<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________to_______________________
Commission file number 001-8988
ECC INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 23-1714658
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2001 West Oak Ridge Road, Orlando, Florida 32809-3803
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code (407)859-7410
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.10 par value New York Stock Exchange
Rights to purchase Series B Junior Participating
Preferred Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 1, 1998, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $10,724,264. (This figure was
computed on the basis of the closing price for the Registrant's Common Stock on
October 1, 1998 using the number of shares held on October 1, 1998 by
stockholders who are not officers, directors or record holders of 10% or more of
the Registrant's outstanding Common Stock. The characterization of such
officers, directors and 10% stockholders as affiliates is for purposes of the
computation only and should not be construed as an admission for any purpose
whatsoever that any of such persons are, in fact, affiliates of the Registrant.)
As of October 1, 1998 there were 8,329,409 shares of the Registrant's Common
Stock, $0.10 par value per share, issued and outstanding.
Information with respect to directors in Item 10 and the information required by
Items 11-13 is incorporated by reference to the definitive proxy statement of
the Registrant to be filed with the Commission in connection with its Annual
Meeting of Stockholders scheduled for December 3, 1998.
The Exhibit Index is located on pages 45 through 49.
<PAGE> 2
PART I
Item 1. Business.
(a) General Development of Business.
(1) ECC International Corp., a Delaware corporation organized in 1969
(the "Company"), designs, manufactures, and markets computer-controlled
simulators used primarily for training personnel to perform maintenance and
operator procedures on military weapons systems. The Company's simulators
measure performance as a trainee operates the equipment, conducts equipment
tests, diagnoses programmed malfunctions, and takes corrective actions. The
Company's equipment is used by all four branches of the U.S. Department of
Defense as well as numerous foreign governments for familiarization, operator
training and maintenance training for aircraft, missiles, submarines, surface
ships, tanks, combat vehicles, and radar systems.
The Company's systems also have application in industrial and
vocational training programs, such as control room simulators for power plants.
The Company also offers training and educational products to
purchasers of its simulators and to others. These products consist of the
development of training programs and curricula, development of multi media
programs and computer-based training, preparation of training handbooks, and
instruction on the use of the Company's simulators.
The Company designs and manufactures substantially all of the
components of its simulator systems, with the exception of certain equipment
such as commercially available computers, CRTs, disk drives and printers, which
it purchases. The Company is not dependent on any one supplier for raw materials
or computer related equipment used in or sold as part of its systems.
The Company's systems are marketed through a direct sales
force and by independent international sales representatives located in 17
foreign countries.
On November 25, 1997 the Company completed the sale of the
fixed assets, inventory and trade receivables of the Company's vending
operation. The sale of the vending operation was accounted for as a discontinued
operation, and accordingly, the vending operations were segregated in the
accompanying Selected Financial Data and Consolidated Financial Statements of
Operations. See Note 15 to the Consolidated Financial Statements for information
concerning Discontinued Operations.
(2) Not applicable.
(b) Financial Information about Industry Segments.
With the sale of the vending operation the Company operates in one
segment - training. This segment includes, design and manufacture of training
simulators and development of training programs and curricula. See Note 12 to
the Consolidated Financial Statements for information concerning sales by
geographic area and major customers.
(c) Narrative Description of Business.
(1) (i) Principal Products, Services and Revenue Sources.
See the information set forth above in Item 1(a) and
(b) and following in Item (c)(1)(iv).
-2-
<PAGE> 3
(ii) New Products.
Not applicable.
(iii) Raw Materials.
The components used in training systems, as well as
the parts used to manufacture the computers and devices used in the Company's
systems, are purchased from original equipment manufacturers, electronics supply
firms and others. The Company has no reason to believe that it cannot continue
to obtain such components, or suitable substitutes, as it may require.
(iv) Patents, Trademarks, Licenses, Franchises and
Concessions.
A Design Patent and two Utility Patents covering key
elements of the bottle vending unit were sold in conjunction with the sale of
certain assets of the vending operation. See Note 15 to the Consolidated
Financial Statements for information concerning Discontinued Operations.
(v) Seasonality of Business.
The Company's business is not seasonal.
(vi) Working Capital Practices.
The Company's working capital practices are similar
to other government contractors.
(vii) Dependence on Customer.
A substantial portion of the Company's training
business is government-related and channeled to the Company through the
Department of Defense. For the fiscal year ended June 30, 1998, 13% of sales
were made directly to the U.S. Department of Defense, while an additional 62% of
sales were made to various other contractors for ultimate use by the U.S.
Department of Defense. Within the U.S. Department of Defense, there are various
agencies which are "customers" of the Company, with the largest being the U.S.
Navy. (Also see Note 12 to the Consolidated Financial Statements.)
(viii) Backlog.
At June 30, 1998, the Company's backlog (which
represents that portion of outstanding contracts not yet included in revenue)
was approximately $65,900,000, as compared to approximately $53,100,000 at
June 30, 1997. It is anticipated that over 80% of the backlog will be
delivered during the fiscal year ending June 30, 1999.
(ix) Renegotiation or Termination of Contracts or
Subcontracts at Government's Election.
The Company's government contracts contain standard
terms permitting termination without cause at the option of the government. In
the event of termination of such contracts, the Company is entitled to receive
reimbursement on the basis of work completed (cost incurred plus a reasonable
profit).
(x) Competitive Conditions.
-3-
<PAGE> 4
The Company is in competition with a large number of
firms. Many of the Company's competitors are substantially larger and have
greater financial resources. Competition is based upon both price and
performance considerations. Positive factors pertaining to the Company's
competitive position are that the Company has a large base of installed systems
and substantially more experience than its competitors in the
computer-controlled maintenance simulation field. The Company expects to see new
competitors in its market, which the Company believes is one of the defense
segments which continues to have growth potential.
(xi) Systems Development.
During the fiscal years ended June 30, 1998, 1997,
and 1996, approximately $2,758,000, $1,126,000 and $289,000, respectively, were
spent on Company-sponsored research activities, including manufacturing,
engineering and software development relating to the development of new products
and product enhancements. There have been no customer-sponsored research
activities within the last three years. During the fiscal year ended June 30,
1998, the Company employed the equivalent of 20 full-time professional employees
whose prime responsibility is in research and development activities. In
addition to this full-time research and development staff, from time to time the
Company utilizes the specialized skills of many of its other employees and
contract personnel on a limited engagement basis.
(xii) Environment.
The Company has nothing to report under this caption.
(xiii) Number of Persons Employed.
As of June 30, 1998, the Company employed
approximately 538 persons.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
Export sales were immaterial to the Company's gross sales.
Management does not believe that any material part of the business is
dependent on any one foreign contract, the loss of which would have a material
adverse effect on the business.
Item 2. Properties.
The Company owns its simulation development and manufacturing
facilities which are situated on 27 acres in Orlando, Florida. The main plant
facility totals 398,086 square feet. Ancillary buildings on the property total
85,460 square feet. The Company sub-leases the 72,500 square foot facility
previously used by the vending subsidiary.
The Company's wholly owned subsidiary, ECC Simulation Limited
has three separate leased facilities. The first lease, expiring in 2015, is for
a 25,000 square foot facility in Shoreham-by-Sea, West Sussex, England. The
second lease, expiring in July 2003, with a lease break option in 1998, is for
9,000 square feet of space in a facility near the Shoreham location. Management
exercised the lease break option for the 9,000 square foot facility in 1998. The
UK operation also has a lease for 50,000 square feet in Brighton, East Sussex,
England. This lease expires June 2016, with a lease break option in 2002.
Management intends to exercise this lease break option. (See Note 16 to the
Consolidated Financial Statements.)
-4-
<PAGE> 5
Item 3. Legal Proceedings.
On April 29, 1997, the Company filed a notice of arbitration against
Teliti Computers Sdn Bhd in the Regional Centre for Arbitration in Kuala Lumpur,
Malaysia. The Company sought $1.3 million for breach of contract. Among other
things, the Company claimed that Teliti failed to furnish a letter of credit to
secure its payment obligations to the Company and failed to provide three of its
personnel to be trained by the Company for a full twelve months as specified in
a contract between the two parties. In addition, Teliti demanded that the
training materials under contract be tested and delivered to Malaysia instead of
at the Company's facility in the United States as specified in the contract.
During the fourth quarter of fiscal year 1998, the Regional Centre for
Arbitration awarded the Company a settlement of $400,000 including amounts
previously advanced to the Company. This settlement resulted in a $200,000
charge to earnings during the fourth quarter of fiscal year 1998. At June 30,
1998, $200,000 remained outstanding related to the arbitration settlement. The
remaining balance is to be paid in equal quarterly installments of $50,000
through July 1,1999. (See Note 3 to the Consolidated Financial Statements.)
Also, during fiscal year 1997, the Company, as a subcontractor,
initiated a lawsuit in Florida State court against Raytheon Training, Inc., the
prime contractor successor to Hughes Training, Inc., under the Army's Battle
Labs Reconfigurable Simulator Initiative ("BLRSI") program. This litigation
sought recovery of approximately $191,000 in unpaid invoices and approximately
$98,000 as a settlement of the termination for convenience of the subcontract.
These amounts were included in accounts receivable at June 30, 1997. Raytheon
submitted a counterclaim in the amount of approximately $1.2 million. During the
first quarter of fiscal year 1999, the parties agreed to a settlement of all
claims in the form of a $150,000 sum payable to the Company. This settlement
resulted in a $139,000 charge to earnings during the fourth quarter of fiscal
year 1998. (See Note 3 to the Consolidated Financial Statements).
The Company submitted a claim, during fiscal year 1996, for contract
adjustment under the Economic Price Adjustment ("EPA") provisions of a major
contract seeking approximately $950,000. The value of the claim was included as
a component of contract value for purposes of revenue recognition and
accordingly is included in costs and estimated earnings in excess of billings on
completed contracts. In the prior fiscal year, the Company also submitted a
claim for the effects of a Stop Work Order issued on one of its contracts in the
amount of $191,000, of which $150,000 was deferred in inventory as of June 30,
1997. The claim represented the cost of idle time resulting from the Stop Work
Order as well as the effect of the release of the Stop Work Order. During the
fourth quarter of fiscal year 1998, the Company was awarded $140,000 with
respect to this claim. The excess $10,000 deferred in inventory was written-off
during the fourth quarter of fiscal year 1998. (See Note 4 to the Consolidated
Financial Statements.)
Item 4. Submissions of Matters to a Vote of Security Holders.
There was no vote of security holders during the fourth quarter of the
last fiscal year.
-5-
<PAGE> 6
Executive Officers and Key Management Employees of the Registrant
Each of the following executive officers and key management employees
of the Company has been elected by the Board of Directors and serves at the
discretion of the Board.
<TABLE>
<CAPTION>
Name Age Position with the Registrant Officer Since
---- --- ---------------------------- -------------
<S> <C> <C> <C>
James C. Garrett 54 President, Chief Executive 1998
Officer and Director
James B. Conyers, Jr. * 55 Vice President, Staff Operations 1987
Ajit W. Hirani 51 Vice President, General Manager Orlando 1986
Training Simulation Division and Director
Ali Kalwar * 48 Vice President, Program Management 1996
Jerome Pogorzelski * 57 Vice President, Manufacturing, 1991
Training Systems Division
Relland Winand 43 Vice President, Finance and 1996
Chief Financial Officer
and Secretary/Treasurer
Robert Wollam * 48 Vice President, Engineering 1996
</TABLE>
* Key management employees who are not "officers" for purposes of Section 16 of
the Securities Exchange Act of 1934 and the rules and regulations thereunder.
