Company, by sending questionnaires with respect to the Year 2000 plans of those third parties. The Company will identify the risks associated with third parties based on responses to those questionnaires and will then formulate appropriate contingency plans. The Company expects to complete its assessment of the readiness of third parties by the end of the second quarter of calendar year 1999. The effect, if any, on the Company's results of operations from failure of these third parties to be Year 2000 compliant is not reasonably estimable but which could be material. 16 The Company has begun, but not yet completed, a comprehensive analysis of the operational problems that would be reasonably likely to result from the failure of the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. The Company's Year 2000 efforts to date have been undertaken largely with its existing engineering and information technology personnel. The Company does not separately track the costs incurred for such efforts and such costs are principally the related compensation costs for those personnel. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires public entities to report certain information about operating segments, their products and services, the geographic areas in which they operate, and their major customers, in complete financial statements and in condensed interim financial statements issued to stockholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 131 is not expected to have a material effect on the Company's results of operations or financial position. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Post-retirement Benefits ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other post-retirement benefit plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The standard addresses disclosure issues and, therefore, will not affect the Company's financial position or results of operations. Also, in June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that gains or losses be recognized in earnings for a fair value hedge in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. Management does not believe that the adoption of SFAS 133 will have a significant impact on the Company's consolidated financial statements. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In accordance with SFAS 133, the Company will begin implementing the requirements under SFAS 133 beginning in fiscal year 2000. 17 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 the Superior Court of the State of California for the County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that filed for bankruptcy, conspired with its own officers and professionals, and with various telephone suppliers (including the Company) to defraud investors in Amtel by operating a Ponzi scheme. See Item 3, Legal Proceedings of Part I of the Company's Form 10-KSB for the fiscal year ended March 31, 1996 and Item I, Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended September 30, 1996. On September 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. Item 4. Submission of Matters to a Vote of Security Holders On October 20, 1998, the Company held its Annual Meeting of Shareholders (the "Meeting"). The matters voted upon at the Meeting were the election of directors and ratification of the appointment of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ending March 31, 1999. At the Meeting, the Shareholders were asked to elect eight directors with each director to serve until the next annual meeting of shareholders or until the election and qualification of a respective successor. 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 ---- --------- -------- Tracey L. Gray 11,686,732 29,426 Joseph M. Jacobs 11,686,732 29,426 C. Shelton James 11,686,732 29,426 Dwight Jasmann 11,686,732 29,426 Charles H. Moore 11,686,732 29,426 Thomas E. Patton 11,686,732 29,426 Mark L. Plaumann 11,686,732 29,426 David R.A. Steadman 11,686,732 29,426 At the Meeting, the shareholders ratified the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending March 31, 1999, and the outcome of the voting was: 11,684,497 For; 13,656 Against; and 18,005 Abstentions. 18 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 ------- ---------------------- 10.1 Amended and Restated Employment Agreement between Elcotel, Inc. and Tracey L. Gray dated October 20, 1998. 10.2 Amended and Restated Employment Agreement between Elcotel, Inc. and C. Shelton James dated October 20, 1998. 10.3 Employment Agreement between Elcotel, Inc. and David F. Hemmings dated December 10, 1998. 10.4 Employment Agreement between Elcotel, Inc. and William H. Thompson dated December 10, 1998. 10.5 Employment Agreement between Elcotel, Inc. and Kenneth W. Noack dated December 10, 1998. 10.6 Employment Agreement between Elcotel, Inc. and Henry W. Swanson dated December 10, 1998. 10.7 Employment Agreement between Elcotel, Inc. and Darold R. Bartusek dated December 10, 1998. 10.8 Employment Agreement between Elcotel, Inc. and Hugh H. Durden dated December 10, 1998. 10.9 Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla dated December 10, 1998. 10.10 1991 Stock Option Plan (as amended). 10.11 Directors' Stock Option Plan (as amended). 27 Financial Data Schedule (Edgar Filing only). (b) Reports on Form 8-K: None 19 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 13, 1999 By: /s/ William H. Thompson ---------------------------- William H. Thompson Senior Vice President, Administration and Finance (Principal Financial and Accounting Officer) 20 INDEX TO EXHIBITS Exhibit Method of No. Description of Exhibit Filing - ------- ---------------------- --------- 10.1 Amended and Restated Employment Agreement between Elcotel, Inc. and Tracey L. Gray dated October 20, 1998. Included in this report. 10.2 Amended and Restated Employment Agreement between Elcotel, Inc. and C. Shelton James dated October 20, 1998. Included in this report. 10.3 Employment Agreement between Elcotel, Inc. and David F. Hemmings dated December 10, 1998. Included in this report. 10.4 Employment Agreement between Elcotel, Inc. and William H. Thompson dated December 10, 1998. Included in this report. 10.5 Employment Agreement between Elcotel, Inc. and Kenneth W. Noack dated December 10, 1998. Included in this report. 