-----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, AkeWM9FCL8MdPANaMLOiKmRLXW5GQl2oCUemIfFfeHQAeepQdXOL9zkHO/zzVKn2 xbyerhmBNqHbBfPES+OWbg== 0000891092-00-000093.txt : 20000214 0000891092-00-000093.hdr.sgml : 20000214 ACCESSION NUMBER: 0000891092-00-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: 534882 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 Commission File No. 0-15205 ELCOTEL, INC. (Exact name of registrant as specified in its charter) Delaware 59-2518405 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6428 Parkland Drive, Sarasota, Florida 34243 (Address of principal executive offices) (Zip Code) (941) 758-0389 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of February 11, 1999, there were 13,520,218 shares of the Registrant's Common Stock outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars, except per share amounts, in thousands)
December 31, March 31, 1999 1999 ------------ ---------- (Unaudited) ASSETS Current assets: Cash $ 1,050 $ 16 Accounts and notes receivable, less allowance for credit losses of $1,338 and $1,970 10,287 12,209 Inventories 9,706 13,978 Income taxes receivable 494 1,997 Deferred tax asset - current portion 2,242 2,215 Prepaid expenses and other current assets 716 912 -------- -------- Total current assets 24,495 31,327 Property, plant and equipment, net 5,786 5,064 Notes receivable, less allowance for credit losses of $738 and $312 278 898 Identified intangible assets, net of accumulated amortization of $2,390 and $1,541 6,885 7,734 Capitalized software, net of accumulated amortization of $439 and $240 4,314 1,573 Goodwill, net of accumulated amortization of $1,394 and $878 22,702 23,218 Deferred tax asset 2,831 948 Other assets 556 533 -------- -------- $ 67,847 $ 71,295 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ -- $ 1,428 Accounts payable 5,167 4,186 Accrued expenses and other current liabilities 4,070 4,197 Notes and debt obligations payable within one year 11,717 823 -------- -------- Total current liabilities 20,954 10,634 Notes and debt obligations payable after one year 48 10,355 -------- -------- 21,002 20,989 -------- -------- Commitments and contingencies -- -- Stockholders' equity: Common stock, $.01 par value, 40,000,000 and 30,000,000 shares authorized, 13,571,693 and 13,551,693 shares issued and outstanding 136 136 Additional paid-in capital 46,686 46,667 Retained earnings 272 3,680 Holding loss on marketable securities (72) -- Less - cost of 52,000 shares of common stock in treasury (177) (177) -------- -------- Total stockholders' equity 46,845 50,306 -------- -------- $ 67,847 $ 71,295 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended December 31, December 31, ------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- ------ Revenues and net sales: Product sales $ 7,984 $ 14,240 $ 27,284 $ 43,101 Services 4,685 2,619 11,594 8,202 -------- -------- -------- -------- 12,669 16,859 38,878 51,303 -------- -------- -------- -------- Cost of revenues and sales: Cost of products sold 5,685 8,991 19,735 26,468 Cost of services 3,489 2,257 9,013 7,199 -------- -------- -------- -------- 9,174 11,248 28,748 33,667 -------- -------- -------- -------- Gross profit 3,495 5,611 10,130 17,636 -------- -------- -------- -------- Other costs and expenses: Selling, general and administrative expenses 2,554 2,126 7,888 8,020 Engineering, research and development expenses 1,850 1,513 4,730 4,662 Restructuring charges 700 -- 700 -- Amortization 547 528 1,630 1,531 Interest expense, net 181 207 458 432 -------- -------- -------- -------- 5,832 4,374 15,406 14,645 -------- -------- -------- -------- Income (loss) before income tax (expense) benefit (2,337) 1,237 (5,276) 2,991 Income tax (expense) benefit 853 (458) 1,868 (1,110) -------- -------- -------- -------- Net income (loss) (1,484) 779 (3,408) 1,881 Other comprehensive loss, net of tax: Holding loss on marketable securities (23) -- (72) -- -------- -------- -------- -------- Comprehensive income (loss) $ (1,507) $ 779 $ (3,480) $ 1,881 ======== ======== ======== ======== Income (loss) per common and common equivalent share: Basic $ (0.11) $ 0.06 $ (0.25) $ 0.14 ======== ======== ======== ======== Diluted $ (0.11) $ 0.06 $ (0.25) $ 0.14 ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 13,509 13,474 13,503 13,445 ======== ======== ======== ======== Diluted 13,509 13,797 13,503 13,794 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended December 31, -------------------------- 1999 1998 -------- ------- Cash flows from operating activities Net income (loss) $(3,408) $ 1,881 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 2,619 2,359 Provision for credit losses 373 48 Loss on impairment of assets 148 -- Provisions for obsolescence and warranty expense 1,313 604 Stock option compensation 66 -- Deferred tax expense (benefit) (1,868) 145 Changes in operating assets and liabilities: Accounts and notes receivable 1,882 (1,651) Inventories 3,289 (6,548) Income taxes receivable 1,503 (19) Prepaid expenses and other current assets 369 (298) Other assets (89) (149) Accounts payable 981 4,338 Accrued expenses and other current liabilities (523) (1,336) ------- ------- Net cash provided by (used for) operating activities 6,655 (626) ------- ------- Cash flows from investing activities Capital expenditures (1,719) (1,128) Capitalized software (3,080) (199) ------- ------- Net cash used for investing activities (4,799) (1,327) ------- ------- Cash flows from financing activities Net proceeds under revolving credit lines 1,191 147 Decrease in bank overdraft (1,428) -- Principle payments on notes payable (604) (56) Proceeds from exercise of common stock options 19 271 ------- ------- Net cash provided by financing activities (822) 362 ------- ------- Increase (decrease) in cash 1,034 (1,591) Cash, beginning of period 16 1,655 ======= ======= Cash, end of period $ 1,050 $ 64 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 ELCOTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars, except per share amounts, in thousands) 1. GENERAL The unaudited consolidated balance sheet at December 31, 1999 and the unaudited consolidated statements of operations and other comprehensive income (loss) for the three months and nine months ended December 31, 1999 and 1998 and of cash flows for the nine months ended December 31, 1999 and 1998 have been prepared by Elcotel, Inc. and subsidiaries (the "Company"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at December 31, 1999, and for all periods presented, have been made. The Company's unaudited consolidated financial statements for the three months and nine months ended December 31, 1998 have been reclassified to conform with the presentation at and for the three months and nine months ended December 31, 1999. The consolidated balance sheet at March 31, 1999 has been derived from the Company's audited consolidated financial statements as of and for the year ended March 31, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. The results of operations for the three months and nine months ended December 31, 1999 are not necessarily indicative of the results for the full fiscal year. 2. INVENTORIES Inventories at December 31, 1999 and March 31, 1999 are summarized as follows: December 31, March 31, 1999 1999 ------------ ------------- Finished products $ 1,029 $ 1,875 Work-in-process 1,955 924 Purchased components 8,384 11,630 -------- -------- 11,368 14,429 Reserve for obsolescence (1,662) (451) ======== ======== $ 9,706 $ 13,978 ======== ======== 3. NOTES AND DEBT OBLIGATIONS PAYABLE The Company is in default of certain financial covenants contained in the loan agreements (the "Loan Agreements") between the Company and its bank. As a result of the default, the bank has the right to accelerate the maturity of outstanding indebtedness under the Loan Agreements. Accordingly, outstanding debt under the Loan Agreements in the aggregate amount of $11,653 at December 31, 1999 is classified as a current liability. 5 The Company and its bank have reached an agreement in principal to enter into a forbearance and modification agreement (the "Forbearance Agreement") that would modify the terms of the Loan Agreements. Pursuant to the terms of the proposed Forbearance Agreement, the maturity date of indebtedness outstanding under the Loan Agreements would be changed to May 31, 2000, the annual interest rate under the Loan Agreements would be increased to one percentage point above the prime interest rate, and the Company's ability to borrow additional funds under a $2,000 export revolving credit line (none of which was borrowed as of such date) and a $1,500 equipment credit line ($281 of which was borrowed as of such date) would be cancelled. During the term of the proposed Forbearance Agreement, the outstanding indebtedness under a $10,000 working capital revolving credit line and a $4,000 installment note could not exceed the value of collateral consisting of eligible accounts receivable and inventories. The Company is attempting to secure alternative financing arrangements and/or raise additional capital to refinance the outstanding indebtedness under the Loan Agreements. The Company has received proposals with respect thereto and believes that its efforts will be successful. However, there is no assurance that the Company's efforts will be successful, or if successful, that such financing would be on terms satisfactory to the Company. 4. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the nine months ended December 31, 1999 are summarized as follows:
Holding Additional Loss on Common Paid-in Retained Marketable Treasury Stock Capital Earnings Securities Stock Total ------- ---------- -------- ---------- -------- ----- Balance, March 31, 1999 $ 136 $ 46,667 $ 3,680 $ -- $ (177) $ 50,306 Net income (loss) (3,408) (3,408) Proceeds from exercise of common stock options 19 19 Holding loss on marketable securities (72) (72) ------- -------- ------- ------ ------ -------- Balance, December 31, 1999 $ 136 $ 46,686 $ 272 $ (72) $ (177) $ 46,845 ======= ======== ======= ====== ====== ========
On November 2, 1999, the stockholders of the Company approved an amendment to the Company's certificate of incorporation to increase in the number of shares of common stock authorized for issuance by 10,000,000 shares, from 30,000,000 shares to 40,000,000 shares. In addition, the stockholders of the Company approved amendments to the Company's 1991 Stock Option Plan and Directors Stock Option Plan to increase the number of shares of common stock reserved for issuance under such plans by 500,000 shares and 75,000 shares, respectively, to 2,600,000 shares and 300,000 shares, respectively. On October 15, 1999, the Board of Directors of the Company adopted the 1999 Stock Option Plan (the "1999 Plan"). The Compensation Committee (the "Committee") appointed by the Board of Directors of the Company administers the 1999 Plan, including having the authority to grant non-qualified stock options to senior executive officers of the Company. Non-qualified stock options to purchase up to an aggregate of 539,988 shares of common stock may be granted under the 1999 Plan at option exercise prices determined by the Committee. The Committee has the authority to interpret the provisions of the 1999 Plan, to determine the terms and provisions of options granted under the 1999 Plan and to determine the number of shares subject to options granted and the vesting periods thereof. The Committee's authority to grant options under the 1999 Plan expires on October 15, 2004. Options granted under the 1999 Plan expire five 6 years from the date of grant unless they are terminated prior thereto upon the termination of employment of a grantee. Unvested options granted under the 1999 Plan expire immediately upon the termination of a grantee's employment by the grantee for any reason or by the Company for cause. Upon the termination of a grantee's employment by the Company without cause, options that would have vested during the twelve months after such termination of employment or during the remaining term of any employment agreement between the grantee and the Company, whichever is less, immediately vest and are thereafter exercisable until their expiration date, and any remaining unvested options expire as of the termination date. Pursuant to the terms of an employment agreement between the Company and its new President and Chief Executive Officer dated October 15, 1999 (see Note 9), the Company granted options under the 1999 Plan to purchase 539,988 shares of the Company's common stock at an exercise price of $1.67 per share. Such options vest and become exercisable ratably at the end of each month over the term of the employment agreement, which expires on October 11, 2002. 