-----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, LH1Du6uee8Xu3jvmDZvQ/Py79k6HfZLNi9c2DZruppgTrn1obiZNk2r92Gwt+vxd xdjJfuIS1bmFD6ntP1/nTg== 0000801448-98-000001.txt : 19980218 0000801448-98-000001.hdr.sgml : 19980218 ACCESSION NUMBER: 0000801448-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NASD 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: 98540838 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, 1997 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) Not Applicable ---------------------------------------------------------------- (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 6, 1998 was 13,264,996. PART I - FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements -------------------- ELCOTEL, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (in thousands)
December 31, March 31, 1997 1997 ------------ ------------ (Unaudited) ASSETS - ------- CURRENT ASSETS - -------------- Cash and temporary investments $311 $1,009 Accounts receivable, net 14,690 4,678 Notes receivable 2,063 1,318 Inventories 12,170 2,733 Refundable income taxes 90 95 Deferred tax asset 4,084 692 Prepaid expenses and other current as 743 457 -------- -------- TOTAL CURRENT ASSETS 34,151 10,982 Property, plant and equipment, net 4,648 3,184 Notes receivable, noncurrent 580 711 Deferred tax asset - 799 Goodwill 23,201 - Other assets 9,523 268 -------- -------- $72,103 $15,944 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES - ------------------- Accounts payable and accrued expenses $8,754 $2,886 Current portion of long-term debt 128 199 -------- -------- TOTAL CURRENT LIABILITIES 8,882 3,085 -------- -------- Deferred tax liability 547 - Acquisition costs payable 325 - Revolving credit line 11,760 - Long term debt, less current portion 1,787 232 -------- -------- TOTAL LONG TERM LIABILITIES 14,419 232 -------- -------- STOCKHOLDERS' EQUITY: Common stock, $0.01 par value: Authorized 30,000,000 shares, Issued 13,253,178 shares and 8,234,216 shares, respectively 132 82 Additional paid-in capital 45,783 11,160 Retained earnings 3,064 1,562 Less treasury stock (177) (177) -------- -------- TOTAL STOCKHOLDERS' EQUITY 48,802 12,627 -------- -------- $72,103 $15,944 ======== ======== 1 See Notes to Condensed Consolidated Financial Statements.
ELCOTEL, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (in thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, ------------------- ----------------- 1997 1996 1997 1996 ------- ------- ------- ------- NET SALES $13,592 $7,206 $27,975 $18,858 ------- ------- ------- ------- COSTS AND EXPENSES: Cost of sales 8,565 4,315 16,578 11,350 Research and development 1,253 692 2,795 1,932 Selling, general and administrative 2,481 1,398 6,200 4,033 Amortization 133 9 145 22 ------- ------- ------- ------- TOTAL COSTS AND EXPENSES 12,432 6,414 25,718 17,337 ------- ------- ------- ------- INCOME FROM OPERATIONS 1,160 792 2,257 1,521 INTEREST INCOME (EXPENSE), net (61) 51 62 127 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 1,099 843 2,319 1,648 INCOME TAX EXPENSE 390 295 817 577 ------- ------- ------- ------- NET INCOME $709 $548 $1,502 $1,071 ======= ======= ======= ======= BASIC EARNINGS PER SHARE - ------------------------ NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $0.08 $0.07 $0.18 $0.13 ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 8,932 8,111 8,433 8,073 ======= ======= ======= ======= FULLY DILUTED EARNINGS PER SHARE - -------------------------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $0.08 $0.07 $0.17 $0.13 ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 9,401 8,348 8,693 8,312 ======= ======= ======= ======= 2 See Notes to Condensed Consolidated Financial Statements.
ELCOTEL, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOW ------------------------------------ (in thousands) (Unaudited)
Nine Months Ended December 31, --------------------------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,502 $1,071 Adjustments to reconcile net income to net cash (used for)/provided by operating activities: Depreciation and amortization 492 285 Provision for doubtful accounts 441 (546) Change in operating assets and liabilities (net of acq. of Technology Service Group, Inc.) Accounts receivable (6,563) (36) Notes receivable (801) 879 Inventories (2,947) (405) Prepaid expenses and other current assets (588) 125 Accounts payable and accrued expense (2,306) 1,299 Other, net (1,722) (86) --------- --------- Net cash flow (used for)/provided by operating activities (12,492) 2,586 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (1,082) (322) Net cash used for acquisition of Technology Service Group, Inc. (428) - --------- --------- Net cash flow used for investing activities (1,510) (322) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds under revolving credit line and refinanced debt obligations 11,760 - Net long term borrowings/(payments) 1,484 (965) Issuance of common stock 60 165 --------- --------- Net cash flow (used for)/provided by financing activities 13,304 (800) --------- --------- Net increase (decrease) in cash and temporary investments (698) 1,464 Cash and temporary investments at beginning of period 1,009 232 --------- --------- Cash and temporary investments at end of period $311 $1,696 ========= ========= ADDITIONAL CASH FLOW INFORMATION: Cash paid (refunded) during the period for: Interest $200 $107 Income taxes 490 (509) 3
ELCOTEL, INC. AND SUBSIDIARIES ------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except for share amounts) (Unaudited) NOTE A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: The condensed consolidated balance sheet as of December 31, 1997 and the consolidated statements of operations for the three and nine month periods ended December 31, 1997 and 1996, and the consolidated statements of cash flows for the nine month periods ended December 31, 1997 and 1996 have been prepared by Elcotel, Inc. (the "Company"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at December 31, 1997, and for all periods presented, have been made. The condensed consolidated balance sheet at March 31, 1997 has been derived from the Company's audited consolidated financial statements as of and for the year ended March 31, 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 1997. The results of operations for the nine month period ended December 31, 1997 are not necessarily indicative of the results for the full fiscal year. NOTE B. ACQUISITIONS: Technology Service Group, Inc. - ------------------------------ On December 18, 1997, the Company acquired Technology Service Group, Inc. ("TSG"), a Delaware corporation, via the merger (the "Merger") of Elcotel Hospitality Services, Inc. ("EHS"), a wholly owned subsidiary of the Company, into TSG, pursuant to an Agreement and Plan of Merger dated as of August 13, 1997 (as amended) among the Company, TSG and EHS ("Merger Agreement"). Immediately following the consummation of the Merger, TSG became a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement each issued and outstanding share of common stock in TSG was converted into the right to receive 1.05 shares of common stock of the Company and in accordance with this formula, the Company is obligated to issue an aggregate of 4,944,292 shares of common stock pursuant to the Merger. 4 In addition, the Company has agreed to issue 80,769 shares of common stock in payment of certain acquisition expenses (30,769 of which have been issued as of December 31, 1997). The value of the shares of common stock not issued are reflected as Acquisition cost payable" in the Condensed Consolidated Balance Sheet. In addition, as a result of the Merger, holders of options and rights to purchase shares of common stock of TSG pursuant to TSG's option and stock purchase plans received options and rights to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the Merger under such options and rights. Similarly, holders of warrants to purchase shares of common stock of TSG received warrants to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the Merger under such warrants. The terms of the Merger Agreement were the result of arm's length negotiations. A summary of the merger consideration (or purchase price) is set forth below. Issuance of 4,944,292 shares of common stock at a market price of $6.50 per share $32,138 Fair value of outstanding common stock warrants, options and purchase rights issued 2,595 Estimated costs and expenses of the merger 872 ------- Total merger consideration $35,605 ======= The acquisition has been accounted for using the purchase method of accounting. Accordingly, the aggregate purchase price of $35,605 was allocated to the assets and liabilities of TSG as of the acquisition date based upon their estimated fair values. The excess of the purchase price over the fair value of the net assets acquired of $23,225 was recorded as goodwill. The Company has estimated the adjustments to allocate the merger consideration to the assets and liabilities of TSG based on their estimated fair values. The allocations are subject to final determinations based on independent appraisals and other evaluations of fair value as of the acquisition date. Therefore, the allocations reflected in the accompanying condensed consolidated balance sheet at December 31, 1997 may differ from the amounts ultimately determined. Differences between the amounts included herein and the final allocations are not expected to have a material effect on the Company's consolidated financial statements. 5 A summary of the book value of the assets and liabilities of TSG at December 18, 1997 as compared to their estimated fair values reflected in the accompanying condensed consolidated balance sheet at December 31, 1997 is set forth below. Estimated Book Fair Value Value -------- -------- Cash and temporary investments $239 $239 Accounts receivable 3,703 3,703 Inventories 11,103 6,490 Refundable income taxes 469 469 Deferred tax asset, current 463 3,446 Prepaid expenses and other current assets 12 12 Property, plant and equipment 662 782 Intangible assets 1,022 7,530 Other assets 29 29 Accounts payable and accrued expenses (4,267) (4,992) Borrowings under lines of credit (3,970) (3,970) Deferred tax liability, non-current - (1,358) ------- ------- Net assets acquired 9,465 12,380 Excess of purchase price over net assets acquired 3,122 23,225 ------- ------- Total $12,587 $35,605 ======= ======= The Company intends to discontinue certain products manufactured and marketed by TSG. The allocation of merger consideration to the estimated fair value of inventories has been decreased by $4,810 to reflect the estimated net realizable value of such inventories. Identifiable intangible assets are comprised of TSG's trade names at an estimated fair value of $2,869, assembled workforce at an estimated fair value of $1,372, product software at an estimated fair value of $847, patented technology at an estimated fair value of $419 and customer contracts at an estimated fair value of $2,023. At December 31, 1997, TSG had net operating loss carryforwards of $11,098 available to reduce future taxable income, which expire from 1998 to 2010. However, the utilization of these net operating loss carryforwards is subject to an annual limitation of approximately $200 as a result of a previous change in ownership of TSG. Accordingly, future tax benefits of net operating loss carryforwards of approximately $2,909 will not be realized, and a corresponding valuation allowance has been provided in the purchase price allocation. The fair value of accrued liabilities includes the estimated costs to terminate the employment of certain employees of TSG and to relocate certain employees and property of TSG. These costs have been estimated based on the Company's preliminary integration and consolidation plan. Employee termination costs reflecting the estimated cost of severance and salary continuation arrangements and related employee benefits have been estimated at $319. The costs of relocating employees and property of TSG have been estimated at $405. 6 The fair value of the intangible assets included in the allocation of the purchase price are being amortized over their estimated useful lives as follows: Goodwill 35 years Trade names 35 years Assembled workforce 35 years Product software 5 years Patented technology 4 years Customer contracts 3.45 years Lucent Technologies - ------------------- On September 30, 1997, the Company acquired from Lucent Technologies Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing and component parts business. The purchase price, including estimated acquisition expenses of $150, was $6,040, subject to adjustment based on the difference between the book value of inventories determined pursuant to the acquisition agreement and $3,849. Assets acquired from Lucent included inventories, machinery, equipment, tooling and certain other assets related to the payphone manufacturing and component parts business conducted by Lucent, as well as a license of certain patent and other intellectual property rights related thereto. On October 2, 1997, the Company borrowed an aggregate of $6,850 under the terms of bank promissory notes to finance the Lucent acquisition, including acquisition expenses, debt issuance expenses of $57 and other general corporate activities, including acquisition of equipment. These notes consisted of an installment note in the principal amount of $3,050 payable in eighty four equal monthly installments of $37, a term note in the principal amount of $2,850 due March 31, 1998 and a term note in the principal amount of $950 due March 31, 1998. The notes were collateralized by the assets of the Company and bore interest at the bank's floating 30 day Libor rate plus 2.25% (7.9% upon issuance). Proceeds from these aforementioned notes were used to pay the purchase price payable obligations recorded at September 30, 1997, acquisition expenses, and the debt issuance expenses related to the Lucent acquisition, which aggregated $6,094. On November 25, 1997, the Company repaid all of the aforementioned notes from the proceeds drawn under a $15,000 revolving credit line entered into on November 25, 1997 (see Note E). A summary of the allocation of the purchase price to the assets acquired as of September 30, 1997, based on the Company's estimates of their fair values is set forth below. Inventories $3,999 Equipment and tooling 500 Intangible Assets 1,541 ------ Total purchase price $6,040 ====== The accompanying consolidated statements of operations for the three months and nine months ended December 31, 1997 reflect the effects of the Lucent acquisition from the acquisition date. 7 Pro Forma Results of Operations ------------------------------- The accompanying consolidated statements of operations for the three months and nine months ended December 31, 1997 includes the operating results of TSG and the effects of purchase of the assets from Lucent from the acquisition dates. Assuming these transactions had occurred on April 1, 1997, and April 1, 1996, respectively, the Company's pro forma results of operations for the nine months ended December 31, 1997 and 1996 would have been as follows: December 31, December 31, 1997 1996 ---- ---- Net Sales $ 47,669 $ 46,650 ======== ======== Net income (loss) ($ 14) $ 1,397 ======== ======== Net income (loss) per share-Basic $0.00 $0.11 ======== ======== Net income (loss) per share -Fully Diluted $0.00 $0.10 ======== ======== The pro forma results of operations for the nine months ended December 31, 1997 include the operating results of TSG from April 1, 1997 to December 18, 1997 and pro forma adjustments consisting of an increase in amortization of goodwill and other intangible assets of $804 due to the increase in the basis of intangible assets and their estimated useful lives, a decrease in depreciation of $228 due to an increase in the basis of property and equipment and their estimated useful lives, a decrease in deferred tax expense of $1 resulting from the allocation to deferred tax assets and liabilities and a decrease in income tax expense of $182 to reflect the pro forma effect on income tax expense resulting from the acquisition. The pro forma adjustments related to the acquisition of Lucent's assets for the nine months ended December 31, 1997 include an increase in amortization of intangible assets of $130, an increase in depreciation of $50, an increase in interest expense of $245 and a decrease in income tax expense of $149. The pro forma results of operations for the nine months ended December 31, 1996 include the operating results of TSG from April 1, 1996 to December 31, 1996 and pro forma adjustments consisting of an increase in amortization of goodwill and other intangible assets of $907 due to the increase in the basis of intangible assets and their estimated useful lives, a decrease in depreciation of $449 due to an increase in the basis of property and equipment and their estimated useful lives, a decrease in deferred tax expense of $11 resulting from the allocation to deferred tax assets and liabilities and a decrease in income tax expense of $189 to reflect the pro forma effect on income tax expense resulting from the acquisition. The pro forma adjustments related to the acquisition of Lucent's assets for the nine months ended December 31, 1996 include an increase in amortization of intangible assets of $195, an increase in depreciation of $75, an increase in interest expense of $368 and a decrease in income tax expense of $223. 