Dr. Garrett assumed his position in June 1998. Messrs. Kalwar, Winand
and Wollam assumed their current positions in fiscal year 1996. Mr. Hirani
assumed his current position in January 1995 and was elected a Director in March
1995. Messrs. Conyers and Pogorzelski assumed their current positions during
1994. With the exception of Dr. Garrett, all other officers have been with the
Company in various capacities for at least five years.
Dr. Garrett has had an extensive career in the defense and aerospace
industries spanning over 28 years. He most recently served as Vice President and
General Manager of the Raytheon E-Systems Communications Division, a position to
which he was named in 1991, with responsibility for a broad range of projects.
During the course of a twenty-year career with Rockwell International
Corporation, he was Vice President of the Command and Control Systems, Satellite
and Secure Systems, Tactical Products and Engineering Divisions.
-6-
<PAGE> 7
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
(a) Market Information.
The Common Stock of the Company is listed on the New York Stock
Exchange (symbol ECC). The price range of the Common Stock during the last two
fiscal years was as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
June 30, 1998 $ 3.56 $ 3.06
March 31, 1998 3.50 2.94
December 31, 1997 4.63 3.06
September 30, 1997 5.50 3.38
June 30, 1997 5.63 5.25
March 31, 1997 6.25 5.75
December 31, 1996 8.25 8.00
September 30, 1996 7.63 7.25
</TABLE>
Common Stock prices shown above are the last daily sales prices on the
New York Stock Exchange.
(b) Holders.
As of October 1, 1998 the Company had approximately 986 stockholders of
record of its Common Stock based on the transfer agent's listings. The Company
believes its shares are beneficially held by several thousand additional
stockholders based on broker dealer demand for proxy materials in 1997.
(c) Dividends.
No cash dividends have been declared on the Company's common stock
during the past two years. Under the Company's amended credit agreement
(described in Note 7 to the Consolidated Financial Statements) the Company is
not permitted to pay cash dividends.
-7-
<PAGE> 8
Item 6. Selected Financial Data.
(In Thousands, Except Per Share Data)
Fiscal Years Ended June 30
Operating Data:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Net Sales ............................ $ 52,618 $ 72,550 $ 101,713 $ 83,534 $ 61,069
Operating (Loss)/Income .............. $ (13,775) $ (3,510) $ 7,929 $ 11,592 $ 9,671
Net (Loss)/Income .................... $ (12,409) $ (4,584) $ 4,232 $ 7,236 $ 5,253
Discontinued Operations:
Net Sales ............................ $ -- $ 10,540 $ 15,443 $ 24,073 $ 2,232
Operating (Loss)/Income .............. $ -- $ (5,830) $ (1,922) $ 142 $ (1,913)
Net (Loss)/Income .................... $ (407) $ (3,951) $ (1,354) $ 82 $ (1,324)
Per Share Data - Basic:
Weighted Average Number of Common
Shares Outstanding .................. 8,174 7,916 7,732 7,616 6,388
(Loss)/Earnings Per Common Share
Continuing Operations ............... $ (1.52) $ (0.58) $ 0.55 $ 0.95 $ 0.82
(Loss)/Earnings Per Common Share
Discontinued Operations ............. $ (0.05) $ (0.50) $ (0.18) $ 0.01 $ (0.20)
---------- --------- --------- --------- ---------
(Loss)/Earnings Per Common Share ..... $ (1.57) $ (1.08) $ 0.37 $ 0.96 $ 0.62
========== ========= ========= ========= =========
Per Share Data - Assuming Dilution:
Weighted Average Number of Common
Shares Outstanding .................. 8,174 7,916 7,950 7,894 6,891
(Loss)/Earnings Per Common Share
Continuing Operations ............... $ (1.52) $ (0.58) $ 0.53 $ 0.92 $ 0.76
(Loss)/Earnings Per Common Share
Discontinued Operations ............. $ (0.05) $ (0.50) $ (0.17) $ 0.01 $ (0.19)
---------- --------- --------- --------- ---------
(Loss)/Earnings Per Common Share ..... $ (1.57) $ (1.08) $ 0.36 $ 0.93 $ 0.57
========== ========= ========= ========= =========
</TABLE>
Earnings/(Loss) Per Common Share have been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128 "Earnings
Per Share." See Note 11 to the Consolidated Financial Statements.
-8-
<PAGE> 9
<TABLE>
<CAPTION>
As Of June 30
Balance Sheet Data: 1998 1997 1996 1995 1994
- -------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Assets ....... $64,358 $82,034 $95,397 $89,739 $65,180
Working Capital .... $11,385 $35,357 $44,236 $40,983 $28,154
Long-Term Debt ..... $ -- $16,640 $18,706 $16,250 $16,818
Stockholders' Equity $33,437 $45,546 $52,875 $49,039 $34,603
</TABLE>
-9-
<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
(a) (1) and (2) Liquidity and Capital Resources.
During fiscal year 1998, the Company's principal sources of cash were
the proceeds from the sale of certain assets of the vending operation as well as
billings and receipts on costs and estimated earnings in excess of billings on
uncompleted contracts. The principal uses of these funds were to make the final
payments on the term loan, pay down the revolving credit agreement, and to fund
the improvements to the Orlando facility. During fiscal year 1997, the Company's
principal sources of cash were receipts on accounts receivable, billings and
receipts on cost and estimated earnings in excess of billings on uncompleted
contracts, advances on contracts in the UK subsidiary and proceeds from the
issuance of common stock, or exercise of stock options. The principal uses of
these funds in fiscal year 1997 were to make payments on the term loan and
accounts payable and to finance acquisitions of property, plant and equipment.
The increase in accounts receivable at June 30, 1998 was primarily due
to billings on several new contracts including Javelin Multi-year and Close
Combat Tactical Trainer Low Rate Initial Production ("CCTT LRIP") for which
payment was received in July 1998. In the prior year, accounts receivable and
costs and estimated earnings in excess of billings on completed contracts
decreased due to the completion or near completion of several contracts in the
domestic training operation.
Costs and estimated earnings in excess of billings on uncompleted
contracts decreased at June 30, 1998 due to the completion or near completion of
several contracts in the domestic training division. This decrease was partially
offset by progress on several new domestic training division contracts which
were awarded during the third quarter of fiscal year 1998.
Raw material inventory increased as a result of a $1.3 million charge
against the obsolescence reserve (which was included as a component of raw
material inventory for classification purposes) to write-off finished goods
inventory in the domestic training operation. The Company no longer maintains
finished goods inventory. Raw material inventory decreased during fiscal year
1997 primarily due to the allocation of common parts to contracts in progress.
Work in process inventory decreased primarily as a result of a
reduction in the production of common parts by the Company. In addition, the
write-off of approximately $166,000 in pre-contract costs in accordance with the
adoption of Statement of Position 98-5, "Reporting on the Cost of Start-Up
Activities," contributed to the decrease. See Notes 4 and 13 to the Consolidated
Financial Statements. Work in process inventory decreased during fiscal year
1997 primarily as a result of the award of certain contracts for which pre
contract costs were included in work in process at June 30, 1996.
Prepaid expenses and other increased during fiscal years 1998 and 1997
primarily due to a federal tax refund receivable recorded for federal net
operating losses realized during both fiscal years. In addition, in fiscal year
1997, prepaid expenses and other increased due to the deferred tax assets
resulting from accruals which were not yet deductible for tax purposes relating
to the loss on disposal of discontinued operations including the phase-out
period.
The increase in accounts payable at June 30, 1998 was primarily the
result of an increase in material purchases as the Company progresses on its new
contracts. The decrease in accounts payable at June 30,
-10-
<PAGE> 11
1997 was primarily the result of a substantial slow-down in material purchases
as two of the Company's largest contracts were completed or near completion.
Advances in long-term contracts increased at June 30, 1997 primarily as
a result of payments received in advance of work performed on contracts in the
U.K. subsidiary.
The increase in capital in excess of par at June 30, 1998 and 1997 was
primarily the result of the purchase of stock under employee stock purchase
plans and the exercise of stock options. In addition, the tax benefit received
from the exercise of employee stock options under one of the Company's stock
option plans contributed to the increase in fiscal year 1997.
The Company's consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying consolidated financial statements and notes, the
Company has suffered losses from continuing operations of $12.4 million and $4.6
million in fiscal years 1998 and 1997, respectively, is experiencing difficulty
generating sufficient cash flow to meet its obligations and sustain operations
and has not yet obtained a new credit facility to replace its current loan
facility, of which the balance of $11.1 million is due January 11, 1999. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. As described in Note 7,
the Company was not in compliance with the fixed charge coverage ratio for its
revolving credit agreement and was unable to obtain waivers from the bank for
its violation. The Company has entered into a forbearance agreement with its
bank lenders which extended the expiration of the revolving credit agreement
from October 1, 1998 to January 11, 1999 and provides for the maintenance of
minimum cash balances, as well as other restrictive covenants through the
expiration date. The forbearance agreement terminates on November 30, 1998,
if the Company does not obtain a letter of commitment from a financial
institution providing for repayment in full of the obligations under the
revolving credit agreement.
The Company is currently in the process of seeking alternative sources
of financing and implementing certain internal operating and management plans to
generate cash flow. These plans include reductions in workforce, relocation of
the Corporate Headquarters and the wind-down of the UK operation, all of which
were announced during the first quarter of fiscal year 1999.
There can be no assurance that the Company will be successful in
generating the necessary cash flow or obtaining such financing.
The Company anticipates spending approximately $1.5 million for new
machinery and equipment and to continue to refurbish the Orlando facility during
fiscal year 1999.
Other than as stated above, the Company has no other material
commitments for capital expenditures.
-11-
<PAGE> 12
(3) Results of Operations.
1998 Compared with 1997.
Continuing Operations
Net Sales decreased 27% for fiscal year 1998 as compared to fiscal year
1997. The decrease in net sales is primarily the result of several domestic
training division contracts with reduced activity as they are complete or near
completion. This decrease in net sales was partially offset by sales generated
from the award of several new contracts during the third quarter of fiscal year
1998 including: Javelin multi-year; CCTT LRIP; a Saudi VIGS contract; as well as
several additions to other ongoing contracts.
Net Sales in the UK subsidiary also decreased as compared to fiscal
year 1997. The decrease in net sales in the UK was a result of reduced activity
on its two major contracts as they are expected to be completed during the first
half of fiscal year 1999. The UK subsidiary was awarded a contract for Cabin
Crew Training equipment from Airtours International Airways Ltd. during the
third quarter of fiscal year 1998, however, there was no other substantial new
business awarded during the year.
Gross margin decreased as a percentage of net sales in fiscal year 1998
as compared to fiscal year 1997. This decrease was due to significant gross
margin adjustments on contracts in the UK subsidiary. The lack of new business
awards over the past year, as well as no anticipated future awards has resulted
in a business base which is not sufficient to absorb fixed costs. As a result,
the UK subsidiary recorded margin adjustments resulting from the need to
recognize additional costs on certain contracts and contract loss accruals of
approximately $2.6 million during the fourth quarter of fiscal year 1998. (See
Note 13 to the Consolidated Financial Statements).
As a result of recurring losses in the UK operation, the Board of
Directors announced, on August 27, 1998, the approval of a plan to wind down and
discontinue the operations of the UK subsidiary by March 1999. Management
expects to record a non-recurring charge of approximately $1.7 million, relating
to severance and stay bonuses, during fiscal year 1999. A portion of the charge
relating to severance will be taken during the first quarter of fiscal year
1999. The remaining portions of the charge, principally relating to stay
bonuses, will be taken during the remainder of fiscal year 1999. Management is
in the process of evaluating options with respect to the leased facilities in
the UK including subletting the facilities or terminating the leases. Any
resulting charge will be determined after this evaluation. The potential costs
associated with the leased facilities range from $1.0 million to $5.0 million.