10.6 Employment Agreement between Elcotel, Inc. and Henry W. Swanson dated December 10, 1998. Included in this report. 10.7 Employment Agreement between Elcotel, Inc. and Darold R. Bartusek dated December 10, 1998. Included in this report. 10.8 Employment Agreement between Elcotel, Inc. and Hugh H. Durden dated December 10, 1998. Included in this report. 10.9 Employment Agreement between Elcotel, Inc. and Eduardo Gandarilla dated December 10, 1998. Included in this report. 10.10 1991 Stock Option Plan (as amended). Included in this report. 10.11 Directors' Stock Option Plan (as amended). Included in this report. 27 Financial Data Schedule (Edgar Filing only). Included in this report. 21 EX-10.1 2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN ELCOTEL INC. AND TRACEY L. GRAY. EXHIBIT 10.1 ELCOTEL, INC. Amended and Restated Employment Agreement of Tracey L. Gray Agreement (this "Agreement") dated as of the 20th day of October, 1998 by and between Elcotel, Inc. (the "Company") and Tracey L. Gray ("Mr. Gray" or "Employee") upon the following terms and conditions: 1. Term: (a) Commencement Date: This Agreement shall commence on October 20, 1998 and supersedes and replaces in its entirety the Employment Agreement dated October 1, 1997 between the Company and Mr. Gray. (b) Expiration Date: September 30, 2001 unless sooner terminated as provided in this Agreement. (c) Renewal: Except as hereinafter provided, on the Termination Date and on each anniversary of the Termination Date, this Agreement may be extended for an additional year if the Company and Mr. Gray mutually agree in writing to an extension at least one hundred eighty (180) days in advance of the Termination Date or an anniversary thereof. 2. Employment: Mr. Gray shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Mr. Gray's position with the Company on the date of this Agreement shall be President and Chief Executive Officer. 3. Salary: During the term of this Agreement, the salary paid to Mr. Gray shall not be less than two hundred thousand dollars ($200,000) per year, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. 4. Benefits: Mr. Gray shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Mr. Gray shall be paid an annual incentive bonus (the "Incentive Bonus") as provided in Exhibit A. 6. Stock Options: Mr. Gray shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Mr. Gray shall retain all options previously granted and unexercised. In the event of a termination of Mr. Gray's employment pursuant to Section 9(b) of this Agreement, (i) all of Mr. Gray's employee stock options shall immediately vest in their entirety and (ii) all of Mr. Gray's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment. 7. Business Expenses: Mr. Gray shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Mr. Gray shall be indemnified by the Company with respect to claims made against him as a director, officer and/or employee of the Company and as a director, officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Mr. Gray's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Mr. Gray and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Mr. Gray has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Mr. Gray and by compliance with the following: (i) In the event that at the date the notice of a termination without Cause is given there is at least twelve (12) months remaining in the current term of this Agreement, such notice of termination shall be sent to Mr. Gray no more than seven (7) days prior to the effective date of termination, and the Company (i) on the effective date shall pay to Mr. Gray his salary in a lump sum for the balance of the current term of this Agreement; (ii) shall continue at its expense to provide the Benefits for the balance of the term of this Agreement; and (iii) shall pay to Mr. Gray an amount in a lump sum equal to the product of (X) the amount of the Incentive Bonus (or for the fiscal year prior to the Commencement Date of this Agreement, Mr. Gray's actual bonus for such fiscal year) paid to or accrued for Mr. Gray with respect to the Company's fiscal year ending prior to the effective date of such termination and (Y) the number of days elapsed in the current Term Year through the effective date of termination divided by 365. "Term Year" of this Agreement shall mean a 365 day year commencing on April 1 of each calendar year. (ii) In the event that at the date the notice of a termination without Cause is given there is less than twelve (12) months remaining in the term, such notice of termination shall be sent to Mr. Gray six (6) months prior to the effective date of termination, and during such 6-month period, Mr. Gray shall continue in his then current position with the Company for all or any part of such six month period as the Company may request, but he shall nevertheless be entitled to take reasonable time during such six month period to look for other employment. At the end of such 6-month period, Mr. Gray's employment shall terminate, and the Company shall provide to Mr. Gray the Severance Benefits. (iii) If without Mr. Gray's written consent, (1) there is a material reduction in Mr. Gray's responsibilities or a reduction in his salary or (2) Mr. Gray is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Mr. Gray's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause; provided, however that if some but not all of Mr. Gray's responsibilities are materially reduced in connection with the training of a successor to Mr. Gray as President and Chief Executive Officer of the Company, Mr. Gray may not treat such reduction as a termination of employment by the Company without Cause so long as Mr. Gray retains the title of President and Chief Executive Officer (except that after October 1, 2000 such a successor may be named President or President and Chief Executive Officer without such reduction and title change being treated as a termination of employment by the Company without Cause so long as Mr. Gray is assigned significant duties within the Company, which may include providing oversight of or advice to such successor). Mr. Gray agrees to assist the Board of Directors to the extent and in the manner requested by the Board in identifying such a successor. (c) Death or Permanent Disability: Upon the death or permanent