8 NOTE C. INVENTORIES: Inventories at December 31, 1997 and March 31, 1997 are summarized as follows: December 31, March 31, 1997 1997 ---- ---- Finished products $ 1,805 $590 Work-in-process 3,343 257 Purchased components 7,022 1,986 ------- ------- $12,170 $2,733 ======= ======= NOTE D. STOCKHOLDERS' EQUITY: Changes in stockholders' equity during the nine-month period ended December 31, 1997 are summarized as follows:
Additional Common Paid-In Retained Treasury Stock Capital Earnings Stock Total ------ ------- -------- -------- ------- Balance at March 31, 1997 $82 $11,160 $1,562 ($177) $12,627 Issuance of 4,975,061 shares - acquisition of Technology Service Group, Inc. and payment of related acquisition expenses 50 34,883 34,933 Stock registration costs (320) (320) Issuance of 43,900 shares upon exercise of common stock options at prices between $1.81 and $6.1875 per share 60 60 Net income for the period 1,502 1,502 ---- ------- ------ ------ ------- Balance at December 31, 1997 $132 $45,783 $3,064 $(177) $48,802 ==== ======= ====== ====== =======
9 NOTE E. REFINANCING OF DEBT On November 25, 1997, the Company entered into a restated loan agreement (the "Loan Agreement") with its bank and refinanced its then outstanding debt under a $2,000 working capital line of credit, a $3,050 term 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. Under the terms of the Loan Agreement, the Company is able to borrow up to a maximum of $15,000 based on the value of eligible collateral under a revolving line of credit that matures on November 25, 2002. Indebtedness outstanding under the Loan Agreement is secured by substantially all the assets of the Company. Interest on amounts borrowed under the line of credit is payable monthly at the bank's floating 30 day Libor rate plus 1.5% (See Note B). In addition, on November 26, 1997, the Company refinanced its mortgage note, which had a principal balance of $315 and a maturity date of May 23, 1999, with a new mortgage note in the amount of $1,920, at the same fixed interest rate of 8.5%, which matures in five years, but whose monthly payments are based on a 15 year term. NOTE F. ADOPTION OF FAS 128 The Company adopted the provisions of Statement of Financial Standards No. 128 "Earnings Per Share" (SFAS 128), during the fourth calendar quarter of 1997 (third fiscal quarter of 1998), as required. The new standard specifies the computation, presentation, and disclosure requirements for earnings per share. The following table represents the computation of basic and diluted earnings per common share as required by SFAS 128. Three Months Ended Nine Months Ended December 31, December 31, ----------------- --------------- 1997 1996 1997 1996 ------ ------ ------ ------ (in thousands, except per share data) BASIC EARNINGS PER SHARE COMPUTATION Net Income Applicable to common shares $709 $548 $1,502 $1,071 ----- ----- ------ ------ Weighted average common shares outstanding 8,932 8,111 8,433 8,073 ----- ----- ------ ------ Basic Earnings per Common Share $0.08 $0.07 $0.18 $0.13 ===== ===== ====== ====== 10 Three Months Ended Nine Months Ended December 31, December 31, ----------------- ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ (in thousands, except per share data) DILUTED EARNINGS PER SHARE COMPUTATION Net Income Applicable to common shares $709 $548 $1,502 $1,071 ----- ----- ------ ------ Weighted average common shares outstanding 8,932 8,111 8,433 8,073 Common stock equivalents 469 237 260 239 Total weighted average shares 9,401 8,348 8,693 8,312 ----- ----- ------ ------ Basic Earnings per Common Share $0.08 $0.07 $0.17 $0.13 ===== ===== ====== ====== 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ---------------------------------------------- CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - --------------------------------------------------------------------- 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 resulting from the acquisitions of TSG and Lucent, competition, the risk of obsolescence of its products, changes in the international business climate, general economic conditions, seasonality, changes in industry practices, the outcome of the Bethlahmy class action lawsuit, and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. ACQUISITIONS Technology Service Group, Inc. - ------------------------------ On December 18, 1997, the Company acquired Technology Service Group, Inc. ("TSG"), a Delaware corporation, via the merger (the "Merger") of Elcotel Hospitality Services, Inc. ("EHS"), a wholly owned subsidiary of the Company, into TSG, pursuant to an Agreement and Plan of Merger dated as of August 13, 1997 (as amended) among the Company, TSG and EHS ("Merger Agreement"). Immediately following the consummation of the Merger, TSG became a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement each issued and outstanding share of common stock in TSG was converted into the right to receive 1.05 shares of common stock of the Company and in accordance with this formula, the Company is obligated to issue an aggregate of 4,944,292 shares of common stock pursuant to the Merger. In addition, the Company has agreed to issue 80,769 shares of common stock in payment of certain acquisition expenses (30,769 of which have been issued as of December 31, 1997). The value of the shares of common stock not issued are reflected as Acquisition cost payable" in the Condensed Consolidated Balance Sheet. In addition, as a result of the Merger, holders of options and rights to purchase shares of common stock of TSG pursuant to TSG's option and stock purchase plans received options and rights to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the Merger under such options and rights. Similarly, holders of warrants to purchase shares of common stock of TSG received warrants to purchase, at a proportionately reduced per share exercise price, a number of shares of common stock of the Company equal to 1.05 times the number of shares of common stock of TSG they were entitled to purchase immediately prior to the Merger under such warrants. 12 A summary of the merger consideration (or purchase price) is set forth below. Issuance of 4,944,292 shares of common stock at a market price of $6.50 per share $32,138 Fair value of outstanding common stock warrants, options and purchase rights issued 2,595 Estimated costs and expenses of the merger 872 ------- Total merger consideration $35,605 ======= The acquisition has been accounted for using the purchase method of accounting. Accordingly, the aggregate purchase price of $35,605 was allocated to the assets and liabilities of TSG as of the acquisition date based upon their estimated fair values. The excess of the purchase price over the fair value of the net assets acquired of $23,225 was recorded as goodwill. The Company has estimated the adjustments to allocate the merger consideration to the assets and liabilities of TSG based on their estimated fair values. The allocations are subject to final determinations based on independent appraisals and other evaluations of fair value as of the acquisition date. Therefore, the allocations reflected in the accompanying condensed consolidated balance sheet at December 31, 1997 may differ from the amounts ultimately determined. Differences between the amounts included herein and the final allocations are not expected to have a material effect on the Company's consolidated financial statements. 13 A summary of the book value of the assets and liabilities of TSG at December 18, 1997 as compared to their estimated fair values reflected in the accompanying condensed consolidated balance sheet at December 31, 1997 is set forth below. Estimated Book Fair Value Value -------- -------- Cash and temporary investments $239 $239 Accounts receivable 3,703 3,703 Inventories 11,103 6,490 Refundable income taxes 469 469 Deferred tax asset, current 463 3,446 Prepaid expenses and other current assets 12 12 Property, plant and equipment 662 782 Intangible assets 1,022 7,530 Other assets 29 29 Accounts payable and accrued expenses (4,267) (4,992) Borrowings under lines of credit (3,970) (3,970) Deferred tax liability, non-current - (1,358) ------- ------- Net assets acquired 9,465 12,380 Excess of purchase price over net assets acquired 3,122 23,225 ------- ------- Total $12,587 $35,605 ======= ======= The Company intends to discontinue certain products manufactured and marketed by TSG. The allocation of merger consideration to the estimated fair value of inventories has been decreased by $4,810 to reflect the estimated net realizable value of such inventories. Identifiable intangible assets are comprised of TSG's trade names at an estimated fair value of $2,869, assembled workforce at an estimated fair value of $1,372, product software at an estimated fair value of $847, patented technology at an estimated fair value of $419 and customer contracts at an estimated fair value of $2,023. At December 31, 1997, TSG had net operating loss carryforwards of $11,098 available to reduce future taxable income, which expire from 1998 to 2010. However, the utilization of these net operating loss carryforwards is subject to an annual limitation of approximately $200 as a result of a previous change in ownership of TSG. Accordingly, future tax benefits of net operating loss carryforwards of approximately $2,909 will not be realized, and a corresponding valuation allowance has been provided in the purchase price allocation. The fair value of accrued liabilities includes the estimated costs to terminate the employment of certain employees of TSG and to relocate certain employees and property of TSG. These costs have been estimated based on the Company's preliminary integration and consolidation plan. Employee termination costs reflecting the estimated cost of severance and salary continuation arrangements and related employee benefits have been estimated at $319. The costs of relocating employees and property of TSG have been estimated at $405. 14 The fair value of the intangible assets included in the allocation of the purchase price are being amortized over their estimated useful lives as follows: Goodwill 35 years Tradenames 35 years Assembled workforce 35 years Product software 5 years Patented technology 4 years Customer contracts 3.45 years Lucent Technologies - ------------------- On September 30, 1997, the Company acquired from Lucent Technologies Inc. ("Lucent") certain assets related to Lucent's payphone manufacturing and component parts business. The purchase price, including estimated acquisition expenses of $150, was $6,040, subject to adjustment based on the difference between the book value of inventories determined pursuant to the acquisition agreement and $3,849. Assets acquired from Lucent included inventories, machinery, equipment, tooling and certain other assets related to the payphone manufacturing and component parts business conducted by Lucent, as well as a license of certain patent and other intellectual property rights related thereto. On October 2, 1997, the Company borrowed an aggregate of $6,850 under the terms of bank promissory notes to finance the Lucent acquisition, including acquisition expenses, debt issuance expenses of $57 and other general corporate activities, including acquisition of equipment. These notes consisted of an installment note in the principal amount of $3,050 payable in eighty four equal monthly installments of $37, a term note in the principal amount of $2,850 due March 31, 1998 and a term note in the principal amount of $950 due March 31, 1998. The notes were collateralized by the assets of the Company and bore interest at the bank's floating 30 day Libor rate plus 2.25% (7.9% upon issuance). Proceeds from these aforementioned notes were used to pay the purchase price payable obligations recorded at September 30, 1997, acquisition expenses, and the debt issuance expenses related to the Lucent acquisition, which aggregated $6,094. On November 25, 1997, the Company repaid all of the aforementioned notes from the proceeds drawn under a $15,000 revolving credit line entered into on November 25, 1997. A summary of the allocation of the purchase price to the assets acquired as of September 30, 1997, based on the Company's estimates of their fair values is set forth below. Inventories $3,999 Equipment and tooling 500 Intangible Assets 1,541 ------ Total purchase price $6,040 ====== The accompanying consolidated statements of operations for the three months and nine months ended December 31, 1997 reflect the effects of the Lucent acquisition from the acquisition date. 15 RESULTS OF OPERATIONS - --------------------- (Dollars in thousands) Quarter ended December 31, 1997, compared to the quarter ended December 31, 1996: Net sales for the quarter ended December 31, 1997 ("third quarter 1998"), increased from $7,206 for the quarter ended December 31, 1996 ("third quarter 1997") to $13,592, an increase of $6,386, or approximately 89%, principally as a result