5. SUPPLEMENTAL CASH FLOW INFORMATION A summary of the Company's supplemental cash flow information for the nine months ended December 31, 1999 and 1998 is as follows: 1999 1998 ------- ------- Cash paid (refunded) during the period for: Interest $ 698 $ 666 Income taxes (1,503) 867 Non-cash transactions: Receipt of marketable securities to satisfy accounts receivable resulting in an increase in other current assets and a reduction in accounts receivable 287 -- Unrealized loss on marketable securities resulting in a reduction of stockholders' equity and other current assets 114 -- Tax benefit from unrealized loss on marketable securities resulting in an increase in current deferred tax assets and stockholders' equity 42 -- 6. RESTRUCTURING CHARGES In November 1999, the Company announced a restructuring plan to consolidate manufacturing operations, resize its core payphone business operations, reorient its distribution strategy and begin to build operations required to introduce its new public access Internet appliance products and back office management systems to the marketplace. In connection with this restructuring, the Company recognized restructuring charges of $700 during the three months ended December 31, 1999. These restructuring charges consisted of estimated employee termination benefits under severance and benefit arrangements of $575 and future lease payments of $125 related to the closure of leased facilities. The restructuring charges do not include the recognition of impairment losses of $148 related to closed facilities and the Company's decision to abandon a software development project related to certain discontinued activities. Impairment losses of $140 and $8 are classified as engineering, research and development expenses and selling, general and administrative expenses, respectively, during the three months and nine months ended December 31, 1999. 7 Under the November 1999 restructuring plan, the Company will terminate the employment of 56 employees by December 31, 2000, including 28 employees in connection with the consolidation of manufacturing operations and the closure of its manufacturing facility in Sarasota, Florida and 28 corporate employees in all major functions. As of December 31, 1999, the Company had terminated the employment of 26 corporate employees under the plan. The other reductions will primarily take place during the three months ending March 31, 2000 upon the closure of the Company's manufacturing facility. During the three months and nine months ended December 31, 1999, the Company charged $97 of severance and benefit payments against the restructuring liability. Under the restructuring plan, the Company closed a leased office facility in Alpharetta, Georgia and leased a larger facility to accommodate service operations related to its new public access Internet appliance products and back office management systems. The restructuring charges related to future lease payments include a termination settlement of $27 under a lease termination agreement with respect to the closed office facility and remaining lease payments of $98 under the lease agreement related to the Company's manufacturing facility. During the three months and nine months ended December 31, 1999, payments of $27 related to the lease termination agreement were charged against the restructuring liability. During the three months and nine months ended December 31, 1999, the Company charged $107 and $360 of severance and benefit payments against the restructuring liability accrued in connection with a reorganization of its sales and marketing organization during the three months ended March 31, 1999. During the three months and nine months ended December 31, 1998, the Company charged payments of $238 and $793, respectively, against restructuring liabilities, consisting of the estimated cost of severance and benefit arrangements and relocation costs, pursuant to a plan to exit certain activities of Technology Service Group, Inc., which was acquired by the Company during the year ended March 31, 1998. 7. EARNINGS (LOSS) PER SHARE Earnings (loss) per common share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 requires disclosure of basic earnings (loss) per share and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and potential dilutive common shares outstanding during the period. The weighted average number of shares of common stock outstanding used to compute basic earnings (loss) per share for the three months and nine months ended December 31, 1999 was 13,509,258 shares and 13,502,881 shares, respectively. The weighted average number of shares of common stock outstanding used to compute basic earnings (loss) per share for the three months and nine months ended December 31, 1998 was 13,473,565 shares and 13,444,801 shares, respectively. There were no potential dilutive common shares outstanding during the three months and nine months ended December 31, 1999 for purposes of computing diluted earnings (loss) per share. The weighted average number of potential dilutive common shares outstanding used in the computation of diluted earnings (loss) per share for the three and nine months ended December 31, 1998 was 323,637 shares and 349,396 shares, respectively. 8 8. DISCLOSURE ABOUT SEGMENTS AND RELATED INFORMATION The Company's reportable segments are based upon the market segments that the Company addresses. The products provided by each of the reportable segments are similar in nature. There are no transactions between the reportable segments, and external customers account for all sales revenue. The information that is provided to the chief operating decision maker to measure the profit or loss of reportable segments includes sales, cost of sales based on standards and gross profit based on standards. Operating expenses, including depreciation, amortization and interest are not included in the information provided to the chief operating decision maker to measure performance of reportable segments. The sales revenue and gross profit of each reportable segment for the three months ended December 31, 1999 and 1998 is set forth below: 1999 1998 -------------------- -------------------- Sales Profit Sales Profit ----- ------ ----- ------ Private $ 3,724 $ 1,687 $ 6,664 $ 2,940 Telephone company 7,415 2,141 7,893 2,724 International 1,530 443 2,302 623 ------- ------- ------- ------- $12,669 $ 4,271 $16,859 $ 6,287 ======= ======= ======= ======= The sales revenue and gross profit of each reportable segment for the nine months ended December 31, 1999 and 1998 is set forth below: 1999 1998 -------------------- -------------------- Sales Profit Sales Profit ----- ------ ----- ------ Private $10,614 $ 4,836 $19,341 $ 9,342 Telephone company 22,808 6,787 26,502 7,979 International 5,456 1,564 5,460 1,786 ------- ------- ------- ------- $38,878 $13,187 $51,303 $19,107 ======= ======= ======= ======= The Company does not allocate assets or other corporate expenses to reportable segments. A reconciliation of segment profit information to the Company's financial statements for the three months and nine months ended December 31, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended December 31, December 31, -------------------- -------------------- 1999 1998 1999 1998 Total profit of reportable segments $ 4,271 $ 6,287 $ 13,187 $ 19,107 Unallocated cost of sales (776) (676) (3,057) (1,471) Unallocated corporate expenses (5,832) (4,374) (15,406) (14,645) -------- -------- -------- -------- Income (loss) before income taxes $ (2,337) $ 1,237 $ (5,276) $ 2,991 ======== ======== ======== ========
9 Information with respect to sales of products and services during the three months and nine months ended December 31, 1999 and 1998 is set forth below:
Three Months Ended Nine Months Ended December 31, December 31, --------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Private segment: Payphone terminals $ 1,405 $ 3,436 $ 4,469 $ 8,922 Printed circuit board control modules and kits 1,658 2,772 4,408 8,809 Components and other products 337 324 813 1,115 Services 324 132 924 495 ------- ------- ------- ------- 3,724 6,664 10,614 19,341 ------- ------- ------- ------- Telephone company segment: Payphone terminals 242 1,058 1,680 6,329 Printed circuit board control modules and kits 2,094 2,488 7,151 4,773 Components and other products 718 1,860 3,307 7,693 Repair, refurbishment and upgrade services 4,361 2,487 10,670 7,707 ------- ------- ------- ------- 7,415 7,893 22,808 26,502 ------- ------- ------- ------- International segment: Payphone terminals 1,378 1,729 4,885 3,419 Printed circuit board control modules and kits 28 3 164 120 Components and other products 124 570 407 1,921 ------- ------- ------- ------- 1,530 2,302 5,456 5,460 ------- ------- ------- ------- $12,669 $16,859 $38,878 $51,303 ======= ======= ======= =======
The Company sells its payphone products in the United States and in certain foreign countries. The Company's international business consists of export sales, and the Company does not presently have any foreign operations. Sales by geographic region for the three months and nine months ended December 31, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- United States $ 11,139 $ 14,557 $ 33,422 $ 45,843 Canada 427 346 2,272 1,882 Latin America 1,088 1,518 2,707 3,115 Europe, Middle East and Africa -- 1 411 23 Asia Pacific 15 437 66 440 -------- -------- -------- -------- $ 12,669 $ 16,859 $ 38,878 $ 51,303 ======== ======== ======== ========
10 9. COMMITMENTS AND CONTINGENCIES On October 15, 1999, the Company hired a new President and Chief Executive Officer. The employment agreement between the Company and its new President and Chief Executive Officer expires on October 11, 2002 and may be terminated earlier by either party with 30 days prior written notice. The agreement provides for minimum annual base compensation of $250 and incentive compensation of up to 50% of base compensation at the discretion of the Board of Directors, subject to a minimum of 25% of base compensation for the period beginning October 15, 1999 and ending December 31, 2000. In addition, under the terms of the agreement, the President and Chief Executive Officer is entitled to receive benefits made available to other executives of the Company and reimbursement of relocation expenses of $40. Further, the agreement provides for the payment of severance compensation if the Company terminates the agreement without cause equal to $250 unless the remaining term of the agreement is less than 12 months in which event such amount is prorated over the remainder of the term. The employment agreement also contains confidentiality and non-compete provisions. Pursuant to the terms of the agreement, the Company granted options under the 1999 Plan to purchase 539,988 shares of the Company's common stock at an exercise price of $1.67 per share (see Note 4). ---------- 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts, except per share data, in this Management's Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands. Forward Looking Statements The statements contained in this report which are not historical facts contain forward looking information regarding the Company (which may be referred to herein as we, us or our) and its financial position, business strategy, plans, projections and future performance based on the beliefs, expectations, estimates, intentions or anticipations of management as well as assumptions made by and information currently available to management. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors that could cause our actual results to differ materially from those expected by us, including competitive factors, customer relations, the integration of operations resulting from acquisitions, the risk of obsolescence of our products, relationships with our suppliers, the risk of adverse regulatory action affecting our business or the business of our customers, changes in the international business climate, product introduction and market acceptance, general economic conditions, seasonality, changes in industry practices, the outcome of litigation to which we are a party, and other uncertainties detailed in this report and in our other filings with the Securities and Exchange Commission. Results of Operations We reported a net loss of $1,484, or $.11 per diluted share, for the three months ended December 31, 1999 on net revenues and sales of $12,669 as compared to net income of $779, or $.06 per diluted share, on net revenues and sales of $16,859 for the three months ended December 31, 1998. For the nine months ended December 31, 1999, we reported a net loss of $3,408, or $.25 per diluted share, on revenues and net sales of $38,878 as compared to net income of $1,881, or $.14 per diluted share, on revenues and net sales of $51,303 for the nine months ended December 31, 1998. The losses for the three months and nine months ended December 31, 1999 reflect substantial expenditures to develop our public access Internet appliance products and related service operations, charges related to the restructuring of our core payphone business of $700 and declines in revenues and sales and gross profit margins as a result of industry conditions beyond our control, including the contraction of the installed base of public access terminals, the consolidation of domestic public communications providers, and declining industry revenues resulting from increasing usage of wireless services and increased volume of dial-around (toll free and access code) calls. As a result of the prolonged continuance of these industry conditions, we do not believe that revenues and net sales from our core payphone products and services will improve significantly in the foreseeable future. However, we believe that our revenues and sales may begin to grow as we launch our public access Internet appliance products and related services, but that a certain period of growth will be required before new sources of revenues from these products and services support the related operations. Therefore, we expect to continue to report operating losses for at least the next three quarters as we invest in the development and launch of our new products and services. Our public access Internet appliance products are designed to provide, among others, advertising, sponsored information and content and e-commerce capabilities in addition to traditional payphone capabilities. We believe, but cannot assure, that