Gross margin as a percentage of net sales in the domestic training
division remained relatively consistent with fiscal year 1997. Contract gross
margin levels improved as a result of the completion or near completion of many
large "cost plus" type contracts which have historically had lower gross margins
than the "fixed price" type. In addition, the Company's cost reduction
initiatives during the past fiscal year reduced overhead costs, thus improving
gross margins. The improvement in contract gross margins were offset by a change
in the method of accounting for precontract costs during the fourth quarter of
fiscal year 1998. The Company changed its method of accounting for precontract
costs from deferring costs incurred for specific anticipated contracts and
including those costs in contract sales and costs when the contract award is
assured, to expensing the costs as incurred in accordance with Statement of
Position 98-5 "Reporting on the Cost of Start-Up Activities." ("SUP 98-5") The
Statement requires that precontract costs that are start-up costs be expensed as
incurred. As a result of implementing SOP 98-5, the Company wrote-off
approximately $785,000, pre-tax of start-up costs during the fourth quarter of
fiscal year 1998 of which $199,000, after tax, related to the fourth quarter
with the balance relating to previous quarters. The first three quarters of
fiscal year 1998 were restated for this change in accounting. (See Note 13 to
the Consolidated Financial Statements).
-12-
<PAGE> 13
Although management initiated several cost cutting initiatives in
fiscal year 1998, the benefit of these reductions was not proportionate to the
decrease in sales volume, thereby resulting in an overall net loss for the year.
Since fiscal year 1997, management has effected a 32% reduction in work force
consistent with the reduction in contract volume. However, costs associated
with the reduction in work force, including severance benefits and out placement
services, were incurred thereby minimizing the impact of the reduction in work
force on gross margin. All of these costs were paid during fiscal year 1998. As
a result, management has initiated further cost reduction measures in the
domestic operation including the relocation of its corporate headquarters and a
reduction in workforce.
On July 7, 1998 the Company announced the relocation of its corporate
headquarters staff and Instructional Systems Development Group from Wayne,
Pennsylvania to the Company's principal Systems Design and Production Center in
Orlando, Florida. The relocation was completed on September 30, 1998. Management
expects to record a non-recurring charge of approximately $800,000 during fiscal
year 1999 associated with the relocation. A majority of the charge relating to
stay bonuses and lease termination will be recorded during the first quarter of
fiscal year 1999. The remaining portion of the charge will be taken during the
second quarter of fiscal year 1999. Management expects to reduce overhead
expenditures and improve efficiencies as a result of this relocation.
Selling, general and administrative expense increased as compared to
fiscal year 1997. This increase was a result of fees paid to international
marketing representatives, consulting fees and an increase in bid and proposal
and marketing activities. In addition, depreciation expense increased as a
result of the implementation of the new computer system on June 1, 1997.
Systems development expense increased as compared to fiscal year 1997
primarily as a result of efforts in the domestic training division to develop or
enhance technologies and processes in order to remain competitive in the
industry. These efforts are expected to continue through fiscal year 1999.
Other operating expenses increased as a result of an evaluation of
expected future undiscounted cash flows associated with the long lived assets in
the UK operation. As a result of this evaluation, an impairment charge of $1.3
million was recorded for plant and equipment during the fourth quarter of fiscal
year 1998. (See Note 1 to the Consolidated Financial Statements).
Interest income decreased as compared to fiscal year 1997 as interest
due the Company based on the IRS look-back method of accounting for completed
contracts was substantially lower than the amount received in the previous
fiscal year.
Interest expense decreased as compared to fiscal year 1997 as a result
of final payments totaling $2,250,000 on the Company's term loan during the
first quarter of fiscal year 1998 as well as payments totaling $5,500,000 on the
revolving credit facility during the second quarter of fiscal year 1998.
-13-
<PAGE> 14
Discontinued Operations
On November 25, 1997 the Company completed the sale of the fixed
assets, inventory and trade receivables of the Company's vending operation.
Proceeds from the sale of the vending operation were used to reduce the
Company's debt.
Operating results have been segregated in the accompanying consolidated
statements of operations. Net losses for fiscal year 1998 were included as a
component of discontinued operations in the Company's June 30, 1997 consolidated
statements. Discontinued operations at June 30, 1997 included management's best
estimates of amounts expected to be realized on the sale of the vending
operation, the costs directly associated with the disposal of the operation, as
well as the operating losses expected to be incurred during the phase-out
period.
During fiscal year 1998, the Company recorded an additional provision
for the estimated loss on disposal of discontinued operations of $407,000,
after-tax. The change in the estimated loss resulted primarily from additional
costs associated with the consummation of the sale of the fixed assets,
inventory and trade receivables of the vending operation.
1997 Compared with 1996.
Continuing Operations
Net Sales decreased 29% for fiscal year 1997 as compared to fiscal year
1996. The decrease in net sales is primarily the result of several domestic
training division contracts with reduced activity as they are complete or
expected to be completed during the first quarter of fiscal year 1998. Sales
volume in the UK subsidiary increased modestly over the preceding year due to
continued efforts on its two largest contracts.
Gross margin decreased as a percentage of sales in fiscal year 1997 as
compared to fiscal year 1996. This decrease was due to gross margin adjustments
on certain contracts in the U.K. subsidiary, a reduction in sales volume in the
domestic training division as well as the continued change in contract mix in
the domestic training division.
Gross margin in the U.K. subsidiary decreased as a result of contract
adjustments recorded during fiscal year 1997. Gross margin adjustments were
taken on its two large contracts due to protracted or delayed hardware/software
testing, re-work required on trainers and late delivery penalties imposed due to
contract delays. In addition, gross margin adjustments were taken due to a
decrease in expected future sales volume which may result in higher overhead
rates than previously anticipated. (Also See Note 13 to the Consolidated
Financial Statements.)
-14-
<PAGE> 15
Domestic training also experienced a decrease in gross margin compared
to the prior fiscal year. While the Company has experienced an increase in
volume on its large domestic cost plus type contracts, these contracts generally
yield lower gross margins than the fixed price type. In addition, actual sales
volume in fiscal 1997 was lower than expected due to the completion or near
completion of numerous contracts which were not replaced by new business. While
cost reduction initiatives are underway, overhead and S,G&A levels have not
decreased proportionate to the decrease in sales volume. Since fiscal year 1996
management has effected a 38% reduction in work force consistent with the
reduction in contract volume. However, costs associated with the reduction in
work force (including subcontracted labor), including severance benefits and out
placement services, were incurred thereby minimizing the impact of the reduction
in work force on gross margin. All of these costs were paid during fiscal year
1997.
System development expense increased in fiscal year 1997 as a result of
efforts in the domestic training division to develop and/or enhance technologies
and processes in order to remain competitive in the industry.
Interest income increased in fiscal year 1997 as a result of interest
due the Company based on the IRS look-back method of accounting for long-term
contracts.
Interest expense increased marginally in fiscal year 1997 due to
increased borrowings under the Company's revolving credit agreement during the
first three quarters of fiscal year 1997.
Discontinued Operations
Operating results of the discontinued operation have been segregated in
the accompanying Consolidated Statements of Operations. Net losses of the
discontinued operation during 1997 were $4.0 million ($0.50 loss per share),
including the loss on disposal as well as provisions for operating losses during
the phase-out period of $1.1 million. This compares to $1.4 million ($0.18 loss
per share) in 1996. The vending operation experienced a reduction in gross
margin as a result of low sales volume which was not sufficient to cover
overhead costs for the year.
1996 Compared with 1995.
Continuing Operations
The Company had a net income of $4.2 million from continuing
operations in fiscal year 1996, a decrease of 41.5% versus fiscal year 1995 net
income of $7.2 million. The decrease in profitability is primarily the result of
changes in contract mix and adjustments to certain domestic and UK contracts.
Gross margin decreased as a percentage of sales in fiscal year 1996
as compared to fiscal year 1995. This decrease was due to gross margin
adjustments on certain contracts of the domestic and U.K. training operations,
as well as other factors. The decrease in the domestic training operation is
largely the result of the Company's continued change in contract mix. While the
Company has experienced an increase in volume on its large domestic cost plus
type contracts, these contracts generally yield lower gross margins than the
fixed price type. A downward adjustment was taken in gross margin on the
Company's large domestic cost plus type contract during the second half of
fiscal year 1996. This adjustment was due to revised manufacturing costs to
complete based upon the initial unit production under the contract. Also,
adjustments were taken to the gross margin of two fixed price domestic contracts
primarily due to protracted
-15-
<PAGE> 16
acceptance schedules which resulted in higher than previously anticipated costs.
These adjustments were partially offset by the recognition of revenue associated
with an Economic Price Adjustment Claim filed during the fourth quarter of
fiscal year 1996. (See Note 4 to the Consolidated Financial Statements).
Gross margin of the U.K. operation decreased due to adjustments on
two major contracts. The first contract adjustment resulted from customer
requirements for extended testing on trainers. The second contract adjustment
was the result of completion of the design phase on the contract which led to a
clarification of the complexity of detailed specifications. The extended testing
on one contract and recognition of the increased complexity of the trainer on
another contract resulted in higher estimated costs than previously anticipated.
Selling, general and administrative costs of the Company increased
14.5% or $1.6 million in fiscal year 1996 as compared to fiscal year 1995. The
increase was primarily the result of higher salaries and bid and proposal costs
of the domestic and UK training divisions in order to meet increased business
opportunities.
Interest income decreased in fiscal year 1996 as interest due the
Company based on the IRS look-back method of accounting for completed contracts
was substantially lower than the amount received in the previous fiscal year.
Interest expense increased marginally in fiscal year 1996 due to
higher borrowings under the Company's revolving credit agreement.
-16-
<PAGE> 17
Discontinued Operations
Net losses of the discontinued operation were $1.4 million ($.18 loss
per share) in 1996 versus net income of $82,000 ($.01 per share) in 1995.
Sales volume and gross margin decreased during fiscal year 1996 as
the discontinued vending operation completed its large vending order to a major
customer during the second/third quarter and did not replace it with another
large order. As a result, efficiencies were not achieved due to low production
volumes and fixed costs were marginally covered.
Statements of Financial Accounting Standards Not Yet Adopted
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Statement is effective for fiscal
years beginning after December 15, 1997 and reclassification of financial
standards for earlier periods provided for comparative purposes is required.
The Company believes that the adoption of this statement will not have a
material impact on the consolidated financial statements.
Additionally, during June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The statement is effective
for fiscal years beginning after December 15, 1997. The Company believes that
the adoption of this statement will not have a material impact on the
consolidated financial statements.
Certain Factors That May Affect Future Operating Results
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
A number of uncertainties exist that could affect the Company's
future operating results, including, without limitation, general economic
conditions, changes in government spending, cancellation of weapons programs,
delays in contract awards, delays in the acceptance process of contract
deliverables, the Company's continued ability to develop and introduce products,
the introduction of new products by competitors, pricing practices of
competitors, the cost and availability of parts and the Company's ability to
control costs.
The Company has entered into a forbearance agreement with its bank
lenders which extended the expiration of its revolving credit agreement from
October 1, 1998 to January 11, 1999 and provides for the maintenance of minimum
cash balances as well as other restrictive covenants through the expiration
date. The forbearance agreement terminates on November 30, 1998, if the Company
does not obtain a letter of commitment from a financial institution providing
for repayment in full of the obligations under the revolving credit agreement.