of an increase in sales of products to customers in the Independent Private Payphone ("IPP") market of $450, or approximately 11%, from $3,936 for the third quarter 1997 to $4,386 for the third quarter 1998, an increase in sales of products to customers in the Regulated Telephone ("Telco") market of $5,992 from $34 for the third quarter 1997 to $6,026 for the third quarter 1998 due to the TSG and Lucent acquisitions described above, a decrease in sales of products to customers in the International market of $366, or approximately 12%, from $2,999 for the third quarter 1997 to $2,633 for the third quarter 1998 due to timing and delays in delivery of orders, and an increase of sales of parts and miscellaneous other sources of revenue of $310, or approximately 130%, from $237 for the third quarter 1997 to $547 for the third quarter 1998. Sales to international customers accounted for approximately 19% of net sales for the third quarter 1998 as compared to approximately 42% for the third quarter 1997. Third quarter 1998 sales include sales of $580 by the Company to TSG prior to the acquisition date. Cost of sales as a percentage of net sales increased to 63% for the third quarter 1998 from 60% for the third quarter 1997 principally as a result of the increase in sales of lower margin products to the Telco market. As a result of the acquisitions described above, the Company believes that its sales to the Telco markets will increase compared to historical sales to such markets. Because sales of products to the Telco markets have lower margins than many of the other markets to which the Company sells, the Company also believes its cost of sales as a percentage of net sales will be higher compared to that percentage for the Company on a historical basis. Research and development costs increased by $561, or approximately 81%, from $692 in the third quarter 1997 to $1,253 in the third quarter 1998 due to the expansion of resources to support development and engineering activities related to technology and products acquired from Lucent and TSG. Selling, general and administrative expenses increased by $1,083, or approximately 77%, from $1,398 in the third quarter 1997 to $2,481 in the third quarter 1998 principally as a result of an increase in the Company's allowance for doubtful accounts, expenses of defending the Bethlahmy class action lawsuit, an expansion of marketing resources to support domestic and international initiatives, and an increase in expenses resulting from the acquisition of TSG. Amortization expense increased by $124 from $9 for the third quarter 1997 to $133 for the third quarter 1998 due to the amortization of intangibles resulting from the Lucent and TSG acquisitions. Interest income increased by $23, or approximately 29%, from $78 in the third quarter 1997 to $101 in the third quarter 1998 due to an increase in the Company's note portfolio. Interest expense increased by $135, or approximately 500%, from $27 in the third quarter 1997 to $162 in the third quarter 1998 due to the increase in outstanding debt related to the Lucent and TSG acquisitions. 16 Nine months ended December 31, 1997, compared to the nine months ended December 31, 1996: Net sales for the nine months ended December 31, 1997 ("nine-months 1998"), increased from $18,858 for the nine months ended December 31, 1996 ("nine-months 1997") to $27,975, an increase of $9,117, or approximately 48%, principally as a result of an increase in sales of products to customers in the IPP market of $2,033, or approximately 16%, from $12,376 for the nine-months 1997 to $14,409 for the nine-months 1998, an increase in sales of products to customers in the Telco market of $6,877 from $224 for the nine-months 1997 to $7,101 for the nine-months 1998 due to the TSG and Lucent acquisitions, a decrease in sales of products to customers in the International market of $405, or approximately 7%, from $5,624 for the nine-months 1997 to $5,219 for the nine-months 1998 due to timing and delays in delivery of orders, and an increase of sales of parts and miscellaneous other sources of revenue of $612, or approximately 97%, from $634 for the nine-months 1997 to $1,246 for the nine-months 1998. Sales to international customers accounted for approximately 19% of net sales for the nine-months 1998 as compared to approximately 30% for the nine-months 1997. Cost of sales as a percentage of net sales decreased to 59% for the nine-months 1998 from 60% for the nine-months 1997. Research and development costs increased by $863, or approximately 45%, from $1,932 in the nine-months 1997 to $2,795 in the nine-months 1998 due to the expansion of development and engineering activities related to technology acquired from Lucent and TSG. Selling, general and administrative expenses increased by $2,167, or approximately 54%, from $4,033 in the nine-months 1996 to $6,200 in the nine-months 1998 principally as a result of an increase in the Company's allowance for doubtful accounts, expenses of defending the Bethlahmy class action lawsuit, an expansion of sales and marketing resources to support domestic and international initiatives, increased costs of customer conferences and an increase in expenses resulting from the TSG acquisition. In addition the Company recorded a non-recurring reduction to its provision for doubtful accounts in the second quarter 1997 due to cash collection or product return of previously reserved amounts. Amortization expense increased by $123 from $22 for the nine-months 1997 to $145 for the nine-months 1998 due to the amortization of intangibles resulting from the Lucent and TSG acquisitions. Interest income increased by $30, or approximately 13%, from $235 in the nine-months 1997 to $265 in nine-months 1998 due to an increase in the Company's note receivable portfolio. Interest expense increased by $95, or approximately 88%, from $108 in the nine-months 1997 to $203 in the nine-months 1998 due to the increase in outstanding debt related to the TSG and Lucent acquisitions. 17 Liquidity and Capital Resources - ------------------------------- (Dollars in thousands) The Company's current assets increased by $23,169, or approximately 211%, from $10,982 at March 31, 1997 to $34,151 at December 31, 1997, predominantly from an increase in accounts receivable of $10,012 (approximately $5,271 of which represents accounts receivable of TSG and the remainder resulting from the higher level of sales by the Company, including of products purchased from Lucent) and an increase of $745 in notes receivable (related to the higher level of sales to the IPP market by the Company), an increase of $9,437 in inventory (approximately $4,000 of which is related to the Lucent acquisition and $4,460 of which is related to the TSG acquisition), and an increase in the deferred tax asset of $3,392 which is related to the TSG acquisition. Current liabilities increased by $5,797, or approximately 188%, from $3,085 at March 31, 1997 to $8,882 at December 31, 1997 predominantly from liabilities of approximately $3,285 acquired from TSG and the remainder an increase in accounts payable and accrued expenses resulting from the Company's increased sales activity. From August 31, 1995 until November 25, 1997, the Company had a $2,000 working capital line of credit secured by the Company's accounts receivable, notes receivable and inventories. Interest on amounts borrowed on the line of credit was at the bank's floating 30 day Libor rate plus 2.75%. The Company borrowed against and repaid the line of credit throughout the year depending upon its working capital needs and cash generated from operations, with the outstanding amount under the line of credit during fiscal 1998 ranging from $0 to $1,500. On October 2, 1997, the Company borrowed an aggregate of $6,850 under bank promissory notes in connection with financing the Lucent acquisition described above. $3,050 of that bank debt was payable in 84 equal monthly installments ending October 2, 2004 and an aggregate principal amount of $3,800 is represented by two term notes that were due on March 31, 1998. See "Acquisitions" for a more complete description of these bank promissory notes. On November 25, 1997, the Company refinanced the $2,000 working capital line of credit, the $3,050 term note due on October 2, 2004 and the $3,800 term notes that were due on March 31, 1998, with a new $15,000 revolving line of credit which matures on November 25, 2002. Interest on amounts borrowed on the line of credit is at the bank's floating 30 day Libor rate plus 1.5%. In addition, on November 26, 1997, the Company refinanced its mortgage note, which had a principal balance of $315 and a maturity date of May 23, 1999, with a new mortgage note in the amount of $1,920, at the same fixed interest rate of 8.5%, which matures in five years, but whose monthly payments are based on a 15 year term. The Company believes that its anticipated cash flow from operations will be sufficient to fund its working capital needs, its capital expenditures and its short and long term note obligations through December 31, 1998. 18 New Accounting Pronouncements - ----------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("SFAS 129"). SFAS 129 requires a Company to explain the privileges and rights of its various outstanding securities, the number of shares issued upon conversion, exercise or satisfaction of required conditions during the most recent annual fiscal period, liquidation preferences of preferred stock and other matters with respect to preferred stock. Although the statement is effective for periods ending after December 15, 1997, the Company's financial statement disclosures are in compliance with SFAS 129. 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 adoption of SFAS 130 is not expected to have a material effect on the Company's results of operations or financial position. Also, 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. 19 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 quarters ended September 30, 1996, June 30, 1997 and September 30, 1997. In July 1997 plaintiffs' motion for class certification was tentatively denied, without prejudice, but the court permitted the plaintiffs to obtain additional evidence which the court could use to reconsider the court's previous denial of plaintiffs' motion to certify the class. On December 9, 1997, the court granted the plaintiffs' motion to certify the class. The Company disputes liability and intends to defend this matter vigorously, although the Company cannot predict the ultimate outcome of this litigation. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On December 5, 1997, the Company held its Annual Meeting of Shareholders (the "Meeting"). The matters voted upon at the Meeting were the election of directors, a proposal to approve the issuance of shares of common stock of the Company in connection with the proposed merger of Elcotel Hospitality Services, Inc., a wholly owned subsidiary of the Company, into Technology Service Group, Inc., a proposal to approve an amendment to the Certificate of Incorporation of the Company to increase the number of shares of common stock authorized for issuance to 30,000,000, a proposal to amend the 1991 Stock Option Plan, a proposal to amend the Directors Stock Option Plan and ratification of the appointment of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ending March 31, 1998. At the Meeting, the Shareholders were asked to elect seven 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: 20 Votes Name Votes For Withheld ---------------- --------- -------- Tracey L. Gray 7,812,825 191,550 C. Shelton James 7,812,675 191,700 Dwight Jasmann 7,812,875 191,500 Charles H. Moore 7,802,275 202,100 Thomas E. Patton 7,812,675 191,700 T. Raymond Suplee 7,812,675 191,700 Thomas R. Wiltse 7,802,275 202,100 In connection with the Company's acquisition of TSG, on December 18, 1997 Thomas R. Wiltse and T. Raymond Suplee resigned as directors of the Company, and David Steadman, Mark Plaumann and Kenneth Rubin (who resigned on February 6, 1998 and was replaced by Joseph M. Jacobs) were elected directors of the Company. At the Meeting, the shareholders were asked to act upon a proposal to approve the issuance of common stock in connection with the proposed merger of Elcotel Hospitality Services, Inc., a wholly owned subsidiary of the Company, into Technology Service Group, Inc. The outcome of the voting was: 4,279,233 For; 460,648 Against; 13,280 Abstentions; and 3,251,214 broker non-votes. At the Meeting, the shareholders were asked to act upon a proposal to amend the Certificate of Incorporation of the Company to increase the number of common stock authorized for issuance to 30,000,000. The outcome of the voting was: 7,553,368 For, 56,121 Against; and 394,886 Abstensions. At the Meeting, the shareholders were asked to act upon a proposal to amend the 1991 Stock Option Plan to increase the number of shares reserved for issuance under the plan by 500,000. The outcome of the voting was: 4,275,024 For; 315,941 Against; 162,196 Abstentions; and 3,251,214 broker non-votes. At the Meeting, the shareholders were asked to act upon a proposal to, among other things, amend the Directors Stock Option Plan to increase the number of shares reserved for issuance under the plan by 50,000. The outcome of the voting was: 5,281,753 For; 366,744 Against; 174,433 Abstentions; and 2,181,445 broker non-votes. 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, 1998, and the outcome of the voting was: 7,852,040 For; 9,250 Against; and 143,085 Abstentions. 21 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Exhibits are listed in the Index to Exhibits on page E-1. (b) Reports on Form 8-K: A Current Report on Form 8-K dated September 30, 1997 was filed in connection with the Registrant's acquisition of certain assets related to the Lucent Technologies, Inc. payphone manufacturing and component parts business. A Current Report on Form 8-K dated December 18, 1997 was filed in connection with the Registrant's acquisition of Technology Service Group, Inc. ("TSG") via the merger of Elcotel Hospitality Services, Inc., a direct wholly owned subsidiary of the Registrant ("EHS"), into TSG, pursuant to the Agreement and Plan of Merger dated as of August 13, 1997 (as amended) among the Registrant, TSG and EHS. 22 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 17, 1998 By: /s/ Ronald M. Tobin ------------------------ Ronald M. Tobin Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 23 INDEX TO EXHIBITS Exhibit Method of Number Description Filing - ------- ----------- ----------------------- 10.1 Restated Loan Agreement between Elcotel, Inc. and NationsBank, N.A. dated November 25, 1997. Included in this report. 10.2 Consolidated Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated November 25, 1997. Included in this report. 10.3 Mortgage Modification and Future Advance Agreement between Elcotel, Inc. and NationsBank, N.A. dated November 26, 1997. Included in this report. 