the revenues that may be generated from these capabilities will be substantially greater than the revenues generated from traditional payphone services. We are developing the services to implement these capabilities through a server network environment with a strategy to share the new revenue streams of our customers. We believe, but cannot assure, that our target customers will begin to deploy our new products and services over the next two quarters after they complete the initial lab and market trials, which began in January 2000. However, there is no assurance that our public access Internet appliance 12 products will be successfully introduced or accepted by the marketplace, or if they are, that revenues from such products and related services and revenues derived from advertising, sponsored content and other sources would have a material favorable impact on the revenues of our customers or on our sales and revenues in the foreseeable future or at all. Our ability to implement this strategy and develop revenues and profits from the relatively new and evolving market for Internet appliances, content and services is subject to substantial risks. These risks include, but are not limited to the following: o uncertain acceptance of our public access Internet appliance products by our customers and the public; o uncertain acceptance of our public access Internet appliance products as a new advertising media; o our ability and the ability of our customers to attract and retain advertisers; o our ability to develop, deliver, enhance, maintain and support the technology; o our ability to attract and retain content providers and the cost and availability of content; o an evolving and unpredictable business model; o the overall level of demand for content and commerce services in a public access setting; o seasonal trends in advertising placements; o the amount and timing of increased expenditures for expansion of operations, including the hiring of personnel, capital expenditures and related costs; o the result of litigation that may be filed against us in the future; o our ability to attract and retain qualified personnel; o the introduction of new or enhanced products and services by competitors; o technical difficulties, system downtime and system failures; o political or economic events and governmental actions affecting Internet operations or content; and o general economic conditions and economic conditions specific to the Internet and advertising industries. Three Months Ended December 31, 1999 Compared to the Three Months Ended December 31, 1998 The following table shows certain line items in the Company's consolidated statements of operations and other comprehensive income (loss) for the three months ended December 31, 1999 and 1998 that are discussed below together with amounts expressed as a percentage of sales. Percent Percent 1999 of Sales 1998 of Sales -------- -------- -------- -------- Revenues and net sales $ 12,669 100% $ 16,859 100% Cost of revenues and sales 9,174 72 11,248 67 Gross profit 3,495 28 5,611 33 Selling, general and administrative expenses 2,554 20 2,126 13 Engineering, research and development expenses 1,850 15 1,513 9 Restructuring charges 700 6 -- -- Income tax expense (benefit) (853) (7) 458 3 13 Revenues and net sales by market segment for the three months ended December 31, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below: Increase Percentage 1999 1998 (Decrease) Change -------- -------- --------- ---------- Private segment $ 3,724 $ 6,664 $ (2,940) (44%) Telephone company segment 7,415 7,893 (478) (6) International segment 1,530 2,302 (772) (34) -------- -------- -------- -------- $ 12,669 $ 16,859 $ (4,190) (25%) ======== ======== ======== ======== Revenues and net sales of products and services for the three months ended December 31, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below:
Increase Percentage 1999 1998 (Decrease) Change --------- -------- --------- ---------- Products: Payphone terminals $ 3,025 $ 6,223 $ (3,198) (51%) Printed circuit board control modules and kits 3,780 5,263 (1,483) (28) Components and other products 1,179 2,754 (1,575) (57) Services: Repair, refurbishment and upgrade services 4,361 2,487 1,874 75 Other services 324 132 192 145 -------- -------- -------- -------- $ 12,669 $ 16,859 $ (4,190) (25%) ======== ======== ======== ========
The decrease in revenues and net sales to the private and telephone company segments is primarily attributable to a decrease in volume of product sales partially offset by an increase in the usage of repair, refurbishment and upgrade services by the telephone company segment. We believe that these fluctuations are primarily attributable to a contraction of the installed base of payphone terminals in the domestic market and to declining revenues of payphone service providers caused by increasing usage of wireless services and a higher volume of dial-around calls. In addition, continuing downward pricing pressures contributed to the decline in revenues and net sales in these domestic market segments. The decrease in revenues and net sales to the international segment is primarily attributable to a decrease in export volume of payphone terminals to customers in Latin America and Asia. Cost of sales and gross profit as a percentage of net sales approximated 72% and 28%, respectively, for the three months ended December 31, 1999 as compared to 67% and 33%, respectively, for the three months ended December 31, 1998. The decline in the gross profit percentage between such periods is principally attributable to (i) the increase in the percentage of sales to telephone companies at margins lower than those achieved from the private segment, (ii) downward pricing pressures in the private segment, and (iii) the increase in low margin repair, refurbishment and upgrade services. The increase in selling, general and administrative expenses is primarily attributable to an increase in the estimated reserve for credit losses of $216, recruiting expenses and stock option compensation related to our new president and chief executive officer of $69 and fluctuations in accrued performance-based compensation. As a result of the restructuring discussed below, we have begun to shift our marketing and 14 selling resources to the introduction of our public access Internet appliance products rather than increasing overall spending. Also, the cost and expense reductions from the restructuring discussed below were not significant during the three months ended December 31, 1999. We continued to make significant investments in the development of our public access Internet appliance products and back office management software which resulted in an increase in engineering, research and development expenditures, including capitalized software development costs, of $1,374, or approximately 84%, to $3,004 versus $1,630 for the three months ended December 31, 1998. Capitalized software expenditures approximated $1,154 during the three months ended December 31, 1999 as compared to $157 during the three months ended December 31, 1998. During the three months ended December 31, 1999, we abandoned a software development project related to certain activities discontinued as part of the restructuring discussed below, and recognized an impairment loss of $140. The impairment loss is included in engineering, research and development expenses for the three months ended December 31, 1999. During the three months ended December 31, 1999, we implemented a restructuring plan to close our Sarasota, Florida manufacturing facility and consolidate manufacturing operations, resize our core payphone business operations, reorient our distribution strategy and begin to build support operations to introduce our public access Internet appliance products to the market and provide the services related thereto. In connection with this restructuring, we recognized restructuring charges of $700 during the three months ended December 31, 1999. These restructuring charges consisted of estimated employee termination benefits under severance and benefit arrangements of $575 and future lease payments of $125 related to the closure of leased facilities. The restructuring charges do not include the recognition of impairment losses of $148 related to closed facilities and the Company's decision to abandon a software development project related to certain discontinued activities. Impairment losses of $140 and $8 are classified as engineering, research and development expenses and selling, general and administrative expenses, respectively, during the three months and nine months ended December 31, 1999. We believe, but cannot assure, that the restructuring will have the impact of reducing costs and expenses in all functional areas of the business by approximately $2,000 annually, net of increases in expenses to support our new business strategy to generate advertising, sponsored content and other new sources of revenue from our public access Internet appliance products. We do not expect to realize the full impact of the anticipated cost and expense reductions from the restructuring until the quarter ending June 30, 2000. The Company's effective tax rate approximated 36.5% of pre-tax income (loss) for the three months ended December 31, 1999 as compared to 37% for the three months ended December 31, 1998. The change in our effective tax rate is primarily due to fluctuations in non-deductible expenses and research and development tax credits. We believe that it is more likely than not that we will be able to realize our deferred tax assets, and have not established a valuation allowance related thereto. 15 Nine Months Ended December 31, 1999 Compared to the Nine Months Ended December 31, 1998 The following table shows certain line items in the Company's consolidated statements of operations and other comprehensive income (loss) for the nine months ended December 31, 1999 and 1998 that are discussed below together with amounts expressed as a percentage of sales. Percent Percent 1999 of Sales 1998 of Sales -------- -------- -------- -------- Revenues and net sales $ 38,878 100% $ 51,303 100% Cost of revenues and sales 28,748 74 33,667 66 Gross profit 10,130 26 17,636 34 Selling, general and administrative expenses 7,888 20 8,020 16 Engineering, research and development expenses 4,730 12 4,662 9 Restructuring charges 700 2 -- -- Income tax expense (benefit) (1,868) (5) 1,110 2 Revenues and net sales by market segment for the nine months ended December 31, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below: Increase Percentage 1999 1998 (Decrease) Change -------- -------- --------- ---------- Private segment $ 10,614 $ 19,341 $ (8,727) (45%) Telephone company segment 22,808 26,502 (3,694) (14) International segment 5,456 5,460 (4) -- ======== ======== ======== ======== $ 38,878 $ 51,303 $(12,425) (24%) ======== ======== ======== ======== Revenues and net sales of products and services for the nine months ended December 31, 1999 and 1998 together with the increase or decrease and with the increase or decrease expressed as a percentage change are set forth below:
Increase Percentage 1999 1998 (Decrease) Change -------- -------- ---------- ---------- Products: Payphone terminals $ 11,034 $ 18,670 $ (7,636) (41%) Printed circuit board control modules and kits 11,723 13,702 (1,979) (14) Components and other products 4,527 10,729 (6,202) (58) Services: Repair, refurbishment and upgrade services 10,670 7,707 2,963 38 Other services 924 495 429 86 ======== ======== ======== ======== $ 38,878 $ 51,303 $(12,425) (24%) ======== ======== ======== ========