disability of Mr. Gray, but only after providing him with the Severance Benefits. (d) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Mr. Gray of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Mr. Gray knew or should have known would be materially detrimental to the Company or its business. (e) Definition of "Severance Benefits": The "Severance Benefits" shall mean the following: (i) the continuation by the Company for a period of six (6) months of the payment of Mr. Gray's salary in effect at the date of the termination of his employment; (ii) the continuation by the Company at its expense for a period of six (6) months of the Benefits; and (iii) the payment in a lump sum by the Company of an amount equal to the Incentive Bonus (or for the fiscal year prior to the Commencement Date of this Agreement, Mr. Gray's actual bonus for such fiscal year) paid to or accrued for Mr. Gray with respect to the Company's fiscal year ending prior to the effective date of such termination. 10. Termination By Mr. Gray: (a) Mr. Gray may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Mr. Gray may also terminate his employment under this Agreement by giving the Company one hundred twenty (120) days notice of termination effective on December 31, 1998 or on any date thereafter. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated for cause, one year; (ii) if this Agreement is terminated without cause, the time period following termination of employment during which the Employee is entitled to receive salary (if his salary is paid in a lump sum, then the time period to which his lump sum relates), but not to exceed one year; and (iii) if this Agreement expires without being renewed, or terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Mr. Gray), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: Chairman of the Board Facsimile: 941-751-4716 If to Mr. Gray, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Mr. Gray under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: This Agreement together with Exhibit A contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede all prior employment agreements between the parties, including the Employment Agreement dated October 1, 1997. No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. In Witness Whereof, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Tracey L. Gray /s/ C. Shelton James - ---------------------- By:-------------------------- Tracey L. Gray C. Shelton James, Chairman EXHIBIT A INCENTIVE BONUS PLAN Tracey L. Gray Employment Agreement An annual incentive bonus will be paid equal to 50% of base salary if the Company achieves its after tax profit plan for the year. If the Company is profitable and earns less than its after tax profit plan, then such bonus shall equal 50% of base salary times a fraction the numerator of which is the actual after tax profit of the Company for the year and the denominator of which is the amount of the after tax profit in such plan. If the Company achieves profits in excess of its after tax profit plan, then, at the discretion of the Board, an additional bonus in excess of 50% of base salary may be paid to Employee. EX-10.2 3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND C. SHELTON JAMES EXHIBIT 10.2 ELCOTEL, INC. Amended and Restated Employment Agreement of C. Shelton James Agreement (this "Agreement") dated as of the 20th day of October, 1998 by and between Elcotel, Inc. (the "Company") and C. Shelton James ("Mr. James" or "Employee") upon the following terms and conditions: 1. Term: (a) Commencement Date: This Agreement shall commence on October 20, 1998 and supersedes and replaces in its entirety the Employment Agreement dated October 1, 1997 between the Company and Mr. James. (b) Termination Date: December 31, 1999 unless sooner terminated as provided in this Agreement. (c) Renewal: Except as hereinafter provided, on the Termination Date and on each anniversary of the Termination Date, this Agreement shall automatically continue for an additional year unless the Company shall have given Mr. James written notice of non-renewal at least one hundred eighty (180) days in advance of the Termination Date or an anniversary thereof. (d) Non-Renewal: If such notice of non-renewal is given, Mr. James shall continue as Chairman of the Board of the Company for all or any part of such 180-day period as the Company may request, but he shall nevertheless be entitled to take reasonable time during such 180 day period to look for other employment. At the end of such 180 day period, Mr. James's employment shall terminate, and the Company shall provide to Mr. James the Severance Benefits (as hereinafter defined). 2. Title & Responsibilities: Mr. James shall be elected Chairman of the Board of Directors and an employee of the Company, and he shall devote such time as he deems necessary to carry out the responsibilities of this position. 3. Salary: During the term of this Agreement, the salary paid to Mr. James shall not be less than ninety-four thousand ($94,000) per year, and shall be subject to annual review for merit or other increases at the sole discretion of the board of directors of the Company. 4. Benefits: Mr. James shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Mr. James shall be paid an annual incentive bonus (the "Incentive Bonus") as provided in Exhibit A. 6. Stock Option: (a) Mr. James shall be eligible for grants of stock options to purchase shares of the Company's common stock pursuant to the Company's stock option plan(s). Mr. James shall retain all options previously granted and unexercised. (b) All of Mr. James' employee stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of termination of Mr. James' employment after or as part of a Change of Control, all of Mr. James' employee stock options shall continue in effect for 30 days after the effective date of such termination, except that (i) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment and (ii) for all options to which (i) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 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 (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. 