10.4 Consolidated Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated November 26, 1997. Included in this report. E-1 EX-10.1 2 RESTATED LOAN AGREEMENT DATED NOVEMBER 25, 1997 EXHIBIT 10.1 - ------------- NATIONSBANK, N.A. RESTATED LOAN AGREEMENT ----------------------- This Restated Loan Agreement (the "Agreement") dated as of November 25, 1997, by and between NationsBank, N.A. f/k/a NationsBank, N.A. (South) as successor in interest to NationsBank of Florida, N.A., a national banking association ("Bank" or "Lender") and the Borrower described below. This Agreement shall replace and supersede that certain loan agreement dated August 31, 1994, as amended, between Bank and Borrower. In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. Borrower: Elcotel, Inc. ("Elcotel"), Elcotel Direct, Inc., ("Elcotel Direct") and Elcotel Hospitality Services, Inc., ("Elcotel Hospitality"), all Delaware corporations, and all subsidiaries, each jointly and severally. B. Borrower's Address: 6428 Parkland Drive Sarasota, FL 34243 C. Collateral. As collateral for the Loan and any other indebtedness of the Borrower, Borrower has granted a first priority lien on all assets of Borrower, now owned or hereinafter acquired and wherever located, including but not limited to all accounts receivable, notes receivable and inventory of Borrower. D. Current Assets. Current Assets means the aggregate amount of all of its assets which would, in accordance with GAAP, properly be defined as current assets, but excluding the following items, if any: N/A E. Current Liabilities. Current Liabilities means the aggregate amount of all current liabilities as determined in accordance with GAAP, but in any event shall include all liabilities except those having a maturity date which is more than one year from the date as of which such computation is being made. F. Debt Service Coverage Ratio. Debt Service Coverage Ratio means Borrower's Net income ("NI") + Depreciation ("D") + Amortization ("AMORT") less Dividends ("DIV"), all divided by Current Maturities of Long Term Debt ("CMLTD") and Current Maturities of Capital Leases ("CMCL") (i.e. NI + D + AMORT - DIV -------------------- CMLTD + CMCL). G. Domestic Accounts Receivable. Domestic Accounts Receivable shall mean trade accounts receivable of Borrower arising from and after the date hereof from the sale of goods in the ordinary course of business to any entity formed under the laws of the United States of America, and its territories, or its 50 states. H. Eligible Accounts Receivable. Eligible Accounts Receivable means: (1) All Domestic Accounts Receivable of the Borrower, which, as of the date of any such determination: (i) are not owed by or in respect of a director, officer, employee, agent, subsidiary or affiliate of the Borrower; (ii) have not been owing for more than 90 days from the invoice date relating thereto; (iii) are not accounts with respect to which the Borrower is or might become liable to the account debtor for goods sold or services rendered to the Borrower; and (iv) are not owed by the United States or any agency, department or instrumentality thereof; (2) All Foreign Open Accounts Receivable of the Borrower which as of the date of any such determination have not been owing for more than ninety (90) days from the invoice date relating thereto, provided however that the total of all such Foreign Open Accounts Receivable to be included in the Borrowing Base shall not exceed 10% of the total of all Eligible Accounts Receivable including Foreign Open Accounts Receivable; (3) All other Foreign Accounts Receivable, except for Foreign Open Accounts Receivable, of Borrower which are (i) secured by letters of credit which are satisfactory to Bank in its sole discretion (ii) covered by export credit insurance or an Exim Bank guaranty satisfactory to Bank in its sole discretion, (iii) are factored through Bank or an affiliate of Bank or (iv) for goods shipped through international site documentation and collection satisfactory to Bank in its sole discretion. I. Eligible Inventory. That portion of inventory on hand exclusive of any work in progress and excluding equipment. J. Foreign Accounts Receivable. Foreign Accounts Receivable shall mean trade accounts receivable of Borrower arising from and after the date hereof from the sale of goods in the ordinary course of business to any entity not formed under the laws of the United States of America, and its territories, or any of its 50 states. 2 K. Foreign Open Accounts Receivable. Foreign Open Accounts Receivable shall mean those Foreign Accounts Receivable of Borrower which are not: (i) secured by letters of credit satisfactory to Bank, (ii) covered by export credit insurance or an Exim Bank guaranty satisfactory to Bank, (iii) factored through the Bank or an affiliate of the Bank, or (iv) for goods shipped through international site documentation and collections satisfactory to Bank. L. Interest Coverage Ratio. Interest Coverage Ratio means Borrower's earnings before interest and taxes divided by Borrower's interest expense, as determined in accordance with GAAP. M. Loan(s). Loan(s) means collectively any and all loans heretofore or hereafter made by Bank to the Borrower. N. Loan Documents. Loan Documents means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan, including but not limited to the previous loan documents executed and delivered in connection with the loans consolidated by the Line of Credit Note and Mortgage Note. O. Tangible Net Worth. Tangible Net Worth means the amount by which total assets exceed total liabilities in accordance with GAAP, less the following items, if any: (a) ANY NOTES FROM SHAREHOLDERS, OFFICERS, DIRECTORS OR EMPLOYEES IN FAVOR OF BORROWER AND (b) ANY GENERAL INTANGIBLE ASSETS, AS DETERMINED IN ACCORDANCE WITH GAAP. P. TSG. TSG shall mean Technology Service Group, Inc. Q. TSG Merger Agreement. TSG Merger Agreement shall mean that certain Agreement and Plan of Merger dated as of August 13, 1997 by and among Elcotel, Elcotel Hospitality and TSG. R. Accounting Terms. All accounting, terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 3.H. and 4.B. hereof. 2. LOANS. A. Loan. Bank hereby agrees to refinance existing loans to Borrower in the principal amounts of $2,000,000.00 (with a current balance of $1,035,000.00), $2,850,000.00, $950,000.00 and $1,408,864.28 of a previous $3,050,000.00 loan, and to make a 3 new line of credit loan in the amount of $7,791,135.72 for a total consolidated line of credit loan in the amount of $15,000,000.00 and to renew a $315,173.80 mortgage loans and to make a $1,604,826.20 future advance loan to Elcotel to be consolidated with the $315,173.80 renewal loan for a $1,920,000.00 consolidated mortgage loan. The obligation to repay the loans is evidenced by a $2,000,000.00 note dated August 31, 1996 (as extended by Note Modification Agreement dated August 20, 1997), a $2,850,000.00 note dated October 2, 1997, a $950,000.00 note dated October 2, 1997, a $3,050,000.00 note dated October 2, 1997, a $1,408,864.28 and a $7,791,135.72 note both dated November 25, 1997, all as consolidated by a $15,000,000.00 Consolidation Promissory Note, dated November 25, 1997 (all such notes together with any other promissory notes heretofore or hereafter executed by Borrower in favor of Bank and any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Line of Credit Note") and by a $315,173.80 renewal note, a $1,604,826.20 future advance note and a $1,920,000.00 Consolidated Promissory Note all dated on or about even date herewith (such notes together with any and all renewals, extensions or rearrangements thereof are hereinafter collectively called the "Mortgage Note") having a maturity date, repayment terms and interest rate as set forth in the Line of Credit Note and Mortgage Note. B. Revolving Credit Feature. Subject to the terms and provisions of this Agreement, the Line of Credit Note provides for a revolving line of credit (the "Line") under which Borrower may from time to time, borrow, repay and re borrow funds, not to exceed the Borrowing Base formula set forth in paragraph 2.D. below at any one time outstanding. Requests for advances must be accompanied by certification of an authorized officer of Borrower that Borrower is not in default of the Loan Documents. Each advance under the Line shall be in increments of $1.00 to facilitate AutoPay or AutoBorrow through the Bank's treasury management system. C. Intentionally Deleted. D. Borrowing Base. Borrowings under the Line of Credit Note will be based upon a Borrowing Base formula and at no time will the outstanding principal balance of the Loan exceed the lesser of: (a) $15,000,000.00 or (b) the sum of 80%f Eligible Accounts Receivable plus 40% of Eligible Inventory (which inventory portion of the Loan will be capped at $5,000,000.00) minus the aggregate face amount of all outstanding Letters of Credit as hereinafter defined; provided however, from and after the date hereof through March 31, 1998 the 40% of Eligible Inventory limitation and the $5,000,000.00 cap on Eligible Inventory shall not apply. Further provided, commencing April 1, 4 1998 such 40% limitation and $5,000,000.00 cap shall be reinstated and commencing April 1, 1999 the 40% limitation on Eligible Inventory shall be changed to 30% and the $5,000,000 cap will remain in place. Borrower, at its expense shall deliver or cause to be delivered to Bank within 30 days of written request by Bank throughout the term of the Loan, an Eligible Inventory Report, in form satisfactory to Bank from Borrower or at Bank's option, some other inspector chosen by Bank listing all of Borrower's Eligible Inventory on hand. On the day of a draw request, the Borrower shall submit to Bank a certification, in form satisfactory to Bank, that Borrower is not in default under the Loan Agreement, the Line of Credit Note, or other Loan Documents. Borrower on a consolidated basis, will provide Borrowing Base Certificates monthly, or at any such time as required by Bank, which Borrowing Base Certificate shall calculate the availability under the full commitment of the Line, in form attached hereto as Exhibit "A", or such other form as Bank determines to be acceptable in its sole discretion. Included in the calculation shall be any Letters of Credit which are being secured by the Loan. The monthly Borrowing Base Certificate shall be provided within 20 days of month end. If at any time the outstanding balance of the Note exceeds the Borrowing Base, the Borrower shall have 30 days to cure such default. E. Letter of Credit Subfeature. As a subfeature under the Line, Bank may from time to time issue letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided, however, that the form and substance of each Letter of Credit shall be subject to approval by Bank in its sole discretion; and provided further that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed the undrawn balance of the Line of Credit Note. Unless otherwise agreed by the Bank, each Letter of Credit shall be issued for a term not to exceed one year, as designated by Borrower, provided, however, if Line of Credit Note is in default or if any Letter of Credit which shall have an expiration date subsequent to November 25, 2002 and the term of the Line of Credit Note is not renewed for a period beyond such expiration date, upon such default or the maturity date of the Line of Credit Note, as applicable, Borrower hereby agrees that Borrower shall either: (i) deposit with Lender and pledge as security for all outstanding Letter(s) of Credit, cash in the amount of all outstanding Letter(s) of Credit or other collateral satisfactory to Bank in its sole discretion, or (ii) Borrower shall immediately make application to another financing institution to issue such letters of credit in replacement of the Letters of Credit and shall agree to such financial institution's conditions to the issuance of the replacement letters of credit without reservation. The failure to provide the Bank with (i) replacement letters of credit for the benefit of beneficiary, as defined in the Letters of Credit, and the beneficiary's authorization to cancel the Letters of Credit or (ii) the cash or 5 additional collateral, within fifteen (15) days of Bank's written request shall constitute an event of default under this Restated Loan Agreement. In connection with the deposit of cash or additional collateral, Borrower agrees to execute and deliver such pledges, security agreements, financing statements or other loan documents reasonably required by Lender. The undrawn amount of all Letters of Credit plus any and all amounts paid by Bank in connection with drawings under any Letter of Credit for which the Bank has not been reimbursed shall be reserved under the Line and shall not be available for advances thereunder. Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line and shall be repaid in accordance with the terms of the Line; provided however, that if the Line is not available for any reason whatsoever, at the time any draft is paid by Bank, or if advances are not available under the Line in such amount due to any limitation of borrowing set forth herein, then the full amount of such drafts shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at that rate of interest applicable to advances under the Line. In such event, Borrower agrees that Bank, at Bank's sole discretion may debit Borrower's deposit account with Bank for the amount of such draft. F. Fees. Borrower will pay to Bank, prior to and as a condition of Bank issuing the Letter of Credit, and on each yearly anniversary date of such Letters of Credit with an expiry date in excess of one year, a fee equal to the greater of: (i) $300.00, or (ii) one and one half percent (1.5%) of the face value of each Letter of Credit issued up to $1,000,000.00, and one percent (1.0%) of the face value of each Letter of Credit with a face value in excess of $1,000,000.00. G. Usage Fee. Borrower will pay hereafter on April 10, 1998 and on the 10th day of each calendar quarter thereafter for the period from and including January 1, 1998 to and including the maturity date of the Line, a usage fee at a rate per annum of .25% of the difference between $15,000,000 and the average daily outstanding principal balance under the Line of Credit Note. For purposes of this calculation, the portion of the Line restricted due to issuance of Letters of Credit shall be deemed outstanding under the Line. The Borrower may at any time upon written notice to the Bank permanently reduce the amount of the Line at which time the obligation of the Borrower to pay a usage fee shall thereupon correspondingly be reduced. H. Accounts; Increase of Line of Credit Note Interest Rate. Borrower, to induce Bank to make the Loan, agrees to maintain its principal operating accounts with Bank. Borrower acknowledges that the interest rate and terms of the Line of Credit Note are based upon this covenant and the terms of this 6 Agreement, and should Borrower breach this covenant or the terms of this Agreement, which breach is not cured within five (5) days, at the option of Bank, the interest rate due under the Line of Credit Note shall automatically and immediately be adjusted to two percent (2%) in excess of the non-default interest rate charged under the Line of Credit Note. The curative period set forth herein shall not be in addition to any other curative period set forth in the Loan Documents. I. Use of Loan Proceeds. Borrower covenants and agrees with Lender that the future advance loan proceeds shall be used solely to refinance a portion of that certain $3,050,000.00 note dated October 2, 1997, and that the Line of Credit Note proceeds shall be used solely to: (i) refinance the remainder of Borrower's existing debt with Bank, (ii) for loan closing costs, (iii) to finance the merger of Elcotel Hospitality into TSG pursuant to the TSG Merger Agreement and (iv) to provide working capital. In connection therewith, Borrower covenants and agrees with Lender that no portion of the Line shall be used to finance the merger of Elcotel Hospitality into TSG unless and until the following conditions have been met: (a) the shareholders of TSG and Elcotel Hospitality, at duly held meetings or by unanimous written consent, approve the merger of TSG and Elcotel Hospitality pursuant to the TSG Merger Agreement. (b) Bank shall have been provided with payoff estoppel letters from all creditors of TSG holding a security interest in any of the TSG assets to be indirectly acquired by Elcotel by acquiring 100% of the Stock of TSG through the TSG Merger Agreement, and the funds available through the Line, are sufficient to satisfy all of such debt. In the event there is a deficiency between the funds available under the Line and the amount necessary to satisfy all of such debt, prior to advancing funds Borrower shall provide to Bank sufficient funds to fully pay such deficiency. (c) Borrower shall not be in default under this Restated Loan Agreement or other Loan Documents. (d) Simultaneously with the consummation of the merger of Elcotel Hospitality into TSG, TSG shall execute and deliver to Bank such UCC-1 financing statements and confirmations and assumption of all of Elcotel Hospitality's obligations under the Loan Documents as Bank shall require. 