The same industry conditions and factors that influenced our revenue and sales performance for the three months ended December 31, 1999 affected our performance for the nine-month period. However, these 16 conditions and factors began to influence the telephone company segment during the later half of last year. Therefore, we experienced a greater percentage decline in net sales and revenues from the telephone company segment for the nine months ended December 31, 1999. Also, we realized 63% of the increase in revenues from repair, refurbishment and upgrade services during the last three months. In the international segment, an increase in export sales to customers in Canada and Africa offset a decline to customers in Latin America and the Asia Pacific region. Cost of sales and gross profit as a percentage of net sales approximated 74% and 26%, respectively, for the nine months ended December 31, 1999 as compared to 66% and 34%, respectively, for the nine months ended December 31, 1998. The same factors that affected our gross profit percentage for the three months ended December 31, 1999 affected our gross profit percentage for the nine-month period. In addition, we increased our inventory reserves by $982 to reflect the estimated net realizable value of certain slow moving inventories as a result of the continued weakness in the domestic market. The decrease in selling, general and administrative expenses is primarily attributable to a reduction in personnel and other operating expenses as a result of the reorganization of selling and marketing activities at the end of fiscal 1999, a decline in variable selling expenses related to the decline in sales offset by an increase in the estimated reserve for credit losses of $325, the estimated cost of severance and benefits of $184 payable to the Company's former chief executive officer under an agreement dated June 11, 1999, recruiting expenses and stock option compensation related to our new president and chief executive officer of $165 and an increase in expenses related to the launch of our public access Internet appliance products. In addition, as a result of the restructuring discussed above, we have begun to shift significant marketing and selling resources to the introduction of our public access Internet appliance products. Also, the cost and expense reductions from the restructuring were not significant during the nine months ended December 31, 1999. Total engineering, research and development expenditures, including capitalized software, during the nine months ended December 31, 1999 increased by $2,991, or approximately 62%, to $7,810 versus $4,819 for the same period last year. Capitalized software related to the development of the Company's public access Internet appliance products and back office management software approximated $3,080 during the nine months ended December 31, 1999 as compared to $157 during the nine months ended December 31, 1998. The Company's effective tax rate declined to approximately 35% of pre-tax income (loss) for the nine months ended December 31, 1999 as compared to 37% for the nine month ended December 31, 1998 primarily due to fluctuations in non-deductible expenses and research and development tax credits. Impact of Inflation The Company's primary costs, inventory and labor, increase with inflation. However, the Company does not believe that inflation and changing prices have had a material impact on its business. Liquidity and Capital Resources Liquidity. We are in default of certain financial covenants contained in the loan agreements (the "Loan Agreements") with our bank. As a result of the default, the bank has the right to accelerate the maturity of outstanding indebtedness under the Loan Agreements. Accordingly, outstanding debt in the aggregate amount of $11,653 at December 31, 1999 is classified as a current liability. 17 We have reached an agreement in principal to enter into a forbearance and modification agreement (the "Forbearance Agreement") with our bank that would modify the terms of the Loan Agreements. Pursuant to the terms of the proposed Forbearance Agreement, the maturity date of indebtedness outstanding under the Loan Agreements would be changed to May 31, 2000, the annual interest rate under the Loan Agreements would be increased to one percentage point above the prime interest rate, and our ability to borrow additional funds under a $2,000 export revolving credit line (none of which was borrowed as of such date) and a $1,500 equipment credit line ($281 of which was borrowed as of such date) would be cancelled. During the term of the proposed Forbearance Agreement, the outstanding indebtedness under a $10,000 working capital revolving credit line and a $4,000 installment note could not exceed the value of collateral consisting of eligible accounts receivable and inventories. We are attempting to secure an asset based financing line and additional equity capital or other sources of funding to refinance the outstanding indebtedness under the Loan Agreements. We have received proposals with respect thereto and believe that our efforts will be successful. However, there is no assurance that our efforts will be successful, or if successful, that such financing would be available on favorable terms. In addition, there is no assurance that any such financing would provide the funding required to refinance outstanding indebtedness and fund continued net operating losses and other liquidity requirements. If our efforts to secure additional capital or other sources of financing are not successful, we may be forced to reduce our product development efforts, slow down the launch of our public access Internet appliance products and take other actions to achieve profitability that may adversely affect our growth potential and future prospects. Further, if our efforts to raise additional capital and/or other sources of financing are not successful, we could experience difficulties meeting our obligations as they become due. Accordingly, there is no assurance that our cash resources will be sufficient to meet our anticipated cash needs for operations, working capital and capital expenditures for the next twelve months unless we are able to successfully raise additional capital and/or financing on satisfactory terms. Financing Activities. We fund our operations, working capital requirements and capital expenditures from internally generated cash flows and funds available under bank credit lines. We borrow funds under our bank credit lines to finance capital expenditures, increases in accounts and notes receivable and inventories and decreases in bank overdrafts (as drafts clear), accounts payable and accrued liability obligations to the extent that such requirements exceed cash provided by operations, if any. We also use the financing available under bank credit lines to fund operations and payments on long-term debt when necessary. We measure our liquidity based upon the amount of funds we are able to borrow under our bank credit lines, which varies based upon operating performance and the value of collateral. Indebtedness outstanding under our bank credit lines cannot exceed the value of eligible collateral (as defined in the Loan Agreements and in the proposed Forbearance Agreement discussed above) consisting of accounts receivable and inventories. At December 31, 1999 and March 31, 1999, outstanding debt under our working capital line was $6,095 and $5,185, respectively, and outstanding debt under our $4,000 installment note was $3,497 and $4,000, respectively. As of December 31, 1999, our bank would not permit us to borrow additional funds under our credit lines as a result of our default on certain financial covenants. As a result, we retained cash that would have customarily been used to repay outstanding indebtedness. Based on the value of collateral including the retained cash, we would have been able to borrow additional funds aggregating $1,420 under the terms of the expected Forbearance Agreement as of December 31, 1999. The indebtedness outstanding under the capital line amounted to $281 at December 31, 1999. At December 31, 1999, the Company had not used the $2,000 export line. Outstanding indebtedness under our bank mortgage note was $1,780 and $1,833 at December 18 31, 1999 and March 31, 1999, respectively. All of the outstanding bank debt is classified as a current liability at December 31, 1999. During the nine months ended December 31, 1999 and 1998, net proceeds under our bank lines aggregated $1,191 and $147, respectively. Principal payments under bank mortgage and installment notes and other notes payable during the nine months ended December 31, 1999 and 1998 amounted to $604 and $56, respectively. Bank overdrafts related to outstanding drafts declined by $1,428 during the nine months ended December 31, 1999. Operating Activities. Cash flows from operating activities for the nine months ended December 31, 1999 and 1998 are summarized as follows: 1999 1998 ------- ------- Net income (loss) $(3,408) $ 1,881 Non-cash charges and credits, net 2,651 3,156 ------- ------- (757) 5,037 Changes in operating assets and liabilities: Accounts and notes receivable 1,882 (1,651) Inventories 3,289 (6,548) Accounts payable, accrued expenses and other current liabilities 458 3,002 Other 1,783 (466) ------- ------- $ 6,655 $ (626) ======= ======= Our operating cash flow is primarily dependent upon operating results, sales levels and related credit terms extended to customers and inventory purchases, and the changes in operating assets and liabilities related thereto. During the nine months ended December 31, 1999, we used $757 in cash to fund operating losses net of non-cash charges and credits. During the same period last year, we generated $5,037 in cash from operations net of non-cash charges and credits. However, during the nine months ended December 31, 1999, we generated $7,412 of cash from changes in operating assets and liabilities as compared to the nine months ended December 31, 1998 when we used $5,663 of cash to fund changes in operating assets and liabilities. Our operating assets and liabilities are comprised principally of accounts and notes receivable, inventories, accounts payable, accrued expenses and other current liabilities. During the nine months ended December 31, 1999, we generated $1,882 and $3,289 of cash through reductions in accounts and notes receivable and inventories, respectively. We also generated $458 and $1,783 of cash from increases in accounts payable, accrued expenses and other current liabilities and from reductions in refundable income taxes and other operating assets, respectively. In comparison, during the nine months ended December 31, 1998, we used $1,651 and $6,548 of cash to fund increases in accounts and notes receivable and inventories, respectively, and generated $2,536 of cash from increases in accounts payable, accrued expenses and other current liabilities, net of increases in other operating assets. Our current ratio declined to 1.17 to 1 at December 31, 1999 as compared to 2.95 to 1 at March 31, 1999 primarily due to the net loss for nine months ended December 31, 1999, the classification of outstanding bank indebtedness as a current liability, and the capital asset and software expenditures discussed below. During the nine months ended December 31, 1999, our current assets decreased by $6,832 (22%) and current liabilities increased by $10,320 (97%). Working capital decreased to $3,541 at December 31, 1999 from $20,693 at March 31, 1999. Extension of credit to customers and inventory purchases represent our principal working capital requirements, and material increases in accounts and notes receivable and/or 19 inventories could have a significant effect on our liquidity. Accounts and notes receivable and inventories represented in the aggregate 84% of current assets at December 31, 1999 and March 31, 1999. We experience varying accounts receivable collection periods from our three customer segments, and believe that credit losses will not have a significant effect on future liquidity as a significant portion of our accounts and notes receivable are due from customers with substantial financial resources. The level of our inventories is dependent on a number of factors, including delivery requirements of customers, availability and lead-time of components and our ability to estimate and plan the volume of our business. Investing Activities. Net cash used for investing activities during the nine months ended December 31, 1999 and 1998 amounted to $4,799 and $1,327, respectively. Our investing activities include capital expenditures consisting primarily of manufacturing tooling and equipment, computer equipment and building improvements required to support operations and capitalized software, including new product software development costs. Cash used for capital expenditures during the nine months ended December 31, 1999 and 1998 aggregated $1,719 and $1,128, respectively. During the nine months ended December 31, 1999 and 1998, cash used to acquire software and capitalized software development costs aggregated $3,080 and $199, respectively. At December 31, 1999, we have no significant outstanding commitments for the purchase of capital assets. However, we are continuing to invest in the development of the back office software systems to provide advertising and content to our public access Internet appliance products. Year 2000 Discussion We have completed our efforts to assess the risks and impact of Year 2000 on our business and address Year 2000 issues resulting from computer programs designed to use two-digit date codes rather than four digits to define the applicable year. We assessed Year 2000 compliance of products and systems that we presently sell and support, performed appropriate compliance testing and modified and/or upgraded non-compliant product software related to such products and systems . In some cases, we identified that certain of our products and systems were Year 2000 compliant with issues, which means that they will operate properly if programmed and configured in accordance with our published guidelines. We also assessed Year 2000 compliance of our business and management information systems and related computer equipment, performed compliance testing and upgraded non-compliant software and equipment where necessary. In addition, we assessed the readiness of third parties, particularly critical suppliers and other third parties that have material relationships with us, to identify and mitigate the risks to our business and operations in the event they experienced Year 2000 problems and difficulties. Based on Year 2000 inquiries that we have received from our customers after December 31, 1999 and our investigations thereof, we are not aware of any significant Year 2000 noncompliance issues related to the products and systems that we presently sell and support. In addition, based on our Year 2000 compliance testing and remediation activities, the only products that we have historically sold that are not Year 2000 compliant or compliant with issues are products that we have discontinued to manufacture and that are no longer supported by the Company. We have previously notified our customers that we do not intend to bring these discontinued, non-compliant products into compliance and that they should upgraded accordingly. We do not believe that we have an obligation to bring these discontinued products into compliance or an obligation to replace these products under our warranties since they were last sold more than five years ago. Accordingly, we have not recorded any liability related to these products in our financial statements. The risks associated with the failure of our products to be Year 2000 compliant include: (1) loss of data or an adverse impact on the reliability of data generated by our products; (2) loss of functionality; (3) failure to communicate with other applications used by our customers that may not be Year 2000 compliant; and (4) potential litigation by customers with respect to products and services no longer supported by us. However, based on Year 2000 inquiries received from our customers after to December 31, 1999 and our investigations 20 thereof, we do not believe that these risks are significant or that Year 2000 issues related to our products and systems will have a material adverse impact on our business or operating results. We have not experienced any material interruptions or operational problems as a result of Year 2000 issues related to our business and management information systems or from the failure of third parties, including critical suppliers and other third parties that have material relationships with us, to be Year 2000 compliant. Principally, our existing engineering and information technology personnel undertook our Year 2000 efforts. We have not separately tracked the costs incurred for such efforts, but such costs consisted primarily of compensation costs for the personnel assessing and mitigating the risk of Year 2000 on our business. In addition, the costs incurred to upgrade or acquire new Year 2000 compliant software and equipment have not been material, and we do not believe that any increases in administrative costs related to Year 2000 issues will be material in the future. Further, we believe, but cannot assure, that we will not incur any significant costs and expenses related to future Year 2000 remediation activities or claims that may be filed against us related to Year 2000 noncompliance issues. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, which establishes standards for accounting of derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires entities to recognize derivative instruments as assets and liabilities and measure them at fair value, and to match the timing of gain or loss recognition on hedging instruments with the recognition of changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or the earnings effect of the hedged forecasted transaction. Management does not believe that the adoption of SFAS 133 will have a significant impact on the Company's consolidated financial statements. During the nine months ended December 31, 1999, the Company adopted Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") issued by the American Institute of Certified Public Accountants (the "AICPA"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and new cost recognition principles and identifies the characteristics of internal use software. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, financial position or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk There are no material changes with regards to quantitative and qualitative disclosures about market risks from that set forth in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. ---------- 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants. San Diego Superior Court Case No. 691635. As previously reported, this putative class action was filed in 1995 in the Superior Court of the State of California for the County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that filed for bankruptcy, conspired with its own officers and professionals, and with various telephone suppliers (including the Company) to defraud investors in Amtel by operating a Ponzi scheme. See Item 3 - Legal Proceedings of Part I of the Company's Form 10-KSB for the fiscal year ended March 31, 1996 and Item 1 - Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended September 30, 1996. On September 28, 1998, the Company's Motion for Summary Judgment was granted by the Court and the Court dismissed the Company from the class action. On December 11, 1998, the plaintiffs appealed the Court's decision to grant the Company's Motion for Summary Judgment and the appeal is pending. The Company disputes liability and intends to defend this matter vigorously, although the Company cannot predict the ultimate outcome of this litigation. Item 3. Defaults by the Company on its Senior Securities The Company is in default of certain financial covenants contained in the loan agreements between the Company and its bank. As a result thereof, the bank has the right to accelerate the maturity of debt outstanding under the loan agreements in the aggregate principal amount of $11.653 million at December 31, 1999. We have reached an agreement in principal to enter into a forbearance and modification agreement (the "Forbearance Agreement") with our bank that would modify the terms of the Loan Agreements. Pursuant to the terms of the proposed Forbearance Agreement, the maturity date of indebtedness outstanding under the Loan Agreements would be changed to May 31, 2000, the annual interest rate under the Loan Agreements would be increased to one percentage point above the prime interest rate, and our ability to borrow additional funds under a $2,000 export revolving credit line (none of which was borrowed as of such date) and a $1,500 equipment credit line ($281 of which was borrowed as of such date) would be cancelled. During the term of the proposed Forbearance Agreement, the outstanding indebtedness under a $10,000 working capital revolving credit line and a $4,000 installment note could not exceed the value of collateral consisting of eligible accounts receivable and inventories. We are attempting to secure an asset based financing line and additional equity capital or other sources of funding to refinance the outstanding indebtedness under the Loan Agreements. However, there is no assurance that our efforts will be successful, or if successful, that such financing would be available on favorable terms. In addition, there is no assurance that any such financing would provide the funding required to refinance outstanding indebtedness and fund continued net operating losses and other liquidity requirements. If our efforts to secure additional capital or other sources of financing were not successful, we may be forced to reduce our product development efforts, slow down the launch of our public access Internet appliance products and take other actions to achieve profitability that may adversely affect our growth potential and future prospects. Further, if our efforts to raise additional capital and/or other sources of financing were not successful, we could experience difficulties meeting our obligations as they become due. Accordingly, there is no assurance that our cash resources will be sufficient to meet our anticipated cash needs for operations, working capital and capital expenditures for the next twelve months unless we are able to successfully raise additional capital and/or financing on satisfactory terms. 22 Item 4. Submission of Matters to a Vote of Security Holders On November 2, 1999, the Company held its Annual Meeting of Stockholders (the "Meeting"). At the Meeting, Company's stockholders voted upon the following matters: 1. The election of a Board of Directors consisting of five directors, with each director to serve until the next annual meeting of stockholders or until the election and qualification of his respective successor; 2. The approval of an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock, $.01 par value (the "Common Stock"), authorized for issuance by 10,000,000 shares, from 30,000,000 shares to 40,000,000 shares; 3. The approval of an amendment to the 1991 Stock Option Plan (the "1991 Plan") to increase the number of shares reserved for issuance under the 1991 Plan by 500,000 shares, from 2,100,000 shares to 2,600,000 shares; 4. The approval of an amendment to the Directors Stock Option Plan (the "Directors Plan") to increase the number of shares reserved for issuance under the Directors Plan by 75,000 shares, from 225,000 shares to 300,000 shares; and 5. The ratification of the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending March 31, 2000. All of the nominees for director recommended by the Board of Directors were elected and the results of the voting were as follows: Votes Name Votes For Withheld - -------------------------------------------------------------------------------- Joseph M. Jacobs 11,368,692 661,095 C. Shelton James 11,342,274 687,513 Charles H. Moore 11,490,126 539,661 Thomas E. Patton 11,497,336 532,451 Mark L. Plaumann 11,491,336 538,451 The stockholders approved the amendment to the Company's Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance by 10,000,000 shares, from 30,000,000 shares to 40,000,000 shares. The results of the voting were: 11,122,850 For; 875,993 Against; and 31,004 Abstentions. The stockholders approved the amendment to the 1991 Plan to increase the number of shares reserved for issuance under the 1991 Plan by 500,000 shares, from 2,100,000 shares to 2,600,000 shares. The results of the voting were: 11,032,878 For; 887,528 Against; and 42,304 Abstentions. The stockholders approved the amendment to the Directors Plan to increase the number of shares reserved for issuance under the Directors Plan by 75,000 shares, from 225,000 shares to 300,000 shares. The results of the voting were: 11,190,233 For; 730,348 Against; and 42,129 Abstentions. The stockholders ratified the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending March 31, 2000. The results of the voting were: 11,946,731 For; 61,547 Against; and 21,509 Abstentions. 23 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The following exhibits are filed herewith as part of this report: Exhibit No. Description of Exhibit ------- ---------------------- 3.1 Certificate of Incorporation as Amended 10.1 1991 Stock Option Plan as Amended 10.2 Directors Stock Option Plan as Amended 10.3 1999 Stock Option Plan 27 Financial Data Schedule (Edgar Filing only) (b) Reports on Form 8-K: None 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Elcotel, Inc. ------------- (Registrant) Date: February 11, 2000 By: /s/ William H. Thompson ---------------------------- William H. Thompson Senior Vice President, Administration and Finance (Principal Financial Officer) By: /s/ Scott M. Klein -------------------------------- Scott M. Klein Controller (Principal Accounting Officer) 25 EX-3.1 2 CERTIFICATE OF INCORPORATION EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF ELCOTEL, INC. (As amended thru December 3, 1999) FIRST - The name of this Corporation is Elcotel, Inc. SECOND - Its registered office in the State of Delaware is to be located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The Registered Agent in charge thereof is Corporation Trust Company. THIRD - The nature of business and, the objects and purposes proposed to be transacted, promoted and carried on, are to do any or all the things therein mentioned, as fully and to the same extent as natural persons might or could do, and in any part of the world, viz: "The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware." FOURTH - The amount of total authorized capital stock of this Corporation is Forty Million (40,000,000) shares of Common Stock, par value $.01 per share." FIFTH - The name and mailing address of the incorporator is as follows: Name Mailing Address ---- --------------- Mary Loughlin Suite 3600 1600 Market Street Philadelphia, PA 19103 SIXTH - The Directors shall have power to adopt, amend or repeal the Bylaws; to fix the amount to be reserved as working capital, and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchise of this Corporation. With the consent in writing, and pursuant to a vote of the holders of a majority of the capital stock issued and outstanding, the Directors shall have authority to dispose, in any manner, of the whole property of this Corporation. The stockholders and Directors of this Corporation shall have the right to inspect the books and records of this Corporation in accordance with the Delaware General Corporation Law. The stockholders and Directors shall have power to hold their meetings and keep the books, documents and papers of this Corporation outside the State of Delaware, at such places as may be from time to time designated by the Bylaws or by resolution of the stockholders or Directors, except as otherwise required by the laws of Delaware. SEVENTH - A Director of this Corporation shall not be personally liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability to the extent provided by applicable law (i) for any breach of the Director's duty of loyalty to this Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived any improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further limitation or elimination of the liability of a Director, then the liability of a Director of this Corporation shall be limited or eliminated to the fullest extent permitted by the amended Delaware General Corporation Law. Any modification or repeal of the foregoing paragraph by the stockholders of this Corporation shall not adversely affect any right or protection of a Director of this Corporation existing at the time of such repeal or modification. 2 EX-10.1 3 1991 STOCK OPTION PLAN EXHIBIT 10.1 ELCOTEL, INC. 1991 STOCK OPTION PLAN 1. Definitions As used in this Plan, the following definitions apply to the terms indicated below: 1. "Board" means the Board of Directors of the Company. 