7. Business Expenses: Mr. James shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Mr. James shall be indemnified by the Company with respect to claims made against him as a director, officer and/or employee of the Company and as a director, officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Mr. James' employment may be terminated by the Company only as provided below: (a) For Cause: For Cause by written notice to Mr. James and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Mr. James has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Mr. James and by compliance with the following: (i) In the event that at the date the notice of a termination Without Cause is given there is at least twelve (12) months remaining in the term, such notice of termination shall be sent to Mr. James no more than seven (7) days prior to the effective date of termination, and the Company (i) on the effective date shall pay to Mr. James his salary in a lump sum for the balance of the term of this Agreement; (ii) shall continue at its expense to provide the Benefits for the balance of the term of this Agreement; and (iii) shall pay to Mr. James an amount in a lump sum equal to the product of (x) the amount of the Incentive Bonus (or for the fiscal year prior to the Commencement Date of this Agreement, Mr. James' actual bonus for such fiscal year) paid to or accrued for Mr. James with respect to the Company's fiscal year ending prior to the effective date of such termination and (y) the number of days elapsed in the current Term Year through the effective date of such termination divided by 365. "Term Year" shall mean a 365 day year commencing on April 1 of each calendar year. (ii) In the event that at the date the notice of a termination Without Cause is given there is less than twelve (12) months remaining in the term, such notice of termination shall be sent to Mr. James six (6) months prior to the effective date of termination, and during such 6-month period, Mr. James shall continue as Chairman of the Board of the Company for all or any part of such six month period as the Company may request, but he shall nevertheless be entitled to take reasonable time during such six month period to look for other employment. At the end of such 6-month period, Mr. James employment shall terminate, and the Company shall provide to Mr. James the Severance Benefits. (iii) A reduction in Mr. James' title, responsibilities or salary may, at Mr. James' option, be treated by him as a notice of termination of his employment by the Company without Cause given as of the date of such reduction. (c) Death or Permanent Disability: Upon the death or permanent disability of Mr. James, but only after providing him with the Severance Benefits. (d) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Mr. James of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Mr. James knew or should have known would be materially detrimental to the Company or its business. (e) Definition of "Severance Benefits": The "Severance Benefits" shall mean the following: (i) the continuation by the Company for a period of six (6) months of the payment of Mr. James' salary in effect at the date of the termination of his employment; (ii) the continuation by the Company at its expense for a period of six (6) months of the Benefits; and (iii) the payment in a lump sum by the Company of an amount equal to the Incentive Bonus (or for the fiscal year prior to the Commencement Date of this Agreement, Mr. James' actual bonus for such fiscal year) paid to or accrued for Mr. James with respect to the Company's fiscal year ending prior to the effective date of such termination. 10. Termination By Mr. James: (a) Mr. James may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company if such breach is not cured within such twenty day period. (b) Mr. James may also terminate his employment under this Agreement by giving the Company one hundred twenty (120) days notice of termination effective on December 31, 1998 or on any date thereafter. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that for a period commencing on the date hereof and ending six months after the date of termination of his employment with Company he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the term of his employment and for a period of six months thereafter, engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company, and for a period of six months following termination of Employee's employment with Company, for whatever reason, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Mr. James), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Mr. James, to his most recent residence address on the books of the Company, or to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Mr. James under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: This Agreement together with Exhibit A contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede all prior employment agreements between the parties, including the Employment Agreement dated October 1, 1997. 17. No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. 18. No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. In Witness Whereof, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ C. Shelton James /s/ Tracey L. Gray - ---------------------- By:-------------------------- C. Shelton James Tracey L. Gray, President and Chief Executive Officer EXHIBIT A INCENTIVE BONUS PLAN C. Shelton James Employment Agreement An annual incentive bonus will be paid equal to 50% of base salary if the Company achieves its after tax profit plan for the year. If the Company is profitable and earns less than its after tax profit plan, then such bonus shall equal 50% of base salary times a fraction the numerator of which is the actual after tax profit of the Company for the year and the denominator of which is the amount of the after tax profit in such plan. If the Company achieves profits in excess of its after tax profit plan, then, at the discretion of the Board, an additional bonus in excess of 50% of base salary may be paid to Employee. EX-10.3 4 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND DAVID F. HEMMINGS EXHIBIT 10.3 ELCOTEL, INC. Employment Agreement of David F. Hemmings Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and David F. Hemmings ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Senior Vice President, Business Development & Technology System Development. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Fifty Thousand Dollars ($150,000.00) per year, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section 1. (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ David F. Hemmings /s/ Tracey L. Gray - ---------------------- By:-------------------------- David F. Hemmings Tracey L. Gray, President EX-10.4 5 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL INC. AND WILLIAM H. THOMPSON EXHIBIT 10.4 ELCOTEL, INC. Employment Agreement of William H. Thompson Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and William H. Thompson ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Senior Vice President, Administration & Finance. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Twenty Five Thousand Dollars ($125,000.00) per year, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days, and in the case of Employee's stock options outstanding under the Technology Service Group, Inc. 1994 Omnibus Stock Plan, 60 days, after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day or 60 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section 1. (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ William H. Thompson /s/ Tracey L. Gray - ----------------------- By:-------------------------- William H. Thompson Tracey L. Gray, President EX-10.5 6 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND KENNETH W. NOACK EXHIBIT 10.5 ELCOTEL, INC. Employment Agreement of Kenneth W. Noack Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and Kenneth W. Noack ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Vice President, Operations. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Five Thousand Dollars ($105,000.00) per year, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Kenneth W. Noack /s/ Tracey L. Gray - ---------------------- By:-------------------------- Kenneth W. Noack Tracey L. Gray, President EX-10.6 7 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND HENRY W. SWANSON EXHIBIT 10.6 ELCOTEL, INC. Employment Agreement of Henry W. Swanson Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and Henry W. Swanson ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Vice President, Systems Development. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Seventeen Thousand Dollars ($117,000.00) per year, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (d) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Henry W. Swanson /s/ Tracey L. Gray - ---------------------- By:-------------------------- Henry W. Swanson Tracey L. Gray, President EX-10.7 8 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL INC. AND DAROLD R. BARTUSEK EXHIBIT 10.7 ELCOTEL, INC. Employment Agreement of Darold R. Bartusek Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and Darold R. Bartusek ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Vice President/General Manager, Telco Sales. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Fifteen Thousand Dollars ($115,000.00) per year plus commissions, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. The Employee shall also be entitled to such sales bonuses and commissions on the basis determined by the Company ("Sales Commissions"). 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days, and in the case of Employee's stock options outstanding under the Technology Service Group, Inc. 1994 Omnibus Stock Plan, 60 days, after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day or 60 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary and Sales Commissions accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary and Sales Commissions accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause du ing a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section 1. (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary and Sales Commissions accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Darold R. Bartusek /s/ Tracey L. Gray - ---------------------- By:-------------------------- Darold R. Bartusek Tracey L. Gray, President EX-10.8 9 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND HUGH H. DURDEN EXHIBIT 10.8 ELCOTEL, INC. Employment Agreement of Hugh H. Durden Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and Hugh H. Durden ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Vice President/General Manager, IPP Sales. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Sixteen Thousand Dollars ($116,000.00) per year plus commissions, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. The Employee shall also be entitled to such sales bonuses and commissions on the basis determined by the Company ("Sales Commissions"). 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary and Sales Commissions accrued, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary and Sales Commissions accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Hugh H. Durden /s/ Tracey L. Gray - ---------------------- By:-------------------------- Hugh H. Durden Tracey L. Gray, President EX-10.9 10 EMPLOYMENT AGREEMENT BETWEEN ELCOTEL, INC. AND EDUARDO GANDARILLA EXHIBIT 10.9 ELCOTEL, INC. Employment Agreement of Eduardo Gandarilla Agreement (this "Agreement") dated as of the 10th day of December, 1998 by and between Elcotel, Inc. (the "Company") and Eduardo Gandarilla ("Employee") upon the following terms and conditions: 1. Term: This Agreement shall commence on December 10th, 1998 and shall continue until either party terminates this Agreement by giving the other party at least 60 days prior written notice or until sooner terminated as provided in this Agreement. 2. Employment. Employee shall be employed by the Company and he shall devote his full business time to carrying out the responsibilities of his position with the Company. Employee's position with the Company on the date of this Agreement shall be Executive Vice President, Sales and Marketing. 3. Salary: During the term of this Agreement, the salary paid to Employee shall not be less than One Hundred Fifty Five Thousand Dollars ($155,000.00) per year plus commissions, and shall be subject to annual review for merit or other increases in the sole discretion of the board of directors of the Company. The Employee shall also be entitled to such sales bonuses and commissions on the basis determined by the Company ("Sales Commissions"). 