There can be no assurance that the Company will be successful in generating
-17-
<PAGE> 18
the necessary cash flows or obtaining such financing.
To date, a substantial portion of the Company's revenues have been
attributable to long-term contracts with various government agencies. As a
result, any factor adversely affecting procurement of long-term government
contracts could have a material adverse effect on the Company's financial
condition and results of operations.
Because of these and other factors, past financial performance should
not be considered an indication of future performance. The Company's future
operating results may vary significantly. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results and other factors, including those
discussed above.
Year 2000 Issues
The Company, its suppliers and customers are heavily reliant upon
computer systems for many aspects of their businesses. The calendar year 2000
will make many current computerized systems ineffective and will require
corrections or replacements before January 1, 2000. This situation could have a
material adverse effect upon the Company if not adequately remedied by the
Company, its suppliers and customers, on a timely basis. The following
describes the Company's status regarding these issues.
The Company has formally addressed Year 2000 issues since November
1997, when a Year 2000 Compliance Program was initiated. This program includes
continual assessments, evaluations, implementation and testing for all systems
running on a variety of computing platforms. A complete evaluation has been made
on all internal systems, including items such as voice mail, automated badge
entry, e-mail, payroll and accounting systems. There are no known problems at
this time. All network servers have been assessed and tested as Year 2000
compliant. In addition, the Company has an ongoing policy of upgrading and
testing for Year 2000 compliance, as new software packages become available.
Upgrading of the over 400 personal computers connected to this network is an
ongoing process. On a routine basis, the PC motherboards have been upgraded
with Year 2000 compliant motherboards. Currently, less than 10 personal
computers require upgrade to Year 2000 compliant status.
The Company began assessing the Year 2000 status of its critical
suppliers in April of 1998 by sending surveys to the suppliers. To date, the
Company has received responses from three-quarters of these suppliers with no
major potential problems identified. This effort will be completed by the end
of November 1998.
The Company is satisfied that its customer base is aware of the Year
2000 issue and is proactively working to ensure that there are no problems
associated with the Year 2000. ECC is aware of this because major customers
such as Lockheed-Martin, Boeing, and the Department of Defense, have asked the
Company for its Year 2000 status. In the process, they have revealed their Year
2000 plans and stated that they are actively engaged in solving any problems.
The Year 2000 Plan includes a final re-verification test of all
systems in the second quarter of calendar year 1999 and contingency plans
(manual backup) to be implemented and validated by the fourth quarter of
calendar year 1999.
As stated above, the Company expects that its systems will be fully
operational and will not cause any material disruptions because of Year 2000
issues. Because of the uncertainties associated with assessing preparedness of
suppliers and customers, there is a risk of a material adverse effect on the
Company's future results of operations if these constituencies are not capable
of correcting their Year 2000 Issues, if any. The Company expects that its
systems will be fully operational and will not cause any material disruption
because of Year 2000 issues. The Company has an ongoing process to continue
evaluation of all critical systems, products, suppliers and customers from now
until the Year 2000 and beyond.
Item 7. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
-18-
<PAGE> 19
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements Page(s)
Report of Independent Accountants 20
Consolidated Statements of Operations for the Fiscal Years
Ended June 30, 1998, 1997 and 1996 21
Consolidated Balance Sheets, June 30, 1998 and 1997 22
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended June 30, 1998, 1997 and 1996 23-24
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 1998, 1997 and 1996 25-26
Notes to Consolidated Financial Statements 27-44
-19-
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
the Board of Directors of
ECC International Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of ECC
International Corp. and its Subsidiaries (the "Company") at June 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company suffered losses from continuing
operations in fiscal years 1998 and 1997, is experiencing difficulty in
generating sufficient cash flow to meet its obligations and sustain operations
and has not yet obtained a new credit facility to replace its current loan
facility due January 11, 1999. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in the fourth quarter of
fiscal year 1998.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 12, 1998
-20-
<PAGE> 21
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended June 30, 1998, 1997 and 1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Sales ................................................. $ 52,618 $ 72,550 $ 101,713
Cost of Sales ............................................. 48,915 63,175 81,159
--------- --------- ---------
Gross Profit .............................................. 3,703 9,375 20,554
--------- --------- ---------
Expenses:
Selling, General & Administrative .................... 13,452 11,759 12,336
Systems Development .................................. 2,758 1,126 289
Impairment of Fixed Assets ........................... 1,268 -- --
--------- --------- ---------
Total Expenses ................................... 17,478 12,885 12,625
--------- --------- ---------
Operating (Loss)/Income ................................... (13,775) (3,510) 7,929
--------- --------- ---------
Other Income (Expense):
Interest Income ...................................... 274 432 238
Interest Expense ..................................... (1,129) (1,541) (1,436)
Other - Net .......................................... 26 (37) (157)
--------- --------- ---------
Total Other (Expense) ............................ (829) (1,146) (1,355)
--------- --------- ---------
(Loss)/Income from Continuing Operations
Before Income Taxes ..................................... (14,604) (4,656) 6,574
(Benefit)/Provision for Income Taxes ...................... (2,195) (72) 2,342
--------- --------- ---------
(Loss)/Income from Continuing Operations .................. $ (12,409) $ (4,584) $ 4,232
--------- --------- ---------
Discontinued Operations (Note 15):
Loss from Operations (net of income taxes
of $1,466 in 1997 and $697 in 1996) ................ -- (2,809) (1,354)
Loss on Disposal, including provision of $1,126 for
operating losses during the phase-out period (net of
income taxes of $162 in 1998 and $596 in 1997) ..... (407) (1,142) --
--------- --------- ---------
Net (Loss)/Income ......................................... $ (12,816) (8,535) $ 2,878
========= ========= =========
(Loss)/Earnings Per Common Share
from Continuing Operations - Basic .................... $ (1.52) $ (0.58) $ 0.55
Loss Per Common Share
from Discontinued Operations - Basic ..................... (0.05) (0.50) (0.18)
Net (Loss)/Earnings Per Common Share - Basic .............. $ (1.57) $ (1.08) $ 0.37
========= ========= =========
(Loss)/Earnings Per Common Share
from Continuing Operations - Diluted .................. $ (1.52) $ (0.58) $ 0.53
Loss Per Common Share
from Discontinued Operations - Diluted ................... (0.05) (0.50) (0.17)
Net (Loss)/Earnings Per Common Share - Diluted ............ $ (1.57) $ (1.08) $ 0.36
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
ECC International Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS as of June 30, 1998 and 1997
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
Current:
<S> <C> <C>
Cash ................................................ $ 4,830 $ 3,888
Accounts Receivable, Net ............................ 8,097 9,189
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts .............................. 16,391 25,497
Inventories ......................................... 5,202 9,666
Prepaid Expenses and Other .......................... 6,868 5,406
-------- --------
Total Current Assets .............. 41,388 53,646
Property, Plant and Equipment, Net ...................... 20,994 26,119
Other Assets ............................................ 1,976 2,269
-------- --------
Total Assets ................................... $ 64,358 $ 82,034
======== ========
LIABILITIES
Current:
Current Portion of Long-Term Debt ................... $ 11,132 $ 2,250
Accounts Payable .................................... 6,263 4,846
Advances on Long-Term Contracts ..................... 4,683 4,551
Accrued Expenses and Other .......................... 7,925 6,642
-------- --------
Total Current Liabilities ...................... 30,003 18,289
-------- --------
Deferred Income Taxes ................................... 918 1,559
-------- --------
Long-Term Debt .......................................... -- 16,640
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.10 par; authorized, 20,000,000 shares;
issued and outstanding, 1998 and 1997,
8,318,058 and 8,046,707 shares, respectively .......... 832 805
Preferred Stock, $0.10 par; authorized, 1,000,000
shares; none issued and outstanding in 1998 and 1997 .. -- --
Notes Receivable from Stockholder ....................... (146) --
Capital in Excess of Par ................................ 24,804 23,935
Retained Earnings ....................................... 7,933 20,749
Cumulative Translation Adjustment ....................... 14 57
-------- --------
Total Stockholders' Equity ..................... 33,437 45,546
-------- --------
Total Liabilities and Stockholders' Equity ..... $ 64,358 $ 82,034
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Fiscal Years Ended June 30, 1998, 1997 and 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Note
Capital Cumulative Receivable Total
Common In Excess Retained Translation From Stockholders'
Stock of Par Earnings Adjustment Stockholder Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 766 $ 21,822 $ 26,406 $ 45 -- $ 49,039
Net Income -- -- 2,878 -- -- 2,878
Stock Issued:
Employee Stock Purchase
Plan - 63,285 Shares 6 517 -- -- -- 523
Exercise of Options -
102,012 Shares 10 272 -- -- -- 282
Income Tax Reduction
Relating to Stock Options -- 220 -- -- -- 220
Translation Adjustment -- -- -- (67) -- (67)
-------- -------- -------- -------- ------- --------
Balance, June 30, 1996 $ 782 $ 22,831 $ 29,284 $ (22) $ -- $ 52,875
-------- -------- -------- -------- ------- --------
Net Loss -- -- (8,535) -- -- (8,535)
Stock Issued:
Employee Stock Purchase
Plan - 65,265 Shares 7 343 -- -- -- 350
Exercise of Options -
158,299 Shares 16 523 -- -- -- 539
Income Tax Reduction
Relating to Stock Options -- 238 -- -- -- 238
Translation Adjustment -- -- -- 79 -- 79
-------- -------- -------- -------- ------- --------
Balance, June 30, 1997 $ 805 $ 23,935 $ 20,749 $ 57 $ -- $ 45,546
-------- -------- -------- -------- ------- --------
</TABLE>
Continued...
-23-
<PAGE> 24
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
For the Fiscal Years Ended June 30, 1998, 1997 and 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Note
Capital Cumulative Receivable Total
Common In Excess Retained Translation From Stockholders'
Stock of Par Earnings Adjustment Stockholder Equity
<S> <C> <C> <C> <C> <C> <C>
Net Loss -- -- $(12,816) -- -- $(12,816)
Stock Issued:
Employee Stock Purchase
Plan- 79,244 Shares $ 8 $ 198 -- -- -- 206
Exercise of Options -
7,340 Shares 1 15 -- -- -- 16
Issuance of Note Receivable
to Stockholder -- -- -- -- $ (146) (146)
Issuance of Common Stock 18 653 -- -- -- 671
Income Tax Reduction
Relating to Stock Options -- 3 -- -- -- 3
Translation Adjustment -- -- -- (43) -- (43)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1998 $ 832 $ 24,804 $ 7,933 $ 14 $ (146) $ 33,437
======== ======== ======== ======== ======== ========
</TABLE>
Common shares issued and outstanding at June 30, 1995 and 1996 were 7,657,846
and 7,833,143 shares, respectively.
See accompanying notes to the consolidated financial statements.