2. A Change of Control means the occurrence of any one or more of the following events: (i) if any transaction occurs whereby a substantial portion of the assets of the Company are transferred, exchanged or sold to a non-affiliated third party other than in the ordinary course of business; (ii) if a merger or consolidation involving the Company occurs and the stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation at least fifty percent (50%) of the outstanding common stock of the surviving entity or the entity into which the common stock of the Company is converted; or (iii) if any person (including without limitation any individual, partnership or corporation) becomes the owner, directly or indirectly, of securities of the Company or its successor (or a parent company thereof) representing thirty-five percent (35%) or more of the combined voting power of the Company's or its successor's (or a parent's, as the case may be) securities then outstanding. 3. "Committee" means the Compensation and Stock Option Committee appointed by the Board from time to time to administer the Plan. The Committee shall consist of at least two persons, who shall be directors of the Company and who shall not be or have been granted or awarded, while serving on the Committee or within one year prior thereto, stock, stock options, or stock appreciation rights pursuant to any plan of the Company or any of its affiliates except a plan that provides for formula grants or awards. 4. "Company" means Elcotel, Inc., a Delaware corporation. 5. "Fair Market Value" of a Share on a given day means, if the Shares are traded in a public market, the mean between the highest and lowest quoted selling prices of a Share as reported on the principal securities exchange on which the Shares are then listed or admitted to trading, or if not so reported, the mean between the highest and lowest quoted selling prices of a Share, or the mean between the highest asked price and the lowest bid price as the case may be, as reported on the National Association of Securities Dealers Automated Quotation System. If the Shares shall not be so traded, the Fair Market Value shall be determined by the Committee taking into account all relevant facts and circumstances. 6. "Grantee" means a person who is either an Optionee or an Optionee-Shareholder. 7. "Incentive Stock Option" means an option, whether granted under this Plan or otherwise, that qualifies as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code. 8. "Option" means a right to purchase Shares under the terms and conditions of this Plan as evidenced by an option certificate or agreement for Shares in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. 9. "Optionee" means a person other than an Optionee-Shareholder to whom an option is granted under this Plan. 10. "Optionee-Shareholder" means a person to whom an option is granted under this Plan and who at the time such option is granted owns, actually or constructively, stock of the Company or of a Parent or Subsidiary possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of such Parent or Subsidiary. 11. "Nonqualified Option" means an Option that is not an Incentive Stock Option. 12. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain (other than the Company) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 13. "Plan" means this Elcotel, Inc. 1991 Stock Option Plan, including any amendments to the Plan. 14. "Share" means a share of the Company's common stock, par value $.01 per share, either now or hereafter owned by the Company as treasury stock or authorized but unissued. 15. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain (other than the last corporation in the chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 16. Options shall be deemed "granted" under this Plan on the date on which the Committee, by appropriate action, approves the grant of an Option hereunder or on such subsequent date as the Committee may designate. 17. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. 2 2. Purpose The purposes of the Plan are as follows. 1. To secure for the Company and its shareholders the benefits arising from share ownership by those officers and key employees of the Company and its Subsidiaries who will be responsible for the Company's future growth and continued success. The Plan is intended to provide an incentive to officers and key employees by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. 2. To enable the Company and its Subsidiaries to obtain and retain the services of key employees, by providing such key employees with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term 1. This Plan shall become effective upon its adoption by the Board, and Options may be issued upon such adoption and from time to time thereafter; provided, however, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose; and provided further, that the approval of the Company's shareholders shall be obtained within 12 months of the date of adoption of the Plan. If the Plan is not approved by the affirmative vote of the holders of a majority of all shares present in person or by proxy, at a duly called shareholders' meeting at which a quorum representing a majority of all voting stock is present in person or by proxy and voting on this Plan, then this Plan and all Options then outstanding under it shall forthwith automatically terminate and be of no force and effect. 2. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of this Plan by the Board. No Options may be granted hereunder except within such period of ten (10) years. 4. Administration of Plan 1. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine to whom Incentive Stock Options and Non-qualified Options shall be granted, how many Shares shall be subject to each such Option, whether a Grantee shall be required to surrender for cancellation an outstanding Option 3 as a condition to the grant of a new Option, and the prices at which Shares shall be sold to Grantees. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. 2. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. 3. Any power granted to the Committee either in this Plan or by the Board, may at any time be exercised by the Board, and any determination by the Committee shall be subject to review and approval or reversal or modification by the Board. 5. Eligibility Officers and key employees of the Company and its Subsidiaries shall be eligible for selection by the Committee to be granted Options. An employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. 6. Options 1. Subject to adjustment as provided in Paragraph 13 hereof, Options may be granted pursuant to the Plan for the purchase of not more than 2,600,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. 2. The aggregate fair market value (determined as of the time Options are granted) of the stock with respect to which Incentive Stock Options may be or become exercisable for the first time by a Grantee during any calendar year (whether granted under this Plan or any other plan of the Company or any Parent or Subsidiary corporation) shall not exceed $100,000. To the extent an Incentive Stock Option may be or become exercisable in violation of this limitation, it shall be deemed to be a Nonqualified Option. 7. Option Price The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee, but shall not be less than the greater of: 4 (1) 100% of the Fair Market Value of such Share on the date the Option is granted (110% of the Fair Market Value of such Share on the date an Incentive Stock Option is granted to an Optionee-Shareholder), and (2) $0.75. 8. Duration of Options Each Option and all rights thereunder shall expire and the Option shall no longer be exercisable on a date not later than five (5) years from the date on which the Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Options shall be subject to termination before their expiration date as provided herein. 9. Conditions Relating to Exercise of Options 1. The Shares subject to any Option may be purchased at any time during the term of the Option, unless, at the time an Option is granted, the Committee shall have fixed a specific period or periods in which exercise must take place. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise as to whole Shares is permitted from time to time, provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $100. 2. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution, and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or, to the extent that such exercise would not prevent an Option from qualifying as an Incentive Stock Option under the Internal Revenue Code, by his or her guardian or legal representative. 3. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. 4. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares. The purchase price shall be paid in cash or by certified check or bank cashier's check. Alternatively, to the extent permitted by the Committee and in its sole discretion, the purchase price may be paid by delivering to the Company: 5 (1) Shares (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by the Grantee having a Fair Market Value equal to the purchase price; or (2) a notarized statement attesting to ownership of the number of Shares which are intended to be used at Fair Market Value to pay the purchase price, with the certificate number(s) thereof, and requesting that only the incremental number of Shares as to which the Option is being exercised be issued by the Company. 5. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until (i) this Plan has been approved by the shareholders of the Company, and (ii) the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop-transfer instructions to the transfer agent of the Company. 6. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer or sale of securities of the Company or over the extension of credit for the purposes of purchasing or carrying any margin securities, or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. 7. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 10. Effect of Termination of Employment or Death 1. In the event of termination of a Grantee's employment by reason of such Grantee's death, disability, or retirement with the consent of the Board or in accordance with an applicable retirement plan, any outstanding Option held by such Grantee shall, notwithstanding the extent to which such Option was exercisable prior to termination of employment, immediately become exercisable as to the total number of Shares purchasable thereunder. Any such Option shall remain so 6 exercisable at any time prior to its expiration date or, if earlier, the first anniversary of termination of the Grantee's employment. 2. In the event of termination of a Grantee's employment for any reason other than death, disability, or retirement with the consent of the Board or in accordance with an applicable retirement plan, all rights of any kind under any outstanding Option held by such Grantee shall immediately lapse and terminate; provided, however, that the Committee may, in its discretion, elect to permit exercise for a period ending on the earlier of the expiration date of the Option absent any such termination of employment and a date thirty days after the termination of employment as to the total number of Shares purchasable under the Option as of the date of such termination; and provided further, that the Committee may, in its discretion, elect to permit exercise until a date determined by the Committee but not later than the expiration date of the Option absent any such termination of employment as to the total number of Shares purchasable under the Option as of the date of such termination, subject to any further conditions that the Committee may determine. 3. Whether an authorized leave of absence or absence in military or government service shall constitute termination of employment shall be determined by the Committee. Transfer of employment between the Company and a Subsidiary corporation or between one Subsidiary corporation and another shall not constitute termination of employment. 11. No Special Employment Rights Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her employment by the Company or a Subsidiary or interfere in any way with the right of the Company or a Subsidiary, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. 12. Rights as a Shareholder The Grantee of an Option shall have no rights as a shareholder with respect to any Shares covered by an Option until the date of issuance of a certificate to him for such Shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date of issuance of such certificate. 13. Anti-dilution Provision 1. In case the Company shall (i) declare a dividend or dividends on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of Shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the number of Shares authorized under the Plan will be adjusted proportionately. Similarly, in any such event, there will be a proportionate adjustment in the 7 number of Shares subject to unexercised Options (but without adjustment to the aggregate option price). 2. The Committee may provide, either before or at or about the time of the occurrence of a Change of Control, in any outstanding or newly issued Option that a Grantee's right to exercise any such Option shall accelerate as a consequence of or in connection with a Change of Control. In addition, the Committee may provide in any outstanding or newly issued Option that a Grantee's right to exercise any such Option shall accelerate in the event of a termination of employment of such Grantee without cause pursuant to the terms of a written agreement between the Company and the Grantee which has been approved by the Committee. 