7 (e) Borrower shall have provided, or Bank obtained, evidence that upon TSG executing and delivering the confirmation, assumption and UCC-1 financing statements and upon payment to the creditors of TSG holding a security interest in the assets to be indirectly acquired by Elcotel by acquiring 100% of the stock of TSG, that Bank's security interest in all of such assets shall be a first priority security interest. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. Good Standing. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business with the exception that Elcotel Hospitality is not yet qualified to do business in the State of Florida. B. Authority and Compliance. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. C. Binding Agreement. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. D. Litigation. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. E. No Conflicting Agreements. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. 8 F. Ownership of Assets. Borrower has good title to its assets, and its assets are free and clear of liens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. G. Taxes. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. H. Financial Statements. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since June 30, 1997. To the best of Borrower's knowledge, all factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. Place of Business. Borrower's chief executive office is located at: 6428 Parkland Drive Sarasota, FL 34243 J. Environmental Matters. The conduct of Borrower's business operations do not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency and any applicable local or state law, rule, regulation or rule of common law and any judicial interpretation thereof relating primarily to the environment or Hazardous Materials and Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees 9 and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. K. Continuation of Representation and Warranties. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance under any Loan. 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. Financial Condition. Maintain Borrower's financial condition on a consolidated basis as follows, determined in accordance with GAAP applied on a consistent basis throughout the period involved except to the extent modified by the following definitions: i. Maintain a consolidated ratio of Current Assets to Current Liabilities of not less than: a. 1.5 to 1.0 for each calendar quarter, measured on a rolling four quarter basis from company prepared statements. b. 1.5 to 1.0 for fiscal year end measured from the consolidated audited financial statements of Borrower. ii. Maintain a consolidated Debt Service Coverage Ratio of not less than 1.3 to 1.0, measured on a rolling four (4) quarter basis from the consolidated annual and quarterly financial statements of Borrower. iii. Maintain a consolidated ratio of Total Liabilities (as determined in accordance with GAAP) to Tangible Net Worth of not more than 1.25 to 1.0 measured on a rolling four quarter basis for each calendar quarter and fiscal year end. iv. Maintain a consolidated Interest Coverage Ratio of greater than 3.0 to 1.0 measured on a rolling four quarter basis from the consolidated annual and quarterly financial statements of Borrower. 10 B. Financial Statements and Other Information. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. All financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: i. Furnish to Bank unqualified and audited financial statements of Borrower on a consolidated and consolidating basis for each fiscal year of Borrower, within 120 days after the close of each such fiscal year. ii. Furnish to Bank company prepared financial statements (including a balance sheet and profit and loss statement and including results for the immediately preceding twelve month period) of Borrower on a consolidated and consolidating basis for each quarter of each fiscal year of Borrower, within 45 days after the close of each such period. iii. Furnish to Bank a compliance certificate for (and executed by an authorized representative of) Borrower, concurrently with and dated as of the date of delivery of each of the financial statements as required in paragraphs i and ii above, containing (a) a certification that the financial statements of even date are true and correct and that the Borrower is not in default under the terms of this Agreement, and (b) computations and conclusions, in such detail as Bank may request, with respect to compliance with all representations, warranties, and covenants contained in this Agreement, and the other Loan Documents, and including computations of all quantitative covenants. iv. Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower, from time to time, as Bank may reasonably request including but not limited to all filings with the Securities and Exchange Commission as and when filed. C. Insurance. Maintain product liability insurance for all its products, in amounts and form satisfactory to Bank from an insurer acceptable to Bank in its sole discretion. 11 Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and with respect to insurance on the Collateral, to contain a mortgagee clause naming Bank as a loss payee or an additional insured (as applicable) as its interest may appear and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank 30 days prior to each policy renewal. Bank acknowledges that Liberty Mutual Insurance Company and the current coverages disclosed to Bank are acceptable to Bank. D. Existence and Compliance. Maintain its existence, good standing and qualification to do business, where required and comply with all applicable laws, regulations and governmental requirements including, without limitation, the Occupational Safety and Health Act, Pension Guaranty Board requirements, Employee Retirement Income Security Act, Americans with Disabilities Act, Environmental Protection Agency regulations, and any other environmental laws applicable to it or to any of its property, business operations and transactions. Elcotel covenants and agrees immediately after the merger of Elcotel Hospitality into TSG to cause TSG to file with the applicable governmental agency to qualify to do business in the State of Florida and to provide to Bank evidence within 30 days from the date hereof that it has so qualified to do business in the State of Florida. E. Adverse Conditions or Events. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's financial condition or operations, the Collateral, or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower exceeding $50,000, (iii) any event that has occurred that would constitute an event of default under any Loan Documents and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $25,000.00. F. Taxes and Other Obligations. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. 12 G. Maintenance. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. H. Notification of Environmental Claims. Borrower shall immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrowers business operations. I. Facilities Leases. Except as waived in writing by Bank from time to time, cause the landlord's lien rights, if any, arising from all facilities leased to Borrower to be fully subordinate to the Loan Documents. J. Borrower covenants and agrees that within 60 days from the date hereof, Borrower will provide to Lender, a company prepared balance sheet for Borrower setting forth the new loan indebtedness to Bank and the equity structure of Borrower (including the assets acquired pursuant to the TSG Merger Agreement). 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. Capital Expenditures. Make non-financed capital expenditures during each fiscal year (including capitalized leases) exceeding in the aggregate $500,000.00 B. Transfer of Assets or Control. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger, consolidation, partnership, joint venture, sale/leaseback agreement, or transfer control or ownership of the Borrower or create or acquire any subsidiary, not a party to the agreements executed in connection with the Loan. Provided however, Bank hereby consents to the merger between TSG and Elcotel Hospitality pursuant to the TSG Merger Agreement. C. Liens. Grant, suffer or permit any contractual or noncontractual lien on, or security interest in, its assets, 13 except in favor of Bank, and except for any purchase money security interest in chattels; or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise. D. Extensions of Credit. Make any loan or advance to any officers or stockholders of Borrower, or any individual, partnership, corporation or other entity. E. Borrowings. Create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for normal trade debts and credit leases incurred in the ordinary course of Borrower's business, and except for existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. F. Dividends and Distributions. Make any distribution (other than dividends payable in capital stock of Borrower) on any shares of any class of its capital stock, or apply any of property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock of Borrower, or in any way amend its capital structure, or pay any dividends if in default. G. Character of Business. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. H. Acquire or purchase any stocks, partnership interest or other equity interest in any other entity; provided however Borrower shall be entitled to acquire, purchase or invest in obligations of the U.S. Government and its agencies and shall be entitled to acquire, purchase or invest in a capital stock of any subsidiary of Borrower. 6. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if any of the following events occurs before the loan is fully repaid: A. Default in Payment. Any default in the payment of principal and/or interest due and owing under the Loans. B. Failure of Performance. Any failure to timely and properly observe, keep or perform any term, covenant, agreement or condition in any Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation. 14 C. Violation of Representations or Warranties Provision. Any warranty, representation, or statement made or furnished to the Bank by Borrower in connection with the Loans and this Agreement (including any warranty, representation, or statement in the Borrower's financial statement(s)) or to induce the Bank to renew the Loans is untrue or misleading in any material respect. D. Bankruptcy. Any voluntary or involuntary bankruptcy, reorganization, insolvency, arrangement, receivership, or similar proceeding is commenced by or against Borrower under any federal or state law, or Borrower makes any assignment for the benefit of creditors. E. Cross-Default. Any default hereunder shall constitute a default under any other mortgage, note, obligation or agreement of Borrower held by Bank. The agreements contained in this paragraph to create cross defaults under all mortgages, notes, obligations and agreements between Borrower and Bank, whether currently existing or hereafter created, in the event of a default under one or more of such mortgages, notes, obligations or agreements is a material and specific inducement and consideration for the making by Bank of the Loan evidenced by the Line of Credit Note and Mortgage Note. 7. REMEDIES UPON DEFAULT. If an event of default shall occur Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as all rights and remedies available at law or in equity. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: 15 Borrower: Elcotel Direct, Inc. Elcotel Hospitality Services, Inc. Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: Ronald M. Tobin Bank: NationsBank, N.A. 1605 Main Street Sarasota, FL 34236 Attn: Nathan Coon, Vice President or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: A. If sent by hand delivery, upon delivery; B. If sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid. 9. COSTS. EXPENSES AND ATTORNEYS FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in house counsel), incurred by Bank in connection with (a) a default hereunder by Borrower, and (b) Bank's continued administration after such default. 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. Cumulative Rights and No Waiver. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. 16 B. Applicable Law. This Restated Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Florida and applicable United States federal law. C. Amendment. No modification, consent, amendment or waiver of any provision of this Restated Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Restated Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Restated Loan Agreement. D. Documents. All documents, certificates and other items required under this Restated Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. Partial Invalidity. The unenforceability or invalidity of any provision of this Restated Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. Indemnification. Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of the Borrower, 17 regardless of whether the Borrower has paid the employee under the workmen s compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan. G. Survivability. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding. 18 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IF ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BANK: NATIONSBANK, N.A. By:/s/ Nathan Coon ---------------------------- Nathan Coon, Vice President (CORPORATE SEAL) BORROWER: ELCOTEL, INC., a Delaware corporation By:/s/ Ronald M. Tobin ------------------------------- Ronald M. Tobin, Vice President and Chief Financial Officer (CORPORATE SEAL) ELCOTEL DIRECT, INC., a Delaware corporation By:/s/ Ronald M. Tobin ------------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) ELCOTEL HOSPITALITY SERVICES, INC., a Delaware corporation By:/s/ Ronald M. Tobin ------------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) 20 STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Nathan Coon, Vice-President of NATIONSBANK, N.A., a National Banking Association, on behalf of Bank. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum ------------------------------ *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President and Chief Financial Officer of ELCOTEL, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum ------------------------------ *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President of ELCOTEL DIRECT, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum ------------------------------ *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA 21 STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President of ELCOTEL HOSPITALITY SERVICES, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum ------------------------------ *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA 22 EX-10.2 3 CONSOLIDATED PROMISSORY NOTE DATED NOVEMBER 25, 1997 EXHIBIT 10.2 - ------------ THIS NOTE CONSOLIDATES THAT NOTE DATED AUGUST 31, 1996 (AS EXTENDED BY NOTE MODIFICATION AGREEMENT DATED AUGUST 20, 1997) IN THE PRINCIPAL SUM OF $2,000,000.00, THAT NOTE DATED OCTOBER 2, 1997, IN THE PRINCIPAL SUM OF $950,000.00, THAT NOTE DATED OCTOBER 2, 1997, IN THE PRINCIPAL SUM OF $2,850,000.00, AND THAT NOTE DATED NOVEMBER 25, 1997 IN THE PRINCIPAL SUM OF $1,408,864.28, AND THAT NOTE DATED NOVEMBER 25, 1997 IN THE PRINCIPAL SUM OF $7,791,135.72. CONSOLIDATION PROMISSORY NOTE --------------- Date of Execution: November 25, 1997 Amount: $15,000,000.00 FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly and severally, if more than one) promise(s) to pay to the order of NATIONSBANK, N.A., a National Banking Association ("Bank"), Sarasota (Banking Center) without setoff, at its offices at 1605 Main Street, Suite 101, Sarasota, Florida, 34236 or at such other place as may be designated by Bank, the principal amount of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereunder, at an annual interest rate, and in accordance with the payment schedule, indicated below. Rate The Rate shall be the Bank's FLOATING LIBOR RATE as follows: 1. As used herein "FLOATING LIBOR RATE INDEX" shall mean the fluctuating interest rate per annum published in the Wall Street Journal at which deposits in U.S. dollars are offered in the London interbank market on the date for which the Bank's FLOATING LIBOR RATE is being calculated in an amount equal to the outstanding amount of the loan and with a term equal to thirty (30) days. 2. The Bank's FLOATING LIBOR RATE shall be determined in accordance with the following: (a) "Bank's FLOATING LIBOR RATE" shall be equal to (A) the quotient (rounded up to the nearest 1/16 of 1%) of (1) the Floating Libor Rate Index, divided by (2) an amount equal to one (1) minus the appropriate reserve requirement imposed on Bank by the Federal Reserve System, if any, plus (B) 1.5%. With each change in the FLOATING LIBOR RATE INDEX the Bank's FLOATING LIBOR RATE shall change effective on the date the FLOATING LIBOR RATE INDEX changes. (b) The Borrower shall pay to Bank, from time to time and on demand, any sum(s) required to compensate the Bank for any additional cost (such as, but not limited to, a reserve requirement) incurred by the Bank at any time which (i) is attributable to the Bank's obtaining a deposit or deposits to cover the outstanding principal balance for which the Borrower has elected to pay or Bank's FLOATING LIBOR RATE, (ii) decreases the effective spread or yield represented by the 1.5% Floating Libor Rate component, that would be earned by the Bank but for such cost, and (iii) is caused or occasioned by any presently existing or subsequently introduced law, rule, regulations or other requirement (or by any change therein, changed effect or interpretation thereof or change in the Bank's cost of complying therewith) imposed, interpreted, administered or enforced by any federal, state or other governmental or monetary authority, which is imposed on or applied to the Bank or any assets held by, deposits or accounts in or with, or credits extended by the Bank. The Bank shall notify the Borrower from time to time of any such additional cost and such notice shall be binding and conclusive evidence of the Borrower's obligation to pay the stated sum upon receipt of the notice. (c) The Bank's reference to and use of the FLOATING LIBOR RATE INDEX to define and determine the Bank's FLOATING LIBOR RATE, shall not obligate the Bank to obtain funds from any particular source in order to charge interest at the Bank's FLOATING LIBOR RATE. Notwithstanding any other provision contained in this Note, Bank does not intend to charge and Borrower shall not be required to pay any amount of interest or other fees or charges that is in excess of the maximum permitted by applicable law. Any payment in excess of such maximum shall be refunded to Borrower or credited against principal, at the option of Bank. Accrual Method Interest at the Rate set forth above, unless otherwise indicated, will be calculated on the basis of the 365/360 method, which computes a daily amount of interest for a hypothetical year of 360 days, then multiplies such amount by the actual number of days elapsed in an interest calculation period. Rate Change Date Any Rate based on a fluctuating index or base rate will change, unless otherwise provided, each time and as of the date that the index or base rate changes. Payment Schedule All payments received hereunder shall be applied first to the payment of any expense or charges payable hereunder or under any other documents executed in connection with this Note ("Loan Documents"), then to interest due and payable, with the balance being applied to principal, or in such other order as Bank shall determine at its option. 1. Commencing December 25, 1997, and on the same day of each month thereafter through November 25, 2002, payments of all accrued and unpaid interest shall be made until maturity as set forth below. 2. The entire principal balance, together with all accrued and unpaid interest shall be due and payable in full on November 25, 2002. Revolving Feature Borrower may borrow, repay and reborrow hereunder at any time, up to a maximum aggregate amount outstanding at any one time equal to the principal amount of this Note; provided, however, that Borrower is not in default under any provision of this Note, any Loan Document, or any other obligation of Borrower to Bank, and provided that the borrowings hereunder do not exceed any borrowing base or other limitations on borrowings by Borrower. Bank shall have no liability for its refusal to advance funds based upon its determination that any conditions of such further advances have not been met. Bank records of the amounts borrowed from time to time shall be conclusive proof thereof. Automatic Payment Borrower has elected to authorize Bank to effect payment of sums due under this Note by means of debiting Borrower's account number ____________________________________. This authorization shall not affect the obligation of Borrower to pay such sums when due, without notice, if there are insufficient funds in such account to make such payment in full on the due date thereof, or if Bank fails to debit the account. Borrower represents to Bank that the proceeds of this loan are to be used primarily for business, commercial or agricultural purposes. Borrower acknowledges having read and understood, and agrees to be bound by all terms and conditions of this Note, including the Additional Terms and Conditions set forth in the Addendum attached hereto and made a part hereof, and hereby executes this Note under seal. BORROWER: ELCOTEL, INC., a Delaware corporation By:/s/ Ronald M. Tobin ----------------------------------- Ronald M. Tobin, Vice President and Chief Financial Officer (CORPORATE SEAL) ELCOTEL DIRECT, INC., a Delaware corporation By:/s/ Ronald M. Tobin ----------------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) ELCOTEL HOSPITALITY SERVICES, INC., a Delaware corporation By:/s/ Ronald M. Tobin ----------------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President and Chief Financial Officer of ELCOTEL, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum -------------------------- *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President of ELCOTEL DIRECT, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum -------------------------- *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this 25th day of November, 1997, by Ronald M. Tobin, Vice-President of ELCOTEL HOSPITALITY SERVICES, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced a Florida Drivers License as identification and did not take an oath. /s/ Carolyn Landrum -------------------------- *Carolyn Landrum (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Georgia My commission expires June 4, 2000 Notary Public, DeKalb County, GA ADDENDUM OF ADDITIONAL TERMS AND CONDITIONS ------------------------------- 1. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor hereof or any other party hereto (collectively "Obligors") and each of them jointly and severally: (a) waive presentment, demand, notice of demand, notice of intent to accelerate, and notice of acceleration of maturity, protest, notice of protest, notice of non-payment, notice of dishonor, and any other notice required to be given under the law to any of Obligors, in connection with the delivery, acceptance, performance, default or enforcement of this Note, of any indorsement or guaranty of this Note or of any Loan Documents; (b) consent to any and all delays, extensions, renewals or other modifications of this Note or the Loan Documents, or waivers of any term hereof or of the Loan Documents, or releases or discharge by Bank of any of Obligors or release, substitution, or exchange of any security for the payment hereof, or the failure to act on the part of Bank or any indulgence shown by Bank, from time to time and in one or more instances (without notice to or further assent from any of Obligors) and agree that no such action, failure to act or failure to exercise any right or remedy on the part of Bank shall in any way affect or impair the obligations of any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under this Note, under any indorsement or guaranty of this Note or under any of the Loan Documents; and (c) agree to pay, on demand, all costs and expenses of collection of this Note or of any indorsement or guaranty hereof and/or the enforcement of Bank's rights with respect to, or the administration, supervision, preservation, protection of, or realization upon, any property securing payment hereof, including without limitation, reasonable attorneys' fees, including fees related to any trial, arbitration, bankruptcy, appeal or other proceeding. 2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank harmless from all state and federal taxes of any kind and other liabilities with respect to or resulting from advances made pursuant to this Note; provided however this shall not apply to income taxes, Federal, State or otherwise, of the Bank. If this Note has a revolving feature and is secured by a mortgage, Obligors expressly consent to the deduction of any applicable taxes from each taxable advance extended by Bank. 3. Prepayments. Prepayment may be made in whole or in part at any time. All prepayments of principal shall be applied in the inverse order of maturity, or in such other order as Bank shall determine in its sole discretion. 4. Events of Default. The following are events of default hereunder: (a) the failure to make any payment due under this Note within ten (10) days after the due date or the failure to pay or perform any obligation, liability or indebtedness of any Obligor to Bank, or to any affiliate of Bank, whether under this Note or any other agreement, note or instrument now or hereafter existing, as and when due (whether upon demand, at maturity or by acceleration); (b) the failure to pay or perform any other obligation, liability or indebtedness of any of Obligors whether to Bank or some other party, the security for which constitutes an encumbrance on the security for this Note; (c) death of any Obligor (if an individual), or a proceeding being filed or commenced against any Obligor for dissolution or liquidation, or any Obligor voluntarily or involuntarily terminating or dissolving or being terminated or dissolved; (d) insolvency of, business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any other property of, or an assignment for the benefit of creditors by, or the filing of a petition under bankruptcy, insolvency or debtor's relief law or for any adjustment of indebtedness, composition or extension by or against any Obligor; (e) any lien or additional security interest being placed upon any of the property which is security for this Note; (f) acquisition at any time or from time to time of title to the whole of or any part of the property which is security for this Note by any person, partnership, corporation or other entity; (g) Bank determining that any representation or warranty made by any Obligor in any Loan Documents or otherwise to Bank is, or was, untrue or materially misleading; (h) failure of any Obligor to timely deliver such financial statements, including tax returns, and other statements of condition or other information as Bank shall request from time to time;(i) any default under any Loan Documents; (j) entry of a judgment against any Obligor which Bank deems to be of a material nature, in Bank's sole discretion; (k) the seizure or forfeiture of, or the issuance of any writ of possession, garnishment or attachment, or any turnover order for any property of any Obligor; (l) the determination by Bank that a material adverse change has occurred in the financial condition of any Obligor; or, (m) the failure to comply with any law or regulation regulating the operation of Borrower's business which has a material effect on Borrower's business. 5. Remedies Upon Default. Whenever there is a default under this Note, (a) the entire balance outstanding and all other obligations of Obligor to Bank (however acquired or evidenced) shall, at the option of Bank, become immediately due and payable, and/or (b) to the extent permitted by law, the Rate of interest on the unpaid principal shall, at the option of Bank, be increased at Bank's discretion up to the maximum rate allowed by law, or if none, twenty-five percent (25%) per annum (the "Default Rate"); and/or (c) to the extent permitted by law, a delinquency charge may be imposed in an amount not to exceed five percent (5%) of any payment in default for more than fifteen (15) days. The provisions herein for a Default Rate or a delinquency charge shall not be deemed to extend the time for any payment hereunder or to constitute a "grace period" giving the Obligors a right to cure any default. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of the Note or any installment thereof, be deemed to be a part of the principal balance, and interest shall accrue on a daily compounded basis after such date at the rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Bank is hereby authorized at any time to setoff and charge against any deposit accounts of any Obligor, as well as any other property of such party at or under the control of Bank, without notice or demand, any and all obligations due hereunder. 6. Non-waiver. The failure at any time of Bank to exercise any of its options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of its options or rights at a later date. All rights and remedies of Bank shall be cumulative and may be pursued singly, successively or together, at the option of Bank. The acceptance by Bank of any partial payment shall not constitute a waiver of any default or of any of Bank's rights under this Note. No waiver of any of its rights hereunder, and no modification or amendment of this Note, shall be deemed to be made by Bank unless the same shall be in writing, duly signed on behalf of Bank; and each such wavier, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Bank or the obligations of Obligor to Bank in any other respect at any other time. 7. Applicable Law. This Note shall be construed under the internal laws and judicial decisions of the State of Florida, and the laws of the United States as the same may be applicable. 8. Partial Invalidity. The unenforceability or invalidity of any provision of this Note shall not affect the enforceability or the validity of any other provision herein and the invalidity or unenforceability of any provision of this Note or of the Loan Documents to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 9. Jurisdiction and Venue. In any litigation in connection with or to enforce this Note or any indorsement or guaranty of this Note or any Loan Documents, Obligors, and each of them, irrevocably consent to and confer personal jurisdiction on the courts of the State of Florida or the United States courts located within the State of Florida, and expressly waive any objections as to venue in any such courts, and agree that service of process may be made on Obligors by mailing a copy of the summons and complaint by registered or certified mail, return receipt requested, to their respective addresses. Nothing contained herein shall, however, prevent Bank from bringing any action or exercising any rights within any other state or jurisdiction or from obtaining personal jurisdiction by any other means available by applicable law. 10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS NOTE OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THE NOTICE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60) DAYS. (B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATIONS OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. PARAGRAPH 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSURE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONALLY OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER THE EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONALLY OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 11. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower, Obligors and Bank and their respective successors, assigns, heirs and personal representatives; provided, however, that no obligations of the Borrower or the Obligor hereunder can be assigned without prior written consent of Bank. 12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BORROWER: ELCOTEL, INC., a Delaware corporation By:/s/ Ronald M. Tobin -------------------------- Ronald M. Tobin, Vice President and Chief Financial Officer (CORPORATE SEAL) ELCOTEL DIRECT, INC., a Delaware corporation By:/s/ Ronald M. Tobin -------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) ELCOTEL HOSPITALITY SERVICES, INC., a Delaware corporation By:/s/ Ronald M. Tobin -------------------------- Ronald M. Tobin, Vice President (CORPORATE SEAL) EX-10.3 4 MORTGAGE MODIFICATION AGREEMENT DATED NOVEMBER 26, 1997 EXHIBIT 10.3 - ------------- Prepared By & Return To: Timothy S. Shaw, Esq. (bh) KIRK PINKERTON 720 S. Orange Avenue Sarasota, Florida 34236 MORTGAGE MODIFICATION AND FUTURE ADVANCE AGREEMENT -------------------------------------------------- THIS AGREEMENT, executed this 26th day of November, 1997, by and between NATIONSBANK, N.A., a National Banking Association, as successor in interest to NATIONSBANK, N.A. (SOUTH) and NATIONSBANK OF FLORIDA, N.A., herein called "MORTGAGEE", and ELCOTEL, INC., a Delaware corporation, herein called "MORTGAGOR". W I T N E S S E T H: WHEREAS, Mortgagor being indebted to Carl G. Santangelo, as Trustee of THE ELCOTEL MORTGAGE TRUST, under Declaration of Trust dated September 27, 1993 (herein called "ASSIGNOR") executed and delivered to the Mortgagee a certain note dated September 28, 1993, as evidence of said debt, and also executed and delivered a Mortgage as security therefor of like date, said Mortgage being recorded in Official Records Book 1416, Page 5745, Public Records of Manatee County, Florida (the "Mortgage") which Mortgage secures that certain promissory note dated September 28, 1993, in the original principal amount of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) (the "Note"), and encumbers the property (the "Property") more particularly described as follows: Lots 9 and 10, Phase II, PARKLAND CENTER, according to the plat thereof recorded in Plat Book 22, Pages 77 through 79, Public Records of Manatee County, Florida. and WHEREAS, Assignor has assigned the Note and Mortgage to Mortgagee by Assignment of Mortgage dated May 20, 1994, recorded in Official Records Book 1435, Page 4451, of the Public Records of Manatee County, Florida; and WHEREAS, the Mortgage was modified by Mortgage Modification Agreement dated May 23, 1994, and recorded in Official Records Book 1435, Page 4456, and by Mortgage Modification Agreement dated August 31, 1995, and recorded in Official Records Book 1468, Page 2483, of the Public Records of Manatee County, Florida; and WHEREAS, Mortgagor has requested Mortgagee to modify the terms of the Note and Mortgage and Mortgagee has agreed to modify the Note and Mortgage in accordance herewith. NOW, THEREFORE, in consideration of Ten Dollars ($10.00) paid by each party to the other, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and the mutual covenants hereinafter set forth, the parties jointly and severally hereby agree as follows: 1. The Mortgage evidences and secures an unpaid principal indebtedness of THREE HUNDRED FIFTEEN THOUSAND ONE HUNDRED SEVENTY THREE AND 80/100 DOLLARS ($315,173.80) on the date of execution of this Agreement. Mortgagor acknowledges and certifies that Mortgagor has no claim, demand or setoff whatsoever against Mortgagee and that Mortgagor is justly indebted to Mortgagee for the sums set forth above. 2. The maturity date of the Mortgage and the indebtedness secured thereby is extended to November 26, 2002, as evidenced by that certain Renewal Note dated of even date herewith in the amount of THREE HUNDRED FIFTEEN THOUSAND ONE HUNDRED SEVENTY THREE AND 80/100 DOLLARS ($315,173.80) (the "Renewal Note"), which Renewal Note is secured by the Mortgage. The required documentary stamps on the obligation evidenced by the Renewal Note have been affixed to the Mortgage securing the original indebtedness renewed hereby, recorded in Official Records Book 1416, Page 5745, Public Records of Manatee County, Florida. 3. Mortgagor hereby acknowledges execution and delivery to Mortgagee of a ONE MILLION SIX HUNDRED FOUR THOUSAND EIGHT HUNDRED TWENTY SIX AND 20/100 DOLLAR ($1,604,826.20) Note (the "Future Advance Note") the maturity date of which is November 26, 2002, which is an obligation in addition to the indebtedness set forth in paragraph 1, and is a future advance pursuant to and secured by the Mortgage. 2 4. The Renewal Note and the Future Advance Note are consolidated by the terms of that certain Consolidation Note dated November 26, 1997, in the amount of ONE MILLION NINE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($1,920,000.00) (the "Consolidation Note") executed by Mortgagor and delivered to Mortgagee, the maturity date of which is November 26, 2002, which Consolidation and Renewal Note is secured by the Mortgage. 5. Mortgagor agrees that a default by Mortgagor on any note, mortgage or other evidence of indebtedness held by Mortgagee, shall at the option of Mortgagee also constitute a default on any other note, mortgage or other evidence of indebtedness held by Mortgagee. 6. It is the intent of the parties that this instrument shall not constitute a novation and shall in no way adversely affect the lien priority of the Mortgage or any other loan documents delivered by Mortgagor to Mortgagee (collectively, the "Loan Documents"). In the event that this Agreement, or any part hereof, shall be construed by a court of competent jurisdiction as operating to affect the lien priority of the Loan Documents over the claims which would otherwise be subordinate thereto, then to the extent that third persons acquiring an interest in such property between the time of execution of the Loan Documents and the execution hereof, are prejudiced thereby, this Agreement or such portion hereof as shall be so construed, shall be void and of no force and effect and this Agreement shall constitute, as to that portion, a subordinate lien on the collateral, incorporating by reference the terms of the Loan Documents, and which Loan Documents then shall be enforced pursuant to the terms therein contained, independent of this Agreement; provided, however, that notwithstanding the foregoing, the parties hereto, as between themselves, shall be bound by all terms and conditions hereof until all indebtedness owing from the Mortgagor to the Mortgagee shall have been paid in full. 7. In consideration of the Mortgagee renewing the indebtedness set forth above, making the future advance, and consolidating the indebtedness evidenced by the Consolidation Note, Mortgagor hereby waives any and all claims, causes of action and/or defenses against Mortgagee arising prior to the execution of this Agreement and agrees to hold Mortgagee, its employees, officers and agents harmless from all matters, claims and liabilities existing or arising prior to the date hereof. Mortgagor acknowledges, represents and warrants to Mortgagee that Mortgagor has no offset or defenses to this Agreement, the indebtedness evidenced by the Consolidation Note or the Loan Documents. 8. State of Florida documentary stamps in the amount required by law for the Renewal Note were affixed to the Mortgage and were cancelled pursuant to law. Documentary stamps for the Future Advance Note have been paid upon the recording of this Mortgage Modification and Future Advance Agreement. The Renewal Note qualifies for an exemption from payment of documentary stamps under regulations adopted pursuant to Chapter 201, Florida Statutes, and therefore, no additional documentary stamps are now due or payable; however, in the event that the Department of Revenue, its agents or employees, notifies either Mortgagor or Mortgagee that the transaction which is the subject of this 3 Mortgage Modification and Future Advance Agreement is subject to payment of documentary stamp tax, intangible tax, or any other such tax, then, in such event, Mortgagor agrees to immediately remit to the Department of Revenue or to the Mortgagee the full amount of such tax deemed to be due and payable as requested by the Department of Revenue. Mortgagor may contest any liability for such tax payment; however, any such contest shall be taken solely at the election, cost, and expense of Mortgagor. The liability of Mortgagor under this provision shall survive the satisfaction of the obligations referenced hereunder. Any failure of Mortgagor to comply with the terms and provisions of this section shall constitute a default under the Renewal Note, Mortgage, and all other loan documents executed in connection therewith. 9. All references in the Mortgage to the "Note" shall be deemed to include the Renewal Note, Future Advance Note, and the Consolidation Note. All terms, covenants, and conditions of said Mortgage remain unchanged except as specified above. This Agreement shall not waive any right or remedy afforded Mortgagee under said Mortgage. This Agreement shall be binding on the parties, their heirs, personal representatives, successors and assigns. 10. Restated Loan Agreement. In connection with this Agreement, Mortgagor and Mortgagee have entered into that certain Restated Loan Agreement dated November 26, 1997 (the "Restated Loan Agreement"). Mortgagor agrees that a default by Mortgagor under the Restated Loan Agreement shall be a default hereunder. 