-24-
<PAGE> 25
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
-------- -------- --------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net (Loss)/Income ............................................ $(12,816) $ (8,535) $ 2,878
Items Not Requiring Cash:
Depreciation ......................................... 2,923 4,196 3,825
Impairment of Fixed Assets ........................... 1,268 -- --
Provision for Doubtful Accounts ...................... -- (29) 84
Deferred Income Taxes ................................ 2,171 (526) (675)
Provision for Discontinued Operations ................ 569 1,738 --
Changes in Certain Assets and Liabilities:
Accounts Receivable ................................. (1,537) 1,976 (2,442)
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts .............................. 9,106 9,754 4,501
Inventories ......................................... 1,077 3,318 (2,949)
Prepaid Expenses and Other .......................... (1,926) (2,565) 114
Accounts Payable .................................... 1,417 (6,121) 3,770
Advances on Long-Term Contracts ..................... 132 3,695 (539)
Accrued Expenses .................................... 179 (1,383) (1,868)
-------- -------- --------
Net Cash Provided By Operating Activities .............. 2,563 5,518 6,699
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from Sale of Discontinued Operation ........... 7,881 -- --
Additions to Property, Plant and Equipment ............. (2,323) (3,629) (6,504)
Other .................................................. 342 (97) (292)
-------- -------- --------
Net Cash Provided By/(Used In) Investing Activities .... 5,900 (3,726) (6,796)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds From Issuance of Common Stock, Options
Exercised and Warrants, Including Related Tax Benefit 237 1,127 1,025
Repayments Under Term Loan ............................. (2,250) (3,000) (3,000)
New Borrowings Under Revolving Credit Facilities, Net .. (5,508) (1,088) 3,594
-------- -------- --------
Net Cash (Used In)/Provided By Financing Activities .... (7,521) (2,961) 1,619
-------- -------- --------
Net Increase/(Decrease) in Cash .............................. 942 (1,169) 1,522
-------- -------- --------
Cash at Beginning of the Year ................................ 3,888 5,057 3,535
-------- -------- --------
Cash at End of the Year ...................................... $ 4,830 $ 3,888 $ 5,057
======== ======== ========
</TABLE>
Continued...
-25-
<PAGE> 26
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
------ ------ ------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year For:
<S> <C> <C> <C>
Interest ...................................... $1,105 $1,835 $1,665
Income Taxes .................................. $ -- $ 922 $2,766
Supplemental Schedule of
Non Cash Financing Activities:
Issuance of Employee Stock Incentives ......... $ 421 $ -- $ --
Issuance of Director Equity Compensation ...... $ 92 $ -- $ --
Note Receivable to Stockholder in connection
with issuance of common stock ................ $ 146 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ECC International Corp. and Subsidiaries
1. Significant Accounting Policies.
Consolidation.
The consolidated financial statements include the accounts of ECC
International Corp. and its wholly owned subsidiaries (collectively, the
"Company"). Intercompany transactions have been eliminated in
consolidation.
As a result of the Company's sale of it's vending operation, the vending
operation was reflected as a discontinued operation in the accompanying
Consolidated Statements of Operations (See Note 15 to the Consolidated
Financial Statements).
Revenue and Cost Recognition.
Contract sales and costs are recognized using the percentage of completion
method, measured by the ratio of costs incurred to date to estimated total
costs. Since many contracts extend over a long period of time, any
revisions in cost and funding estimates during the progress of work have
the effect of adjusting the current period earnings applicable to
performance in prior periods.
Contract costs include all direct labor and material costs and those
indirect costs related to contract performance, such as indirect labor,
supplies and depreciation.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Claims are included as a
component of contract value for purposes of revenue recognition at such
time as the amount to be recognized is reasonably determinable and
probable.
Costs and estimated earnings in excess of billings on uncompleted
contracts, consists principally of contract revenue for which billings have
not been presented, as such amounts were not billable at the balance sheet
date. Substantially all of these amounts will be billed in the following
fiscal year.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories.
Work in process and finished goods inventory are valued using the specific
identification cost method, but not in excess of net realizable value. Raw
materials are valued at the lower of average cost or market.
-27-
<PAGE> 28
Property, Plant and Equipment.
Property, plant and equipment is stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the
respective assets as follows: buildings 15 to 30 years; machinery and
equipment 3 to 10 years; and demonstration and test equipment 5 years.
Applicable asset and accumulated depreciation accounts are reduced for the
sale or other disposition and the resulting gain or loss is included in the
Consolidated Statements of Operations.
Impairment of Long Lived Assets.
In the event that facts and circumstances indicate that the cost of
property, plant and equipment may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required.
As a result of an evaluation of expected future undiscounted cash flows
associated with the long lived assets in the UK operation, an impairment
charge of $1.3 million was recorded for plant and equipment during the
fourth quarter of fiscal year 1998.
Income Taxes.
The Company recognizes deferred income taxes by applying enacted statutory
tax rates, applicable to future years, to temporary differences between the
tax basis and financial statement carrying values of the Company's assets
and liabilities.
Earnings/(Loss) Per Share.
Basic earnings/(loss) per common share is computed by dividing net
income/(loss) available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted
earnings/(loss) per share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common
shares outstanding during the period adjusted for the number of shares
that would have been outstanding if the dilutive potential common shares
had been issued. The diluted earnings/(loss) per share does not assume the
exercise of options that would have an antidilutive effect on
earnings/(loss) per share.
Employee Benefit Plans.
The Company has a profit sharing plan which covers all employees who work
in excess of 1,000 hours per year. Minimum contributions are based on
income before income taxes, subject to limitations based on employee
compensation and certain other restrictions defined in the plan document.
Contributions of $424,388, $1,323,782 and $2,698,533 were accrued and paid
in the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
The Company also has a savings and investment plan which covers all
employees. Employer contributions are based on a percentage of employee
contributions and certain other
-28-
<PAGE> 29
restrictions defined in the plan document. Employer contributions of
$516,984, $657,683 and $640,354 were accrued and paid in the fiscal years
ended June 30, 1998, 1997 and 1996, respectively.
Statements of Financial Accounting Standards ("SFAS") Not Yet Adopted.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Statement is effective for
fiscal years beginning after December 15, 1997 and reclassification of
financial statements for earlier periods provided for comparative purposes
is required. The Company believes that the adoption of this statement will
not have a material impact on the consolidated financial statements.
Additionally, during June 1997, the FASB issued Statement of Financial
Accounting Standard SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Statement is effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption
of this statement will not have a material impact on the consolidated
financial statements.
2. Basis of Presentation.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying consolidated financial statements
and notes, the Company has suffered losses from continuing operations of
$12.4 million and $4.6 million in fiscal years 1998 and 1997, respectively,
is experiencing difficulty generating sufficient cash flow to meet its
obligations and sustain operations and has not yet obtained a new credit
facility to replace its current loan facility, of which the balance of
$11.1 million is due January 11, 1999. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
As described in Note 7, the Company was not in compliance with the fixed
charge coverage ratio for its revolving credit agreement and was unable to
obtain waivers from the bank for its violation. The Company has entered
into a forbearance agreement with its bank lenders which extended the
expiration of the revolving credit agreement from October 1, 1998 to
January 11, 1999 and provides for the maintenance of minimum cash balances,
as well as other restrictive covenants through the expiration date. The
forbearance agreement terminates on November 30, 1998, if the Company does
not obtain a letter of commitment from a financial institution providing
for repayment in full of the obligations under the revolving credit
agreement.
-29-
<PAGE> 30
The Company is currently in the process of seeking alternative sources of
financing and implementing certain internal operating and management plans
to generate cash flow. These plans include reductions in workforce,
relocation of the Corporate Headquarters and the wind-down of the UK
operation, all of which were announced during the first quarter of fiscal
year 1999.
There can be no assurance that the Company will be successful in generating
the necessary cash flow or obtaining such financing.
3. Accounts Receivable.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
---- ----
<S> <C> <C>
Contract Receivables, Billed Amounts $ 7,628 $ 6,152
Commercial Vending Receivables ..... -- 2,797
Other .............................. 469 346
Allowance for Doubtful Accounts .... -- (106)
------- -------
Total .......................... $ 8,097 $ 9,189
======= =======
</TABLE>
Contract receivables include amounts under long-term contracts and
subcontracts principally with the U.S. Government, or its contractors, and
the United Kingdom Ministry of Defense or its contractors. Commercial
vending receivables consisted of amounts due from a variety of
geographically disbursed vending customers.
The provision for doubtful accounts included in Selling, General and
Administrative expense was immaterial.
During fiscal year 1997, the Company filed a notice of arbitration against
Teliti Computers Sdn Bhd in the Regional Centre for Arbitration in Kuala
Lumpur, Malaysia. The Company sought $1.3 million for breach of contract of
which approximately $500,000 was included in costs and estimated earnings
in excess of billings on uncompleted contracts at June 30, 1997. During the
fourth quarter of fiscal year 1998, the Regional Centre for Arbitration
awarded the Company a settlement of $400,000 including amounts previously
advanced to the Company. This settlement resulted in a $200,000 charge to
earnings during the fourth quarter of fiscal year 1998. At June 30, 1998,
$200,000 of this settlement is included in Other Accounts Receivable and
will be paid in equal quarterly installments of $50,000 through July
1,1999.
Also, during fiscal year 1997, the Company, as a subcontractor, initiated a
lawsuit in Florida State court against Raytheon Training, Inc., the prime
contractor successor to Hughes Training, Inc., under the Army's Battle Labs
Reconfigurable Simulator Initiative ("BLRSI") program. This litigation
sought recovery of approximately $191,000 in unpaid invoices and
approximately $98,000 as a settlement of the termination for convenience of
the subcontract. These amounts were included in accounts receivable at
June 30, 1997. Raytheon submitted a counterclaim in the amount of
approximately $1.2 million. During the first quarter of fiscal year 1999,
the parties agreed to a settlement of all claims in the form of a $150,000
sum payable to the Company. This settlement resulted in a $139,000 charge
to earnings during the fourth quarter of fiscal year 1998.
-30-
<PAGE> 31
4. Inventories.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
------ ------
<S> <C> <C>
Finished Goods $ - $2,278
Work in Process 1,053 2,326
Raw Materials . 4,149 5,062
------ ------
Total ..... $5,202 $9,666
====== ======
</TABLE>
During fiscal year 1996, the Company submitted a claim for contract
adjustment under the Economic Price Adjustment (EPA) provisions of a major
contract seeking approximately $950,000. The value of the claim is included
in costs and estimated earnings in excess of billings on uncompleted
contracts.
The Company also submitted a claim, during fiscal year 1996, for the
effects of a Stop Work Order issued on one of its contracts in the amount
of $191,000, of which $150,000 was deferred in inventory as of June 30,
1997. The claim represented the cost of idle time resulting from the Stop
Work Order as well as the effect of the release of the Stop Work Order.
During the fourth quarter of fiscal year 1998, the Company was awarded
$140,000 with respect to this claim. The excess $10,000 deferred in
inventory was written-off during the fourth quarter of fiscal year 1998.
5. Property, Plant and Equipment.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
------- -------
<S> <C> <C>
Land ........................... $ 2,411 $ 2,411
Buildings ...................... 21,106 21,726
Machinery and Equipment ........ 24,292 27,702
Demonstration and Test Equipment 8,238 9,761
------- -------
Total ...................... 56,047 61,600
Less Accumulated Depreciation .. 35,053 35,481
------- -------
Total ...................... $20,994 $26,119
======= =======
</TABLE>
Repairs and maintenance expense for the fiscal years ended June 30, 1998,
1997 and 1996 were $844,000, $700,000 and $942,000, respectively.
6. Accrued Expenses and Other.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
------ ------
<S> <C> <C>
Compensation .................................. $ 956 $1,785
Vacation ...................................... 1,150 1,402
Accrual for Disposal of Discontinued Operations 76 1,738
Contract Loss Provisions ...................... 1,455 --
Deferred Income Tax Liability ................. 2,348 --
Other ......................................... 1,940 1,717
------ ------
Total ..................................... $7,925 $6,642
====== ======
</TABLE>
-31-
<PAGE> 32
7. Debt.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
------- -------
<S> <C> <C>
Revolving Credit Facility and Term Loan $11,132 $18,890
Less Current Portion .................. 11,132 2,250
------- -------
Total Long Term .......... $ -- $16,640
======= =======
</TABLE>
On September 20, 1994, the Company entered into a revolving credit and term
loan facility ("Loan Facility") with a bank which, as amended, was due to
expire on October 1, 1998. The amended loan facility includes certain
covenants related to, among other things, maintaining a minimum fixed
charge coverage ratio, debt to equity ratio and current ratio. In addition,
substantially all of the assets of the Company are pledged as collateral
for the loan facility.