14. Withholding Taxes Whenever an Option is to be exercised under the Plan, the Company shall have the right to require the Grantee, as a condition of exercise of the Option, to remit to the Company an amount sufficient to satisfy the Company's (or a Subsidiary's) Federal, state and local withholding tax obligation, if any, that will, in the sole opinion of the Committee, result from the exercise. In addition, the Company shall have the right, at the sole discretion of the Committee, to satisfy any such withholding tax obligation by retention of Shares issuable upon such exercise having a Fair Market Value on the date of exercise equal to the amount to be withheld. 15. Amendment of the Plan The Board may at any time and from time to time terminate or modify or amend the Plan in any respect, except that, without shareholder approval, the Board may not (a) increase the number of Shares which may be issued under the Plan, or (b) modify the requirements as to eligibility for participation under the Plan. The termination or modification or amendment of the Plan shall not, without the consent of a Grantee, affect his rights under an Option previously granted to him or her. With the consent of the Grantee, the Board may amend outstanding Options in a manner not inconsistent with the Plan. 16. Miscellaneous 1. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any person, by reason of the adoption of this Plan, be deemed to be entitled to the grant of any Option; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. 2. All expenses of the Plan, including the cost of maintaining records, shall be borne by the Company. 17. Governing Law This Plan and all rights hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware. 8 EX-10.2 4 DIRECTORS STOCK OPTION PLAN EXHIBIT 10.2 ELCOTEL, INC. DIRECTORS STOCK OPTION PLAN 1. Definitions As used in this Plan, the following definitions apply to the terms indicated below: A. "Board" means the Board of Directors of the Company. B. A Change of Control means the occurrence of any one or more of the following events: (i) if any transaction occurs whereby a substantial portion of the assets of the Company are transferred, exchanged or sold to a non-affiliated third party other than in the ordinary course of business; (ii) if a merger or consolidation involving the Company occurs and the stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation at least fifty percent (50%) of the outstanding common stock of the surviving entity or the entity into which the common stock of the Company is converted; or (iii) if any person (including without limitation any individual, partnership or corporation) becomes the owner, directly or indirectly, of securities of the Company or its successor (or a parent company thereof) representing thirty-five percent (35%) or more of the combined voting power of the Company's or its successor's (or a parent's, as the case may be) securities then outstanding. C. "Committee" means the Compensation and Stock Option Committee appointed by the Board from time to time to administer the Plan. The Committee shall consist of at least two persons, who shall be directors of the Company. D. "Company" means Elcotel, Inc., a Delaware corporation. E. "Director" means a member of the Board who is not an employee of the Company. F. "Fair Market Value" of a Share on a given day means, if the Shares are traded in a public market, the mean between the highest and lowest quoted selling prices of a Share as reported on the principal securities exchange on which the Shares are then listed or admitted to trading, or if not so reported, the mean between the highest and lowest quoted selling prices of a Share, or the mean between the highest asked price and the lowest bid price as the case may be, as reported on the National Association of Securities Dealers Automated Quotation System. If the Shares shall not be so traded, the Fair Market Value shall be determined by the Committee taking into account all relevant facts and circumstances. G. "Grantee" means a person to whom an Option is granted. H. "Option" means a right to purchase Shares under the terms and conditions of this Plan as evidenced by an option certificate or agreement for Shares in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. I. "Plan" means this Elcotel, Inc. Directors Stock Option Plan, including any amendments to the Plan. J. "Share" means a share of the Company's common stock, par value $.01 per share, either now or hereafter owned by the Company as treasury stock or authorized but unissued. K. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. 2. Purpose The purposes of the Plan are as follows. A. To secure for the Company and its shareholders the benefits arising from share ownership by Directors. The Plan is intended to provide an incentive to Directors by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. B. To enable the Company and its Subsidiaries to obtain and retain the services of Directors, by providing Directors with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term A. This Plan shall become effective upon its adoption by the Board, and Options shall be issued from time to time thereafter; provided, however, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose; and provided further, that the approval of the Company's shareholders shall be obtained within 12 months of the date of adoption of the Plan. If the Plan is not approved by the affirmative vote of the holders of a majority of all shares present in person or by proxy, at a duly called shareholders' meeting at which a quorum representing a majority of all voting stock is present in person or by proxy and voting on this Plan, then this Plan and all Options then outstanding under it shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of 2 this Plan by the Board. No Options may be granted hereunder except within such period of ten (10) years. 4. Administration of Plan A. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine how many Shares shall be subject to each discretionary Option, whether a Grantee shall be required to surrender for cancellation an outstanding Option as a condition to the grant of a new Option, and the prices at which Shares shall be sold to Grantees. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. B. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. C. Any power granted to the Committee may at any time be exercised by the Board, and any determination by the Committee shall be subject to review and reversal or modification by the Board on its own motion. 5. Options A. Subject to adjustment as provided in Paragraph 12 hereof, an Option shall be granted to each Director on the last business day of each fiscal year of the Company for the purchase of (i) 1,000 Shares for each committee on which such Director is then serving; and (ii) 1,000 Shares for each committee of which such Director is then the chairperson. Subject to adjustment as provided in Paragraph 12 hereof, a new Director shall receive a one-time automatic grant of an option to purchase 4,000 Shares at the time such Director is either elected by the shareholders to serve on the Board or appointed by the Board to fill a vacancy. In addition to the grants of Options mandated by the foregoing sentences of this Paragraph 5A and subject to adjustment as provided in Paragraph 12 hereof, a Director may be granted discretionary Options as the Committee shall determine. 3 B. Subject to adjustment as provided in Paragraph 12 hereof, Options may be granted pursuant to the Plan for the purchase of not more than 300,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. 6. Option Price The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee but shall not be less than the greater of: (1) 100% of the Fair Market Value of such Share on the date the Option is granted, and (2) $2.00. 7. Duration of Options Each Option and all rights thereunder shall expire and the Option shall no longer be exercisable on a date five (5) years from the date on which the Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Options shall be subject to termination before their expiration date as provided herein. 8. Conditions Relating to Exercise of Options A. The Shares subject to any Option may be purchased at any time during the term of the Option beginning on the first anniversary date of the date of the grant of such Option. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise as to whole Shares is permitted from time to time, provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $1,000. B. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution, and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or by his or her guardian or legal representative. C. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. D. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to 4 which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares. The purchase price shall be paid in cash or by certified check or bank cashier's check. Alternatively, to the extent permitted by the Committee and in its sole discretion, the purchase price may be paid by delivering to the Company: (1) Shares (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by the Grantee having a Fair Market Value equal to the purchase price; or (2) a notarized statement attesting to ownership of the number of Shares which are intended to be used at Fair Market Value to pay the purchase price, with the certificate number(s) thereof, and requesting that only the incremental number of Shares as to which the Option is being exercised be issued by the Company. E. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until (i) this Plan has been approved by the shareholders of the Company, and (ii) the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop-transfer instructions to the transfer agent of the Company. F. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer or sale of securities of the Company or over the extension of credit for the purposes of purchasing or carrying any margin securities, or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. G. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 5 9. Effect of Termination of Directorship or Death A. In the event of termination of a Grantee's status as a Director by reason of such Grantee's death or disability, any outstanding Option held by such Grantee shall, notwithstanding the extent to which such Option was exercisable prior to such termination, immediately become exercisable as to the total number of Shares purchasable thereunder. Any such Option shall remain so exercisable at any time prior to its expiration date or, if earlier, only until the first anniversary of termination of the Grantee's status as a Director. B. In the event of termination of a Grantee's status as a Director for any reason other than death or disability, any outstanding Option held by such Grantee shall remain exercisable at any time prior to the expiration date of such Option absent termination of Director status or, if earlier, only until the date thirty days after the termination of Director status; provided, however, that if such termination of Director status (other than by resignation) occurs within one year after a Change of Control, any outstanding Option held by such Grantee shall remain exercisable at any time prior to the expiration date of such Option absent such termination of Director status; and provided, further, however, that the Board may permit any outstanding Option to remain exercisable at any time prior to the expiration date of such Option absent such termination of Director status to the extent that such Option is or was vested as the date of termination of a Grantee's status as a Director for any reason other than death or disability. C. Whether an authorized leave of absence or absence in military or government service shall constitute termination of status as a Director shall be determined by the Committee. 10. No Special Rights Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her status as a Director or interfere in any way with the right of the Company at any time to terminate such status or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. 11. Rights as a Shareholder The Grantee of an Option shall have no rights as a shareholder with respect to any Shares covered by an Option until the date of issuance of a certificate to him for such Shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date of issuance of such certificate. 6 12. Anti-dilution Provision A. In case the Company shall (i) declare a dividend or dividends on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of Shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the number of Shares authorized under the Plan will be adjusted proportionately. Similarly, in any such event, there will be a proportionate adjustment in the number of Shares subject to unexercised Options (but without adjustment to the aggregate option price). B. The Committee may provide, either before or at or about the time of the occurrence of a Change of Control, in any outstanding or newly issued Option that a Grantee's right to exercise any such Option shall accelerate as a consequence of or in connection with a Change of Control. 