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). 5. Bonuses: Employee shall be entitled to receive such annual bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines or has approved prior to the date hereof through the Company's Incentive Compensation Plan (the "Bonus"). 6. Stock Options: (a) Employee shall be eligible for additional stock option grants to purchase shares of the Company's common stock pursuant to the Company's stock option plans. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including by 60 days prior written notice pursuant to Section 1) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's employee stock options shall continue in effect for 30 days after the effective date of such termination except that (x) for all options granted after the date of this Agreement and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment and (y) for all options to which (x) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment but not to exceed one year from the date of termination of employment. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (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 (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. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as an officer and/or employee of the Company and as an officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued and Sales Commissions, but not paid through the date of termination; provided however - (i) If the nature of such Cause involves dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud or serious moral turpitude, such termination shall be effective upon the expiration of thirty (30) days after the giving of such notice unless within such thirty-day period, Employee has cured the basis of such Cause, or if a cure is not possible within a thirty-day period, if he has diligently and in good faith commenced to effect such cure. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary and Sales Commissions accrued, but not paid through the date of termination and shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) for a period of (x) six months from the date of termination of employment and thereafter (y) until such date that the Employee locates employment comparable to his employment with the Company at the date of termination of employment but not beyond the date that is twelve months from the date of termination of employment. If the Employee's employment is terminated without Cause during a fiscal year effective on a date that is on or after 6 months after the beginning of such fiscal year, then the Company shall pay to Employee in a lump sum within 30 days after the termination of employment the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year prior to the termination of employment; provided however with respect to a termination of employment without Cause that is effective during the fiscal year ending March 31, 1999, the Company shall pay to Employee on or before June 30, 1999 the Pro Rata portion of the Employee's bonus from the Company with respect to the fiscal year ending March 31, 1999, such bonus (but not the Pro Rata portion thereof) shall be calculated as if he had been employed through the end of such fiscal year. Pro Rata shall mean the number of days from the beginning of the Company's fiscal year during which the termination of employment occurred up to and including the date of termination of employment divided by 365 days. (ii) If without Employee's written consent, (x) there is a material reduction in Employee's responsibilities or a reduction in his salary or (y) Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, the reduction or requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such reduction or requirement, be treated by him as a notice of termination of his employment by the Company without Cause. (c) Termination on 60 Days Notice: If the Company terminates this Agreement by 60 days prior written notice pursuant to Section 1 and if Employee's employment is thereafter terminated by the Company without Cause, such termination shall be treated as a termination without Cause pursuant to Section 9(b) and Employee's stock options shall be subject to the provisions of Section 6(b). The obligations of the Company contained in this Section 9(c) shall survive the termination of this Agreement by the Company pursuant to Section 1. (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary and Sales Commissions accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude; or (ii) misconduct of a material nature or a material breach in connection with the performance by him of his responsibilities hereunder that Employee knew or should have known would be materially detrimental to the Company or its business. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with or assistance of any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones. "Restricted Period" shall mean (i) if this Agreement is terminated For Cause, one year; (ii) if this Agreement is terminated by the Company without Cause or by either party by 60 days prior written notice pursuant to Section 1, the time period following termination of employment during which the Employee is entitled to receive salary and Benefits, but not to exceed one year; and (iii) if this Agreement terminates for any other reason, there shall be no Restricted Period. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: President Facsimile: 941-751-4716 If to Employee, to his most recent residence address on the books of the Company, or, to such other address of a party as to which that party shall notify the other parties in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties except as otherwise expressly contemplated herein; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, personal representatives and assigns; and shall supersede and replace all prior employment agreements between the parties, including without limitation the letter from the Company to the Employee dated April 8, 1996. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ Eduardo Gandarilla /s/ Tracey L. Gray - ---------------------- By:-------------------------- Eduardo Gandarilla Tracey L. Gray, President EX-10.10 11 1991 STOCK OPTION PLAN (AS AMENDED) EXHIBIT 10.10 ELCOTEL, INC. 1991 STOCK OPTION PLAN (as amended through October 20, 1998) 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. "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 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. D. "Company" means Elcotel, Inc., a Delaware corporation. E. "Fair Market Value" of a Share on a given day means, if the Shares are traded in a public market, the mean between the highest and lowest quoted selling prices of a Share as reported on the principal securities exchange on which the Shares are then listed or admitted to trading, or if not so 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. F. "Grantee" means a person who is either an Optionee or an Optionee-Shareholder. G. "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. 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. "Optionee" means a person other than an Optionee- Shareholder to whom an option is granted under this Plan. J. "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. K. "Nonqualified Option" means an Option that is not an Incentive Stock Option. L. "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. M. "Plan" means this Elcotel, Inc. 1991 Stock Option Plan, including any amendments to the Plan. N. "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. O. "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. P. 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. Q. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. 2. Purpose The purposes of the Plan are as follows. A. To secure for the Company and its shareholders the benefits arising from share ownership by those officers and key employees of the Company and its Subsidiaries who will be responsible for the Company's future growth and continued success. The Plan is intended to provide an incentive to officers and key employees by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. B. To enable the Company and its Subsidiaries to obtain and retain the services of key employees, by providing such key employees with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term A. This Plan shall become effective upon its adoption by the Board, and Options may be issued upon such adoption and from time to time thereafter; provided, however, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose; and provided further, that the approval of the Company's shareholders shall be obtained within 12 months of the date of adoption of the Plan. If the Plan is not approved by the affirmative vote of the holders of a majority of all shares present in person or by proxy, at a duly called shareholders' meeting at which a quorum representing a majority of all voting stock is present in person or by proxy and voting on this Plan, then this Plan and all Options then outstanding under it shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of this Plan by the Board. No Options may be granted hereunder except within such period of ten (10) years. 4. Administration of Plan A. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine to whom Incentive Stock Options and Non-qualified Options shall be granted, how many Shares shall be subject to each such Option, whether a Grantee shall be required to surrender for cancellation an outstanding Option as a condition to the grant of a new Option, and the prices at which Shares shall be sold to Grantees. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. B. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. C. Any power granted to the Committee either in this Plan or by the Board, may at any time be exercised by the Board, and any determination by the Committee shall be subject to review and approval or reversal or modification by the Board. 5. Eligibility Officers and key employees of the Company and its Subsidiaries shall be eligible for selection by the Committee to be granted Options. An employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. 6. Options A. Subject to adjustment as provided in Paragraph 13 hereof, Options may be granted pursuant to the Plan for the purchase of not more than 2,100,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. B. The aggregate fair market value (determined as of the time Options are granted) of the stock with respect to which Incentive Stock Options may be or become exercisable for the first time by a Grantee during any calendar year (whether granted under this Plan or any other plan of the Company or any Parent or Subsidiary corporation) shall not exceed $100,000. To the extent an Incentive Stock Option may be or become exercisable in violation of this limitation, it shall be deemed to be a Nonqualified Option. 7. Option Price The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee, but shall not be less than the greater of: (1) 100% of the Fair Market Value of such Share on the date the Option is granted (110% of the Fair Market Value of such Share on the date an Incentive Stock Option is granted to an Optionee- Shareholder), and (2) $0.75. 8. Duration of Options Each Option and all rights thereunder shall expire and the Option shall no longer be exercisable on a date not later than five (5) years from the date on which the Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Options shall be subject to termination before their expiration date as provided herein. 9. Conditions Relating to Exercise of Options A. The Shares subject to any Option may be purchased at any time during the term of the Option, unless, at the time an Option is granted, the Committee shall have fixed a specific period or periods in which exercise must take place. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise as to whole Shares is permitted from time to time, provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $100. B. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution, and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or, to the extent that such exercise would not prevent an Option from qualifying as an Incentive Stock Option under the Internal Revenue Code, by his or her guardian or legal representative. C. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. D. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares. The purchase price shall be paid in cash or by certified check or bank cashier's check. Alternatively, to the extent permitted by the Committee and in its sole discretion, the purchase price may be paid by delivering to the Company: (1) Shares (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by the Grantee having a Fair Market Value equal to the purchase price; or (2) a notarized statement attesting to ownership of the number of Shares which are intended to be used at Fair Market Value to pay the purchase price, with the certificate number(s) thereof, and requesting that only the incremental number of Shares as to which the Option is being exercised be issued by the Company. E. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until (i) this Plan has been approved by the shareholders of the Company, and (ii) the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop-transfer instructions to the transfer agent of the Company. F. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer or sale of securities of the Company or over the extension of credit for the purposes of purchasing or carrying any margin securities, or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. G. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 10. Effect of Termination of Employment or Death A. In the event of termination of a Grantee's employment by reason of such Grantee's death, disability, or retirement with the consent of the Board or in accordance with an applicable retirement plan, any outstanding Option held by such Grantee shall, notwithstanding the extent to which such Option was exercisable prior to termination of employment, immediately become exercisable as to the total number of Shares purchasable thereunder. Any such Option shall remain so exercisable at any time prior to its expiration date or, if earlier, the first anniversary of termination of the Grantee's employment. B. In the event of termination of a Grantee's employment for any reason other than death, disability, or retirement with the consent of the Board or in accordance with an applicable retirement plan, all rights of any kind under any outstanding Option held by such Grantee shall immediately lapse and terminate; 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. C. Whether an authorized leave of absence or absence in military or government service shall constitute termination of employment shall be determined by the Committee. Transfer of employment between the Company and a Subsidiary corporation or between one Subsidiary corporation and another shall not constitute termination of employment. 11. No Special Employment Rights Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her employment by the Company or a Subsidiary or interfere in any way with the right of the Company or a Subsidiary, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. 12. Rights as a Shareholder The Grantee of an Option shall have no rights as a shareholder with respect to any Shares covered by an Option until the date of issuance of a certificate to him for such Shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date of issuance of such certificate. 13. Anti-dilution Provision A. In case the Company shall (i) declare a dividend or dividends on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of Shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the number of Shares authorized under the Plan will be adjusted proportionately. Similarly, in any such event, there will be a proportionate adjustment in the number of Shares subject to unexercised Options (but without adjustment to the aggregate option price). 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. 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 A. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any person, by reason of the adoption of this Plan, be deemed to be entitled to the grant of any Option; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. B. All expenses of the Plan, including the cost of maintaining records, shall be borne by Company. 17. Governing Law This Plan and all rights hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware. EX-10.11 12 DIRECTORS' STOCK OPTION PLAN (AS AMENDED) EXHIBIT 10.11 ELCOTEL, INC. DIRECTORS STOCK OPTION PLAN (as amended through October 20, 1998) 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. "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. 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 opportu- nity 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 out- standing under it shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of this Plan by the Board. No Options may be granted hereunder except within such period of ten (10) years. 4. Administration of Plan A. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine 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. B. Subject to adjustment as provided in Paragraph 12 hereof, Options may be granted pursuant to the Plan for the purchase of not more than 225,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. 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 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 accom- panied 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. 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 became exercisable as to the total number of Shares purchasable thereunder. Any such Option shall remain so exercisable at any time prior to its expiration date or, if earlier, only until the first anniversary of termination of the Grantee's status as a Director. B. In the event of termination of a Grantee's status as a Director for any reason other than death or disability, any outstanding Option held by such Grantee shall remain exercisable at any time prior to 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. 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 share- holder 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. 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 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. EX-27 13 EXHIBIT 27 - FINANCIAL DATA SCHEDULE FOR 10-Q - 12/31/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATMENTS AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1999 APR-01-1998 DEC-31-1998 64 0 12,841 (1,842) 15,635 34,329 5,079 0 72,929 11,404 0 0 0 135 51,677 72,929 51,303 51,303 33,905 33,905 13,975 0 432 2,991 1,110 1,881 0 0 0 1,881 0.14 0.14
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