Interest is payable quarterly in arrears at a rate defined in the agreement
(ranging from 7.1% to 8.5% at June 30, 1998). The Company is also required
to pay fees on an annual basis as calculated by the bank. The revolving
credit commitment fee is equal to .25% per annum on the total outstanding
balance. A Standby letter of Credit fee is equal to 1% per annum plus
issuance costs.
The Company did not comply with the minimum fixed charge coverage ratio
covenant at June 30, 1998 and was unable to obtain a waiver from its bank
lender for its violation. On October 1, 1998 the Company entered into a
forbearance agreement with the bank which extended the expiration date of
the revolving credit agreement from October 1, 1998 to January 11, 1999 and
reduced the availability of credit from $13.0 million to $11.4 million. The
forbearance agreement also provides for the maintenance of minimum cash
balances, fixed charge coverage ratio and current ratio as well as maximum
debt to equity ratio through the expiration date. The forbearance agreement
terminates on November 30, 1998, if the Company does not obtain a letter of
commitment from a financial institution providing for repayment in full of
the obligations under the revolving credit agreement.
The Company is currently in the process of seeking alternative sources of
financing and anticipates obtaining this financing by November 30, 1998.
There can be no assurance, however, that the Company will obtain such
financing.
Interest under the forbearance agreement is payable quarterly in arrears at
a rate of prime plus 2.5%. In addition, the Company is required to pay a
forbearance fee of $75,000 in three equal monthly installments beginning
October 6, 1998.
-32-
<PAGE> 33
8. Income Taxes.
The domestic and foreign components of (loss)/income before income taxes
are presented below:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
-------- -------- --------
Continuing Operations:
<S> <C> <C> <C>
Domestic ............... $ (4,304) $ (49) $ 7,036
Foreign ................ (10,300) (4,607) (462)
-------- -------- --------
Total ............. $(14,604) $ (4,656) $ 6,574
======== ======== ========
Discontinued Operations:
Domestic ............... $ (569) $ (6,013) $ (2,051)
-------- -------- --------
Total ............. $(15,173) $(10,669) $ 4,523
======== ======== ========
</TABLE>
The components of the (benefit)/provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
------- ------- -------
Current:
<S> <C> <C> <C>
Federal ....................... $(4,419) $(1,608) $ 2,207
State ......................... -- -- 140
Foreign ....................... -- -- (27)
------- ------- -------
Subtotal .................. (4,419) (1,608) 2,320
------- ------- -------
Deferred:
Federal ....................... $ 1,929 $ (421) $ (663)
State ......................... 133 (105) (12)
------- ------- -------
Subtotal .................. 2,062 (526) (675)
------- ------- -------
(Benefit)/Provision for Income Taxes $(2,357) $(2,134) $ 1,645
======= ======= =======
</TABLE>
The (benefit)/provision for Income Taxes is included in the financial
statements as follows:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Continuing Operations . $(2,195) $ (72) $ 2,342
Discontinued Operations (162) (2,062) (697)
------- ------- -------
Total ............ $(2,357) $(2,134) $ 1,645
======= ======= =======
</TABLE>
The Company utilized $245,000 of Pennsylvania net operating loss
carryforwards to reduce fiscal year 1996 Pennsylvania income taxes payable.
The Company's current federal benefit for the fiscal year ended June 30,
1998 results from the Company's carryback of the current years net
operating loss.
In addition, the Company had available at June 30, 1998, net operating loss
carryforwards of $6.6 million and $781,000 for Florida and Pennsylvania
state income tax purposes, respectively. The Florida net operating loss
carryforwards expire in the year 2013. The Pennsylvania net operating loss
carryforwards expire in the year 2001.
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities are as follows for the years
ended June 30 (in thousands):
-33-
<PAGE> 34
<TABLE>
<CAPTION>
1998 1997
---- ----
Asset Liability Asset Liability
<S> <C> <C> <C> <C>
Revenue Recognized on Completed
Contract for Tax Return and on
Percentage of Completion for
Financial Reporting .................. $ 184 $ - $ 123 $ -
Foreign Net Operating Loss ............. 4,790 - 2,015 -
Federal Operating Loss Carryforwards ... 826 - -- -
State Tax Loss Carryforwards ........... 384 - 70 -
Difference between Book and
Tax Depreciation ..................... - 855 - 1,496
Capitalized Bid and Proposal Expense ... 215 - 197 -
Investment in Foreign Subsidiary ....... - 2,348 - -
Accruals Not Currently Deductible ...... 195 63 1,823 63
------- ------- ------- -------
Subtotal ........................... 6,594 3,266 4,228 1,559
Valuation Allowance .................... (4,857) - (2,027) -
------- ------- ------- -------
Total .............................. $ 1,737 $ 3,266 $ 2,201 $ 1,559
======= ======= ======= =======
</TABLE>
A valuation allowance has been provided primarily for foreign net operating
loss carryforwards which are subject to uncertainty as to their ultimate
realization.
These deferred tax assets and liabilities are included in/or classified as
follows on the Consolidated Balance Sheets at June 30:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Prepaid Expenses and Other ................ $1,737 $2,201
Accrued Expenses and Other ................ 2,348 --
Non-current Deferred Income Tax ........... 918 1,559
</TABLE>
-34-
<PAGE> 35
Differences between the statutory U.S. Federal Income Tax rate and the
effective income tax rate reported in the financial statements are as
follows for continuing operations at June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal Statutory Rates ..................... (34.0%) (34.0%) 34.0%
Increase in Taxes Resulting From:
State Income Taxes (after deducting
federal income tax benefit) ............. (0.4%) (1.0%) 0.8%
Foreign Net Operating Loss Carryforward . 18.4% 33.6% 2.0%
Other ................................... 1.0% (0.1%) (1.2%)
------ ------ ------
Total (Benefit)/Provision for Income Taxes .. (15.0%) (1.5%) 35.6%
====== ====== ======
</TABLE>
The Company realized an income tax benefit of $238,000 and $220,000 during
fiscal year 1997 and 1996, respectively, related to the exercise of certain
employee stock options which are recognized as employee compensation for
tax purposes, however, not for financial reporting purposes. The tax
benefit realized from the exercise of these stock options was immaterial in
fiscal year 1998. This tax benefit was credited to Capital in Excess of
Par.
9. Financial Instruments.
Off Balance Sheet Risk.
As collateral for leased facilities and for performance and advances on
certain long-term contracts, the Company is contingently liable under
standby letters of credit in the amount of $498,000 at June 30, 1998. The
Company pays a fee to its primary lender of 1% per annum of their face
value. If the Company were required to obtain replacement standby letters
of credit as of June 30, 1998 for those currently outstanding, it is the
Company's opinion that the replacement cost for such standby letters of
credit would not significantly vary from the present fee structure.
Concentrations of Credit Risk.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Except for U.S. and foreign government agencies, concentration of credit
risk with respect to accounts receivable are limited, due to the large
number of customers comprising the Company's customer base and their
dispersion among many different geographies. The Company generally does not
require collateral or other security to support customer receivables.
-35-
<PAGE> 36
Fair Value of Financial Instruments.
At June 30, 1998, the carrying amounts and fair values of the Company's
financial instruments are listed below.
(In Thousands) Carrying Fair
Value Value
----- -----
Revolving Credit Facility 11,132 11,132
Standby Letters of Credit -- 498
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues of debt with similar terms and
remaining maturities.
The fair value of Standby Letters of Credit are based on fees currently
charged for similar agreements.
10. Stock Compensation.
The Company has several stock-based compensation plans, which are described
below. The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. The stock option exercise price is equal to
the fair market value of the stock on the date of grant for its fixed stock
option plan and equal to 85% of the fair market value on the date of
exercise for stock issued under the employee stock purchase plan.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans and its stock purchase plan. Had compensation cost for the
Company's stock-based compensation plans been determined based on fair
value at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's net (loss)/income and net
(loss)/income per share for fiscal years 1998, 1997 and 1996 would have
been changed to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net (Loss)/Income $ (13,111) $ (8,612) $ 2,384
Net (Loss)/Income Per Share- Basic $ (1.60) $ (1.09) $ 0.31
Net (Loss)/Income Per Share- Diluted $ (1.60) $ (1.09) $ 0.30
</TABLE>
The pro forma information regarding net (loss)/income and (loss)/earnings
per share is required by SFAS 123, and has been determined as if the
Company had accounted for its stock-based compensation plans under the fair
value method of that Statement. There were 335,000 and 135,000 options
granted during fiscal years 1998 and 1996, respectively with weighted
average a fair values of $3.67 in 1998 and $5.00 in 1996. There were no
option grants during fiscal year 1997.
The fair value of options were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1996
------- -------
<S> <C> <C>
Expected dividend yield ........... 0.00% 0.00%
Risk-free interest rate ........... 5.36% 5.40%
Expected volatility ............... 45.70% 50.00%
Expected life (in years) .......... 4.6 5.0
</TABLE>
Under the Company's Qualified Stock Option Plans, directors, officers and
certain key employees may purchase the Company's Common Stock at 100% of
the fair market value of the shares on the date of grant. Options are
exercisable up to 10 years from the date granted.
Under the Company's 1986 and 1991 Non-Qualified Stock Option Plans,
directors, officers, and key employees may purchase the Company's Common
Stock at 100% of fair market
-36-
<PAGE> 37
value of the shares on the date of grant. Except as otherwise determined by
the Board of Directors, no options granted under the Plan will be
immediately exercisable, but, rather, will be exercisable as to twenty
percent of the shares covered thereby after one year from the date the
option is granted and will be exercisable as to an additional twenty
percent each year thereafter. All options will expire upon the earlier of
10 years and 30 days from date of grant or, with respect to shares covered
by such options, five years from the date the option first became
exercisable with respect to such shares.
On April 7, 1998 the Board of Directors approved the 1998 Stock Incentive
Plan a Non-Qualified Stock Option Plan. Under the Plan, directors,
officers, and key employees may purchase the Company's Common Stock at an
exercise price established by the Board of Directors at the time each
option is granted. Options granted under the Plan are exercisable at such
times and subject to terms as established by the Board of Directors at the
time each option is granted. There were 600,000 shares reserved for
the 1998 Plan and 175,000 shares issued under the 1998 Stock Incentive Plan
as of June 30, 1998. The 1998 grants were issued with an exercise price
equal to 100% of the fair market value of the shares on the date of grant.
A summary of stock option transactions for the fiscal years ended June 30,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Shares Weighted
Under Average
Option Exercise Price
------ --------------
<S> <C> <C>
Balance at June 30, 1995 ... 1,043,934 $ 9.37
Options Granted ........ 135,000 10.06
Options Exercised ...... (72,012) 2.26
Options Terminated ..... (22,750) 11.29
---------- ----------
Balance at June 30, 1996 1,084,172 9.89
Options Exercised ...... (75,799) 2.28
Options Terminated ..... (98,600) 11.10
---------- ----------
Balance at June 30, 1997 909,773 10.41
Options Granted ........ 335,000 3.32
Options Exercised ...... (7,337) 2.19
Options Terminated ..... (210,400) 10.69
---------- ----------
Balance at June 30, 1998 1,027,036 $ 8.02
========== ==========
</TABLE>
Options exercisable were 638,136 at June 30, 1998, 559,523 at June 30,
1997, and 525,372 at June 30, 1996, respectively.