13. Amendment of the Plan The Board may at any time and from time to time terminate or modify or amend the Plan in any respect, except that (1) without shareholder approval, the Board may not (a) materially increase the number of securities which may be issued under the Plan or (b) materially modify the requirements as to eligibility for participation under the Plan; and (2) the Plan provisions governing the amounts and purchase prices of Shares and the requirements as to eligibility for participation may not be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code or the rules thereunder. The termination or modification or amendment of the Plan shall not, without the consent of a Grantee, affect his rights under an Option previously granted to him or her. 14. Miscellaneous A. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. B. All expenses of the Plan, including the cost of maintaining records, shall be borne by the Company. 15. Governing Law This Plan and all rights hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware. 7 EX-10.3 5 1999 STOCK OPTION PLAN EXHIBIT 10.3 ELCOTEL, INC. 1999 STOCK OPTION PLAN 1. Definitions As used in this Plan, the following definitions apply to the terms indicated below: 1. "Board" means the Board of Directors of the Company. 2. "Change of Control" means the occurrence of any one or more of the following events: (i) if any transaction occurs whereby substantially all of the assets of the Company are transferred, exchanged or sold to a non-affiliated third party other than in the ordinary course of business; (ii) if a merger or consolidation involving the Company occurs and the stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation at least fifty percent (50%) of the outstanding common stock of the surviving entity or the entity into which the common stock of the Company is converted; or (iii) if any person (including without limitation any individual, partnership or corporation), other than Fundamental Management Corporation and its affiliates or other than Wexford Management LLC and its affiliates, becomes the owner, directly or indirectly, of securities of the Company or its successor (or a parent company thereof) representing thirty-five percent (35%) or more of the combined voting power of the Company's or its successor's (or a parent's, as the case may be) securities then outstanding. 3. "Committee" means the Compensation and Stock Option Committee appointed by the Board from time to time to administer the Plan. The Committee shall consist of at least two persons, who shall be directors of the Company and, while the Company has any class of equity securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), who shall satisfy the requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor rule or regulation adopted by the Securities and Exchange Commission which exempts certain transactions from Section 16(b) of the Exchange Act. 4. "Company" means Elcotel, Inc., a Delaware corporation. 5. "Fair Market Value" of a Share on a given day means: (i) if the Shares are listed or admitted to trading on a national securities exchange or the National Association of Securities Dealers Automated Quotation System National Market System ("NMS"), then the closing sale price on such exchange or NMS on such date, or, if no trading occurred on such date, then on the closest preceding date on which the Shares were traded; (ii) if the Shares are not so listed or admitted but are reported by the National Association of Securities Dealers Automated Quotation System, the mean between the highest asked price and the lowest bid price, as reported on the National Association of Securities Dealers Automated Quotation System on such date; or (iii) if the Shares are not so listed or admitted, the Fair Market Value shall be determined by the Committee taking into account all relevant facts and circumstances. 6. "Grantee" means a person to whom an Option is granted under this Plan. 7. "Option" means a right to purchase Shares under the terms and conditions of this Plan as evidenced by an option certificate or agreement for Shares in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. 8. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain (other than the Company) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 9. "Plan" means this Elcotel, Inc. 1999 Stock Option Plan, including any amendments to the Plan. 10. "Share" means a share of the Company's common stock, par value $.01 per share. 11. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain (other than the last corporation in the chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 12. Options shall be deemed "granted" under this Plan on the date on which the Committee, by appropriate action, approves the grant of an Option hereunder or on such subsequent date as the Committee may designate. 13. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. 2. Purpose The purposes of the Plan are as follows. 1. To secure for the Company and its stockholders the benefits arising from share ownership by those senior executive officers of the Company and its Subsidiaries who will be responsible for the Company's future growth and continued success. The Plan is intended to provide an incentive to senior executive officers by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. 2 2. To enable the Company and its Subsidiaries to obtain and retain the services of senior executive officers, by providing such senior executive officers with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term 1. This Plan shall become effective upon its adoption by the Board, and Options may be issued upon such adoption and from time to time thereafter. 2. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for five (5) years from the date of adoption of this Plan by the Board. No Options may be granted hereunder except within such period of five (5) years. 4. Administration of Plan 1. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine to whom Options shall be granted, how many Shares shall be subject to each such Option, whether a Grantee shall be required to surrender for cancellation an outstanding Option as a condition to the grant of a new Option, and the prices at which Shares shall be sold to Grantees. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. 2. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. 3. Any power granted to the Committee either in this Plan or by the Board, may at any time be exercised by the Board, and any determination by the Committee shall be subject to review and approval or reversal or modification by the Board. 3 5. Eligibility Senior executive officers of the Company and its Subsidiaries shall be eligible for selection by the Committee to be granted Options. A senior executive officer who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. 6. Options 1. Subject to adjustment as provided in Paragraph 13 hereof, Options may be granted pursuant to the Plan for the purchase of not more than 539,988 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. Options to purchase not more than 539,988 Shares may be granted to one Grantee. 2. All Options granted under this Plan shall be non-qualified options. 7. Option Price The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee. 8. Duration of Options Each Option and all rights thereunder shall expire and the Option shall no longer be exercisable on that date five (5) years from the date on which the Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Options shall be subject to termination before their expiration date as provided herein. 9. Conditions Relating to Exercise of Options 1. The Shares subject to any Option may be purchased at any time during the term of the Option, unless, at the time an Option is granted, the Committee shall have fixed a specific period or periods in which exercise must take place. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise as to whole Shares is permitted from time to time, provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $100. 2. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution, and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or by his or her guardian or legal representative. 4 3. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. 4. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares. The purchase price shall be paid in cash or by certified check or bank cashier's check. Alternatively, the purchase price may be paid by delivering to the Company: (1) Shares (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by the Grantee having a Fair Market Value equal to the purchase price; or (2) a notarized statement attesting to ownership of the number of Shares which are intended to be used at Fair Market Value to pay the purchase price, with the certificate number(s) thereof, and requesting that only the incremental number of Shares as to which the Option is being exercised be issued by the Company. 5. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop-transfer instructions to the transfer agent of the Company. 6. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer or sale of securities of the Company or over the extension of credit for the purposes of purchasing or carrying any margin securities, or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. 7. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such Option may not be exercised in 5 whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 10. Effect of Termination of Employment 1. In the event a Grantee's employment is (i) terminated by the Company For Cause (as defined in any employment agreement between the Company and the Grantee), or (ii) terminated by the Grantee for any reason, the Options shall cease vesting as of the date that the Company or the Grantee provides notice of such termination, and any unvested Options as of such date shall immediately terminate and become void. 2. In the event the Grantee's employment is terminated by the Company other than for Cause (as defined in any employment agreement between the Company and the Grantee), any Options held by the Grantee that would have vested, if the Grantee's employment had not been terminated, during the (12) twelve months after such termination or such lesser period through the end of the term of any employment agreement between the Grantee and the Company shall immediately vest. 3. Whether an authorized leave of absence or absence in military or government service shall constitute termination of employment shall be determined by the Committee. Transfer of employment between the Company and a Subsidiary corporation or between one Subsidiary corporation and another shall not constitute termination of employment. 11. No Special Employment Rights Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her employment by the Company or a Subsidiary or interfere in any way with the right of the Company or a Subsidiary, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. 12. Rights as a Stockholder The Grantee of an Option shall have no rights as a stockholder with respect to any Shares covered by an Option until the date of issuance of a certificate to him for such Shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date of issuance of such certificate. 6 13. Anti-dilution Provision 1. In case the Company shall, by stock dividend, stock split, combination, reclassification or exchange, or through merger, consolidation or otherwise, change its shares of Common Stock into a different number, kind or class of shares or other securities or property, then the Board shall arrange for the successor or surviving corporation, if any, to grant replacement options, or to adjust appropriately the number of shares covered by the Options and the price of each share. The determination of the Board shall be conclusive. 2. Upon the occurrence of a Change of Control, all unvested Options shall become immediately exercisable in their entirety. 14. Withholding Taxes Whenever an Option is to be exercised under the Plan, the Company shall have the right to require the Grantee, as a condition of exercise of the Option, to remit to the Company an amount sufficient to satisfy the Company's (or a Subsidiary's) Federal, state and local withholding tax obligation, if any, that will, in the sole opinion of the Committee, result from the exercise. In addition, the Company shall have the right, at the sole discretion of the Committee, to satisfy any such withholding tax obligation by retention of Shares issuable upon such exercise having a Fair Market Value on the date of exercise equal to the amount to be withheld. 15. Amendment of the Plan The Board may at any time and from time to time terminate or modify or amend the Plan in any respect except to the extent that stockholder approval of such amendment is required by applicable law or the rules of any national securities exchange or any automated quotation system. The termination or modification or amendment of the Plan shall not, without the consent of a Grantee, affect his rights under an Option previously granted to him or her. With the consent of the Grantee, the Board may amend outstanding Options in a manner not inconsistent with the Plan. 16. Miscellaneous 1. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any person, by reason of the adoption of this Plan, be deemed to be entitled to the grant of any Option; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. 2. All expenses of the Plan, including the cost of maintaining records, shall be borne by Company. 17. Governing Law This Plan and all rights hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware. 7 EX-27 6 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA. 3-Mos Mar-31-2000 Oct-01-1999 Dec-31-1999 1,050 0 11,625 1,338 9,706 24,495 11,047 5,261 67,847 20,954 48 0 0 136 46,709 67,847 27,284 38,878 19,735 28,748 0 373 458 (2,337) (853) (1,484) 0 0 0 (1,484) (.11) (.11)
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