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THE MORTGAGE OR THIS MODIFICATION AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS MODIFICATION AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS MODIFICATION AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN BRADENTON, FLORIDA, AND ADMINISTERED BY ENDISPUTE, INC., D/B/A J.A.M.S/ENDISPUTE WHO WILL APPOINT AN ARBITRATOR; IF 4 J.A.M.S./ENDISPUTE IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THE MORTGAGE OR THIS MODIFICATION AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS MODIFICATION AGREEMENT; OR (II) BE A WAIVER BY THE MORTGAGEE OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE MORTGAGEE HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE MORTGAGEE MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THE MORTGAGE OR THIS MODIFICATION AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OF CLAIM OCCASIONING RESORT TO SUCH REMEDIES. IN WITNESS WHEREOF, the parties hereto have set their hands and seals effective as of the day and year first above written. Signed, sealed and delivered NATIONSBANK, N.A., a National in the presence of: Banking Association, as successor in interest to NATIONSBANK, N.A. (SOUTH) and NATIONSBANK OF FLORIDA, N.A. /s/ Rebecca S. Harshman By:/s/ Nathan Coon - ----------------------- --------------------------- *Rebecca S. Harshman Nathan Coon, Vice President *(Print Name of Witness) Address: 1605 Main Street Sarasota, FL 34236 /s/ Timothy S. Shaw - ----------------------- *Timothy S. Shaw (CORPORATE SEAL) *(Print Name of Witness) 5 MORTGAGEE ELCOTEL, INC., a Delaware corporation /s/ James L. Essenson By:/s/ Ronald M. Tobin - ---------------------- ------------------------ *James L. Essenson Ronald M. Tobin, as *(Print Name of Witness) Vice-President and Chief Financial Officer Address: 6428 Parkland Drive Sarasota, FL 34243 /s/ Rebecca S. Harshman - ----------------------- *Rebecca S. Harshman (CORPORATE SEAL) *(Print Name of Witness) MORTGAGOR 6 STATE OF FLORIDA COUNTY OF SARASOTA The foregoing instrument was acknowledged before me this 26th day of November, 1997, by NATHAN COON, as Vice President of NATIONSBANK, N.A., a National Banking Association, as successor in interest to NATIONSBANK, N.A. (SOUTH) and NATIONSBANK OF FLORIDA, N.A., on behalf of said corporation. He is personally known to ---------------- me and produced as identification and did not take an oath. /s/ Rebecca S. Harshman ----------------------- *Rebecca S. Harshman (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Florida My commission expires May 27,1999 Commission Number CC564756 STATE OF FLORIDA COUNTY OF SARASOTA The foregoing instrument was acknowledged before me this 26th day of November, 1997, by Ronald M. Tobin, as Vice-President and Chief Financial Officer of ELCOTEL, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced as ---------------- identification and did not take an oath. /s/ Rebecca S. Harshman ----------------------- *Rebecca S. Harshman (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Florida My commission expires May 27,1999 Commission Number CC564756 7 EX-10.4 5 CONSOLIDATED PROMISSORY NOTE DATED NOVEMBER 26, 1997 EXHIBIT 10.4 - -------------- THIS NOTE CONSOLIDATES THAT RENEWAL PROMISSORY NOTE DATED NOVEMBER 26, 1997, IN THE PRINCIPAL SUM OF $315,173.80, AND THAT FUTURE ADVANCE NOTE DATED NOVEMBER 26, 1997, IN THE PRINCIPAL SUM OF $1,604,826.20, AND DOES NOT INCREASE THE AMOUNT DUE, NOR CHANGE THE ORIGINAL OBLIGOR, THEREFORE NO DOCUMENTARY STAMPS ARE REQUIRED. CONSOLIDATED PROMISSORY NOTE ---------------- Date of Execution: November 26, 1997 Amount: $1,920,000.00 FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly and severally, if more than one) promise(s) to pay to the order of NATIONSBANK, N.A., a National Banking Association ("Bank"), Sarasota (Banking Center) without setoff, at its offices at 1605 Main Street, Suite 101, Sarasota, Florida, 34236 or at such other place as may be designated by Bank, the principal amount of ONE MILLION NINE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($1,920,000.00), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereunder, at an annual interest rate, and in accordance with the payment schedule, indicated below. Rate. The interest Rate due hereon shall be fixed at 8.5% per annum. Notwithstanding any other provision contained in this Note, Bank does not intend to charge and Borrower shall not be required to pay any amount of interest or other fees or charges that is in excess of the maximum permitted by applicable law. Any payment in excess of such maximum shall be refunded to Borrower or credited against principal, at the option of Bank. Accrual Method Interest at the Rate set forth above, unless otherwise indicated, will be calculated on the basis of the 365/360 method, which computes a daily amount of interest for a hypothetical year of 360 days, then multiplies such amount by the actual number of days elapsed in an interest calculation period. Payment Schedule All payments received hereunder shall be applied first to the payment of any expense or charges payable hereunder or under any other documents executed in connection with this Note ("Loan Documents"), then to interest due and payable, with the balance being applied to principal, or in such other order as Bank shall determine at its option. Principal and interest shall be paid in fifty-nine (59) equal monthly installments of $18,907.00 each, commencing on December 26, 1997, and continuing on the same day of each successive month thereafter, with a final payment of all unpaid principal and interest thereon on November 26, 2002. Automatic Payment Borrower has elected to authorize Bank to effect payment of sums due under this Note by means of debiting Borrower's account number ____________________________________. This authorization shall not affect the obligation of Borrower to pay such sums when due, without notice, if there are insufficient funds in such account to make such payment in full on the due date thereof, or if Bank fails to debit the account. Borrower represents to Bank that the proceeds of this loan are to be used primarily for business, commercial or agricultural purposes. Borrower acknowledges having read and understood, and agrees to be bound by all terms and conditions of this Note, including the Additional Terms and Conditions set forth in the Addendum attached hereto and made a part hereof, and hereby executes this Note under seal. BORROWER: ELCOTEL, INC., a Delaware corporation By: /s/ Ronald M. Tobin ------------------------ Ronald M. Tobin, Vice-President and Chief Financial Officer (CORPORATE SEAL) STATE OF FLORIDA COUNTY OF SARASOTA The foregoing instrument was acknowledged before me this 26th day of November, 1997, by Ronald M. Tobin, as Vice-President and Chief Financial Officer of ELCOTEL, INC., a Delaware corporation, on behalf of said corporation. He is personally known to me and produced ---------------- _________________ as identification and did not take an oath. /s/ Rebecca S. Harshman ----------------------- *Rebecca S. Harshman (NOTARIAL SEAL) *(Print Name of Notary Public) Notary Public - State of Florida My commission expires May 27, 1999 Commission Number CC564756 ADDENDUM OF ADDITIONAL TERMS AND CONDITIONS ------------------------------- 1. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor hereof or any other party hereto (collectively "Obligors") and each of them jointly and severally: (a) waive presentment, demand, notice of demand, notice of intent to accelerate, and notice of acceleration of maturity, protest, notice of protest, notice of non-payment, notice of dishonor, and any other notice required to be given under the law to any of Obligors, in connection with the delivery, acceptance, performance, default or enforcement of this Note, of any indorsement or guaranty of this Note or of any Loan Documents; (b) consent to any and all delays, extensions, renewals or other modifications of this Note or the Loan Documents, or waivers of any term hereof or of the Loan Documents, or releases or discharge by Bank of any of Obligors or release, substitution, or exchange of any security for the payment hereof, or the failure to act on the part of Bank or any indulgence shown by Bank, from time to time and in one or more instances (without notice to or further assent from any of Obligors) and agree that no such action, failure to act or failure to exercise any right or remedy on the part of Bank shall in any way affect or impair the obligations of any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under this Note, under any indorsement or guaranty of this Note or under any of the Loan Documents; and (c) agree to pay, on demand, all costs and expenses of collection of this Note or of any indorsement or guaranty hereof and/or the enforcement of Bank's rights with respect to, or the administration, supervision, preservation, protection of, or realization upon, any property securing payment hereof, including without limitation, reasonable attorneys' fees, including fees related to any trial, arbitration, bankruptcy, appeal or other proceeding. 2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank harmless from all state and federal taxes of any kind and other liabilities with respect to or resulting from advances made pursuant to this Note; provided however this shall not apply to income taxes, Federal, State or otherwise, of the Bank. If this Note has a revolving feature and is secured by a mortgage, Obligors expressly consent to the deduction of any applicable taxes from each taxable advance extended by Bank. 3. Prepayments. Prepayment may be made in whole or in part at any time. All prepayments of principal shall be applied in the inverse order of maturity, or in such other order as Bank shall determine in its sole discretion. 4. Events of Default. The following are events of default hereunder: (a) the failure to make any payment due under this Note within ten (10) days after the due date or the failure to pay or perform any obligation, liability or indebtedness of any Obligor to Bank, or to any affiliate of Bank, whether under this Note or any other agreement, note or instrument now or hereafter existing, as and when due (whether upon demand, at maturity or by acceleration); (b) the failure to pay or perform any other obligation, liability or indebtedness of any of Obligors whether to Bank or some other party, the security for which constitutes an encumbrance on the security for this Note; (c) death of any Obligor (if an individual), or a proceeding being filed or commenced against any Obligor for dissolution or liquidation, or any Obligor voluntarily or involuntarily terminating or dissolving or being terminated or dissolved; (d) insolvency of, business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any other property of, or an assignment for the benefit of creditors by, or the filing of a petition under bankruptcy, insolvency or debtor's relief law or for any adjustment of indebtedness, composition or extension by or against any Obligor; (e) any lien or additional security interest being placed upon any of the property which is security for this Note; (f) acquisition at any time or from time to time of title to the whole of or any part of the property which is security for this Note by any person, partnership, corporation or other entity; (g) Bank determining that any representation or warranty made by any Obligor in any Loan Documents or otherwise to Bank is, or was, untrue or materially misleading; (h) failure of any Obligor to timely deliver such financial statements, including tax returns, and other statements of condition or other information as Bank shall request from time to time;(i) any default under any Loan Documents; (j) entry of a judgment against any Obligor which Bank deems to be of a material nature, in Bank's sole discretion; (k) the seizure or forfeiture of, or the issuance of any writ of possession, garnishment or attachment, or any turnover order for any property of any Obligor; (l) the determination by Bank that a material 2 adverse change has occurred in the financial condition of any Obligor; or, (m) the failure to comply with any law or regulation regulating the operation of Borrower's business which has a material effect on Borrower's business. 5. Remedies Upon Default. Whenever there is a default under this Note, (a) the entire balance outstanding and all other obligations of Obligor to Bank (however acquired or evidenced) shall, at the option of Bank, become immediately due and payable, and/or (b) to the extent permitted by law, the Rate of interest on the unpaid principal shall, at the option of Bank, be increased at Bank's discretion up to the maximum rate allowed by law, or if none, twenty-five percent (25%) per annum (the "Default Rate"); and/or (c) to the extent permitted by law, a delinquency charge may be imposed in an amount not to exceed five percent (5%) of any payment in default for more than fifteen (15) days. The provisions herein for a Default Rate or a delinquency charge shall not be deemed to extend the time for any payment hereunder or to constitute a "grace period" giving the Obligors a right to cure any default. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of the Note or any installment thereof, be deemed to be a part of the principal balance, and interest shall accrue on a daily compounded basis after such date at the rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Bank is hereby authorized at any time to setoff and charge against any deposit accounts of any Obligor, as well as any other property of such party at or under the control of Bank, without notice or demand, any and all obligations due hereunder. 6. Non-waiver. The failure at any time of Bank to exercise any of its options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of its options or rights at a later date. All rights and remedies of Bank shall be cumulative and may be pursued singly, successively or together, at the option of Bank. The acceptance by Bank of any partial payment shall not constitute a waiver of any default or of any of Bank's rights under this Note. No waiver of any of its rights hereunder, and no modification or amendment of this Note, shall be deemed to be made by Bank unless the same shall be in writing, duly signed on behalf of Bank; and each such wavier, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Bank or the obligations of Obligor to Bank in any other respect at any other time. 7. Applicable Law. This Note shall be construed under the internal laws and judicial decisions of the State of Florida, and the laws of the United States as the same may be applicable. 8. Partial Invalidity. The unenforceability or invalidity of any provision of this Note shall not affect the enforceability or the validity of any other provision herein and the invalidity or unenforceability of any provision of this Note or of the Loan Documents to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 9. Jurisdiction and Venue. In any litigation in connection with or to enforce this Note or any indorsement or guaranty of this Note or any Loan Documents, Obligors, and each of them, irrevocably consent to and confer personal jurisdiction on the courts of the State of Florida or the United States courts located within the State of Florida, and expressly waive any objections as to venue in any such courts, and agree that service of process may be made on Obligors by mailing a copy of the summons and complaint by registered or certified mail, return receipt requested, to their respective addresses. Nothing contained herein shall, however, prevent Bank from bringing any action or exercising any rights within any other state or jurisdiction or from obtaining personal jurisdiction by any other means available by applicable law. 10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS NOTE OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR 3 ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THE NOTICE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BRADENTON, FLORIDA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60) DAYS. (B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATIONS OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. PARAGRAPH 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSURE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONALLY OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER THE EXERCISE OF SELF HELP 4 REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONALLY OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 11. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower, Obligors and Bank and their respective successors, assigns, heirs and personal representatives; provided, however, that no obligations of the Borrower or the Obligor hereunder can be assigned without prior written consent of Bank. 12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BORROWER: ELCOTEL, INC., a Delaware corporation By: /s/ Ronald M. Tobin ------------------------------ Ronald M. Tobin, Vice-President and Chief Financial Officer (CORPORATE SEAL) EX-27 6 FINANCIAL DATA SCHEDULE FOR 10Q-12/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1998 APR-01-1997 DEC-31-1997 311 0 16,753 0 12,170 34,151 4,648 0 72,103 8,882 0 0 0 132 48,670 72,103 27,975 27,975 16,578 16,578 9,140 0 203 2,319 817 1,502 0 0 0 1,502 .18 .17
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