Stock options outstanding at June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 1.15-$ 2.30 23,600 2.80 years $ 2.13 23,600 $ 2.13
$ 2.30-$ 3.45 298,286 8.70 years $ 3.11 115,886 $ 3.09
$ 3.45-$ 4.60 57,000 8.50 years $ 4.14 37,000 $ 4.01
$ 4.60-$ 5.75 40,000 2.90 years $ 5.50 40,000 $ 5.50
$ 9.20-$10.35 110,000 7.60 years $10.00 108,800 $10.00
$10.35-$11.50 498,150 6.30 years $11.45 312,850 $11.44
--------- ---- ------ ------- ------
1,027,036 7.00 years $ 8.02 638,136 $ 8.53
========= ==== ====== ======= ======
</TABLE>
-37-
<PAGE> 38
On February 11, 1988, the Company granted each of its then four outside
directors an option to purchase 12,500 shares of the Company's Common Stock
at a price of $7.20 per share (the market value on that day) later reduced
to 6,250 shares at $2.375 in fiscal year 1993 for the two directors who
were not part of the Stock Option Committee. As of June 30, 1997 and 1996,
12,500 and 5,000 shares of these options were exercised, respectively.
There were no shares of these options exercised during fiscal year 1998.
During fiscal year 1996, the Stockholders approved the 1996 Employee Stock
Purchase Plan. The Plan is the same in all aspects as the 1990 and 1993
Stock Purchase Plans including the number of shares reserved - 360,000
shares. The Plan is intended to provide eligible employees with an
opportunity to purchase the Company's Common Stock through payroll
deductions at eighty-five percent of the market price on specified dates.
No shares were issued under this Plan in fiscal year 1996. There were
79,244 and 65,265 shares issued under this plan during the years ended June
30, 1998 and 1997, respectively. There were 63,285 shares issued under the
prior Plan during the year ended June 30, 1996. The fair value of shares
issued during fiscal year 1998 and 1997 were $0.91 and $1.38 per share,
respectively. The fair value of these shares was estimated using a
Black-Scholes Option pricing model with the following weighted average
assumptions for fiscal year's:
1998 1997 1996
------- ------- -------
Expected dividend yield . 0.00% 0.00% 0.00%
Risk-free interest rate . 5.49% 5.40% 5.40%
Expected Volatility ..... 46.80% 61.20% 61.20%
Expected life (in months) 6 6 6
The Company's Compensation Committee, administers all the stock benefit
plans of the Company.
The Company has available 1,000,000 authorized and unissued shares of $0.10
par value Preferred Stock. Shares may be issued from time to time in one or
more series, each series having such special rights, privileges and
preferences as may be determined by the Board of Directors at time of
issuance.
On August 27, 1996, the Board of Directors declared a dividend distribution
of one Right for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on September 17, 1996. Each
Right entitles the registered holder to purchase from the Company a unit
consisting of one one-thousandth of a share (a "Unit") of Series B Junior
Participating Preferred Stock, $0.10 par value per share at a purchase
price of $40.00 per unit, subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement, as amended, between the
Company and Mellon Bank, N.A. as Rights Agent.
On July 31, 1997, the Board of Directors approved the 1997 Employee
Incentive Plan. Under the Plan, the Board granted all of the 107,100
unrestricted shares of the
-38-
<PAGE> 39
Company's common stock reserved for issuance under the Plan to employees
who were not officers of the Company.
On July 31, 1997, the Board of Directors approved the 1997 Director Equity
Compensation Plan. Under the Plan, the members of the Company's Board of
Directors shall receive unrestricted shares of the Company's Common Stock
in lieu of 50% of the otherwise payable directors' fees. A total of 75,000
shares of Common Stock are reserved for issuance under the Plan. During
fiscal year 1998, 27,670 shares were granted under this plan. A balance of
47,330 shares are reserved for this Plan at June 30, 1998.
On June 15, 1998 the Company entered into a Stock Purchase Agreement with
its Chief Executive Officer(CEO). In connection with this agreement, the
CEO purchased 50,000 shares of common stock. The CEO paid $10,000 cash and
issued a Promissory Note to the Company in the amount of $146,250 in
payment of the shares. The Promissory Note bears an interest rate of 5.58%
and is payable together with interest on June 15, 2001.
11. Earnings Per Share.
In 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No, 128 "Earnings per Share" (SFAS No. 128)
which changes the presentation and calculation requirements of earnings per
share amounts. The Company restated all prior year per share amounts
presented in these consolidated financial statements and notes according to
the requirements of SFAS No. 128. This restatement resulted in no material
change from amounts previously reported. Two per share amounts are
presented for net (loss)/income, basic and diluted. See Note 1 to the
consolidated financial statements.
The following is a reconciliation of the basic and diluted net
(loss)/income per common share computations (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(Loss)/Income Continuing Operations ............ $(12,409) $ (4,584) $ 4,232
-------- -------- --------
Loss Discontinued Operations ................... $ (407) $ (3,951) $ (1,354)
-------- -------- --------
Weighted Average Shares Outstanding - Basic .... 8,174 7,916 7,732
-------- -------- --------
Basic Per Share Amount Continuing Operations ... $ (1.52) $ (0.58) $ 0.55
-------- -------- --------
Basic Per Share Amount Discontinued Operations . $ (0.05) $ (0.50) $ (0.18)
-------- -------- --------
(Loss)/Income Continuing Operations ............ $(12,409) $ (4,584) $ 4,232
-------- -------- --------
Loss Discontinued Operations ................... $ (407) $ (3,951) $ (1,354)
-------- -------- --------
</TABLE>
-39-
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
Weighted Average Shares Outstanding - Diluted .. 8,174 7,916 7,732
Dilutive Options ............................... -- -- 218
-------- -------- --------
Total Diluted Shares ........................... 8,174 7,916 7,950
-------- -------- --------
Diluted Per Share Amount Continuing Operations . $ (1.52) $ (0.58) $ 0.53
-------- -------- --------
Diluted Per Share Amount Discontinued Operations $ (0.05) $ (0.50) $ (0.17)
-------- -------- --------
</TABLE>
In 1998 and 1997, the weighted average number of shares outstanding for the
basic and diluted per share calculations are identical since the assumed
exercise of outstanding options would be antidilutive.
In 1996, additional options to purchase 787,478 shares of common stock at a
range of prices of $10.75 to $11.50 were outstanding but were not included
in the computation of the diluted per share amount because the options'
exercise price was greater than the average market price of common shares.
12. Business Segment Information.
Due to the sale of the vending operation during fiscal year 1998, the
Company operates in one segment - training. This segment includes the
design and manufacture of training simulators.
Sales by Class of Customer.
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
-------- -------- --------
U.S. Government
<S> <C> <C> <C>
Direct ......................... $ 7,067 $ 13,590 $ 24,835
Subcontract .................... 32,504 39,933 61,742
-------- -------- --------
Total U.S. Government . 39,571 53,523 86,577
-------- -------- --------
Foreign Governments ................ 11,663 16,397 14,392
Foreign Commercial ................. 854 1,688 305
Other .............................. 530 942 439
-------- -------- --------
Total Foreign and Other 13,047 19,027 15,136
-------- -------- --------
Total Sales ........... $ 52,618 $ 72,550 $101,713
======== ======== ========
</TABLE>
Export Sales from the U.S. were not material for the fiscal years ended
June 30, 1998, 1997 and 1996. Export sales do not include Foreign Military
Sales through U.S. Government agencies and prime contractors of $1,540,000,
$4,750,000 and $14,445,000 in the fiscal years ended June 30, 1998, 1997,
and 1996, respectively.
Since a substantial portion of the Company's revenues are attributable to
long-term contracts with various government agencies, any factor affecting
procurement of long-term government contracts such as changes in government
spending, cancellation of weapons programs and delays in contract awards
could have a material impact on the Company's financial condition and
results of operations.
-40-
<PAGE> 41
Sales by Geographic Area.
<TABLE>
<CAPTION>
(In Thousands)
United Europe and
States Middle East Consolidated
------ ----------- ------------
<S> <C> <C> <C>
Revenues
1998 $ 39,707 $12,911 $ 52,618
1997 54,465 18,085 72,550
1996 86,779 14,934 101,713
Operating (Loss)/Income
1998 (5,777) (7,998) (13,775)
1997 702 (4,212) (3,510)
1996 7,981 (52) 7,929
Identifiable Assets (1)
1998 55,704 8,654 64,358
1997 69,501 12,533 82,034
1996 83,365 12,032 95,397
</TABLE>
(1) Includes discontinued vending operations assets of $13.8 million in 1997
and $11.2 million in 1996.
13. Summary of Quarterly Results (Unaudited).
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
September December March June
1998 30 31 31 30
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 12,156 $ 12,520 $ 12,378 $ 15,564
Gross Profit/(Loss) $ 2,498 $ 1,967 $ 1,921 $ (2,683)
Operating Loss $ (1,097) $ (2,187) $ (1,937) $ (8,554)
Loss from Continuing Operations $ (1,111) $ (1,860) $ (1,588) $ (7,850)
Loss from Discontinued Operations $ -- $ (370) $ -- $ (37)
Net Loss $ (1,111) $ (2,230) $ (1,588) $ (7,887)
Loss Per Common Share - Basic and
Assuming Dilution:
Loss Per Common Share from
Continuing Operations $ (0.14) $ (0.23) $ (0.19) $ (0.96)
Loss Per Common Share
from Discontinued Operations $ -- $ (0.05) $ -- $ --
-------- -------- -------- --------
Loss Per Common Share $ (0.14) $ (0.28) $ (0.19) $ (0.96)
======== ======== ======== ========
</TABLE>
In the fourth quarter of fiscal year 1998, the Company changed its method
of accounting for precontract costs from deferring costs incurred for
specific anticipated contracts and including those costs in contract sales
and costs when the contract award was assured to expensing the costs as
incurred in accordance with Statement Of Position 98-5 "Reporting on the
Cost of Start-Up Activities"("SOP 98-5"). The Statement requires that
precontract costs that are start-up costs be expensed as incurred. The
$106,000, after tax, cumulative effect of the change on prior years is
included in cost of sales for fiscal year 1998. The effect of the change on
the three month period ended September 30, 1997, was to increase net loss
$12,000 ($0.00 per share); the effect of the change on the three months
ended December 31, 1997, was to increase net loss $153,000 ($0.02 per
share); the effect of the change on the three month period ended March 31,
1998 was to increase net loss $138,000 ($0.02 per share); the effect of the
change on the three month period ended June 30, 1998 was to increase net
loss $199,000
-41-
<PAGE> 42
($0.02) per share. These amounts are reflected in the summary of quarterly
results presented above.
As a result of the periodic review of estimated costs at completion and
consideration of changes in facts and circumstances, revisions were made in
the estimated costs to complete in the fourth quarter of fiscal year 1998
to certain contracts. A gross margin adjustment resulting from the need to
recognize additional cost on one of the domestic operation contracts was
required due to delays in contract progress resulting from attrition and
learning curve inefficiencies. The effect of this adjustment was to
increase net loss from continuing operations by $935,000 for the fourth
quarter and year ended June 30, 1998. The UK operation was also required to
adjust margins and recognize additional costs to complete on all of its
contracts. The lack of new business awards over the past year, as well as
no anticipated future awards has resulted in a business base which is not
sufficient to absorb fixed costs. As a result, the UK subsidiary recorded
margin adjustments on certain contracts and contract loss accruals of
approximately $2.6 million during the fourth quarter of fiscal year 1998.
Additionally, during the fourth quarter of fiscal year 1998, the Company
incurred charges relating to the impairment of fixed assets and settlement
of claims. See Notes 1, 3 and 4 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
September December March June
1997 30 31 31 30
--------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 22,426 $ 21,153 $ 13,842 $ 15,129
Gross Profit $ 4,900 $ 2,676 $ 1,292 $ 507
Operating Income/(Loss) $ 1,718 $ (521) $ (1,493) $ (3,214)
Income/(Loss) from
Continuing Operations $ 740 $ (1,054) $ (1,342) $ (2,928)
Loss from Discontinued Operations $ (526) $ (595) $ (610) $ (2,220)
Net Income/(Loss) $ 214 $ (1,649) $ (1,952) $ (5,148)
Income/(Loss) Per Common Share -
Basic and Assuming Dilution:
Income/(Loss) Per Common Share
from Continuing Operations $ 0.09 $ (0.13) $ (0.17) $ (0.37)
Loss Per Common Share
from Discontinued Operations $ (0.06) $ (0.08) $ (0.08) $ (0.28)
-------- -------- -------- --------
Income/(Loss) Per Common Share $ 0.03 $ (0.21) $ (0.25) $ (0.65)
======== ======== ======== ========
</TABLE>
As a result of the periodic review of estimated costs at completion and
consideration of changes in facts and circumstances, revisions were made in
the estimated costs to complete in the fourth quarter of fiscal year 1997
to certain contracts. The UK operation was required to adjust margins and
recognize additional costs to complete on two of its largest contracts.
Gross margin adjustments were necessary due to protracted or delayed
hardware/software testing, re-work required on trainers and late delivery
penalties imposed due to contract delays. In addition, gross margin
adjustments were necessary due to a decrease in expected future sales
volume which may result in higher overhead rates than previously
anticipated. The effect of these adjustments was to increase the net loss
from continuing operations by $1.5 million for the fourth quarter and year
ended June 30, 1997.
This reduction in gross margin was partially offset by a reduction in
manufacturing overhead
-42-
<PAGE> 43
related primarily to the Company's profit sharing expense and other payroll
related costs which during the first three quarters were accrued for in
anticipation of a 75% contribution. However, due to the Company's lack of
profitability for the year, the actual profit sharing contribution was
reduced to 40%.
The income/(loss) per share amounts presented in the summary of quarterly
results above have been restated to conform to SFAS No. 128. See Note 11 to
the consolidated financial statements.
14. Commitments and Contingencies.
The Company and its subsidiaries lease certain office facilities and
equipment under operating leases. Future minimum lease payments under all
noncancellable operating leases as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1999 ........................................ $ 887
2000 ........................................ 734
2001 ........................................ 709
2002 ........................................ 701
Remaining Years ............................. 5,765
--------
Total Minimum Lease Payments.................. $ 8,796
========
</TABLE>
Rent expense under all operating leases was approximately $1,142,000,
$1,806,000, and $1,633,000 for the fiscal years ended June 30, 1998, 1997
and 1996, respectively.
15. Discontinued Operations.
On November 25, 1997, the Company completed the sale of the fixed assets,
inventory and trade receivables of the Company's vending operation.
Proceeds from the sale of the vending operation were used to reduce the
Company's debt.
The vending operation was accounted for as a discontinued operation
beginning in fiscal year 1997, and accordingly, the vending operation was
segregated in the accompanying Consolidated Statements of Operations and
prior years were reclassified. However, the Consolidated Balance Sheets and
Consolidated Statements of Cash Flows were not reclassified.
Discontinued operations at June 30, 1997 included management's best
estimates of the amounts expected to be realized on the sale of the vending
operation, the costs directly associated with the disposal of the
operation, as well as the operating losses expected to be incurred during
the phase-out period.
Revenues of the discontinued vending operation were $10.5 million, and
$15.4 million in fiscal years 1997 and 1996, respectively. The results of
the discontinued vending operation also reflect corporate interest expense
allocations of $183,000, and $133,000 in fiscal years 1997 and 1996,
respectively. The amount of interest allocated to the phase-out period was
$36,000. Interest expense was allocated based on the ratio of net assets of
the vending operation to the sum of consolidated stockholders' equity and
consolidated debt less debt directly attributable to other operations.
Assets (excluding inter-company) attributable to the discontinued operation
were as follows at June 30, 1997:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Current Assets ..................... $10,295
</TABLE>
-43-
<PAGE> 44
<TABLE>
<S> <C>
Property, Plant and Equipment, net . 3,176
Other Assets ....................... 311
-------
Assets of Discontinued Operation $13,782
=======
</TABLE>
During fiscal year 1998, the Company recorded an additional provision for
the estimated loss on disposal of discontinued operations of $407,000,
after-tax. This change in estimated loss resulted primarily from additional
costs associated with the consummation of the sale of the fixed assets,
inventory and trade receivables of the vending operation.
16. Subsequent Events.
On July 7, 1998 the Company announced the relocation of its corporate
headquarters staff and Instructional Systems Development Group from Wayne,
Pennsylvania to the Company's principal Systems Design and Production
Center in Orlando, Florida. The relocation was completed on September 30,
1998.
Management expects to record a non-recurring charge of approximately
$800,000 during fiscal year 1999 associated with this relocation. A
majority of the charge principally relating to stay bonuses and lease
termination will be recorded during the first quarter of fiscal year 1999.
The remaining portion of the charge will be taken during the second quarter
of fiscal year 1999.
On August 27, 1998, the Board of Directors announced the approval of a
plan to wind down and discontinue the operations of the UK subsidiary by
March 1999. Management expects to record a non-recurring charge of
approximately $1.7 million relating to severance and stay bonuses during
fiscal year 1999. A portion of the charge relating to severance will be
taken during the first quarter of fiscal year 1999. The remaining portions
of the charge, principally relating to stay bonuses, will be taken during
the remainder of fiscal year 1999. Management is in the process of
evaluating options with respect to the leased facilities in the UK
including subletting the facilities or terminating the leases. Any
resulting charge will be determined after the evaluation. The potential
costs associated with the leased facilities range from $1.0 million to
$5.0 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
The Company has nothing to report under this item.
-44-
<PAGE> 45
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in Items
10 - 13 (except for the information set forth at the end of Part I with respect
to Executive Officers of the Company) is incorporated by reference to the
Company's definitive proxy statement which is expected to be filed pursuant to
Regulation 14A on or before October 28, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
(a) (1) and (2) Financial Statements
The financial statements filed as part of this Annual Report are
listed in the Index to Consolidated Financial Statements on page 19. Schedules
other than those so listed are omitted for the reason that they are either not
applicable or not required or because the information required is contained in
the consolidated financial statements or notes thereto.
(3) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Certificate of Incorporation (5)
3.2 By-Laws (2)
4.1 Form of Common Stock Certificate (5)
10.1 * Educational Computer Corporation
1981 Incentive Stock Option Plan (5)
10.2 * Educational Computer Corporation
1986 Incentive Stock Option Plan (5)
10.3 * Educational Computer Corporation
1986 Non-Qualified Stock Option Plan (5)
10.4 * ECC International Corp. 1991 Option Plan (4)
</TABLE>
-45-
<PAGE> 46
<TABLE>
<S> <C>
10.5 * Form of Stock Option Agreement for outside directors (7)
10.6 Term Loan and Revolving Credit Agreement dated as of September 20,
1994 by and among First Fidelity Bank, National Association and
ECC International Corp. (7)
10.7 Guaranty and Surety Agreement dated as of September 20, 1994 to
induce First Fidelity Bank, N.A. to make loans or other financial
accommodations to ECC Simulation Limited. (7)
10.8 * Form of Director's and Officer's Agreement to Defend and
Indemnify. (3)
10.9 First Amendment dated as of April 6, 1995 to the Term and
Revolving Credit Agreement dated as of September 20, 1994 by and
among First Fidelity Bank, National Association and ECC
International Corp. (10)
10.10 Overdraft Facility dated as of April 3, 1995 by and among ECC
Simulation Limited and First Fidelity Bank, N.A. London Branch.
(10)
10.11 Second Amendment dated as of October 13, 1995 to the Term and
Revolving Credit Agreement dated as of September 20, 1994 by and
among First Fidelity Bank, National Association and ECC
International Corp. (6)
10.12 Lease between ECC International Corp. and State of Wisconsin
Investment Board for the premises 2900 Titan Row, Orlando,
Florida. (6)
10.13 Lease between ECC Simulation Limited, ECC International Corp. and
G.J. King & Son Limited for the premises Unit 1 Home Farm Business
Centre, Brighton, England. (6)
10.14 Lease between ECC Simulation Limited, ECC International Corp. and
G.J. King & Son Limited for the premises Unit 3A Home Farm
Business Centre, Brighton, England. (6)
10.15 Lease between ECC Simulation Limited, ECC International Corp. and
G.J. King & Son Limited for the premises Unit 2 Home Farm Business
Centre, Brighton, England. (6)
10.16 * ECC International Corp. Executive Savings Plan. (6)
</TABLE>
-46-
<PAGE> 47
<TABLE>
<S> <C>
10.17 Third Amendment dated as of June 19, 1996 to the Term and
Revolving Credit Agreement dated as of September 20, 1994 between
ECC International Corp; ECC Simulation Limited and First Union
National Bank (Successor by merger to First Fidelity Bank,
National Association). (1)
10.18 Rights Agreement dated August 27, 1996 between ECC International
Corp. and Mellon Bank, N.A. (9)
10.19 Amendment No. 1 to Rights Agreement, dated as of March 25, 1997,
between ECC International Corp. and Mellon Bank, N.A. (8)
10.20 Amendment dated as of November 13, 1997 to the Term and Revolving
Credit Agreement dated as of September 20, 1994 by and among the
Company and First Fidelity Bank, N.A. (11)
10.21 Amendment dated as of December 19, 1997, to the Term and Revolving
Credit Agreement dated as of September 20, 1994 by and among the
Company and First Fidelity Bank, N.A. (11)
10.22 Asset Purchase Agreement, dated as of November 25, 1997, by and
among Dixie- Narco, Inc., ECC International Corp. and ECC Vending
Corp. (12)
10.23* Director Equity Compensation Plan (13)
10.24 Amendment dated as of January 30, 1998, to the Term and Revolving
Credit Agreement dated as of September 20, 1994 by and among the
Company and First Fidelity Bank, N.A. (14)
10.25 Amendment dated as of February 17, 1998, to the Term and Revolving
Credit Agreement dated as of September 20, 1994 by and among the
Company and First Fidelity Bank, N.A. (14)
10.26 Amendment dated as of March 16, 1998, to the Term and Revolving
Credit Agreement dated as of September 20, 1994 by and among the
Company and First Fidelity Bank, N.A. (14)
10.27 Amended and Restated Revolving Credit Note, dated February 17,
1998 (14)
10.28* 1998 Stock Incentive Plan
10.29* Employment Agreement, dated as of June 15, 1998, by and between
the Company and James C. Garrett
10.30* Stock Purchase Agreement, dated as of June 15, 1998, by and
between the Company and James C. Garrett
</TABLE>
-47-
<PAGE> 48
<TABLE>
<S> <C>
10.31* Promissory Note, dated as of June 15, 1998, by and between the
Company and James C. Garrett
10.32* Consulting Agreement dated as of April 1, 1998, by and between the
Company and George W. Murphy
10.33* Non-Competition and Non-Solicitation Agreement, dated as of April
1, 1998, by and between the Company and George W. Murphy
21 Subsidiaries of the Registrant (15)
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
</TABLE>
* Management contract or other compensatory plan or arrangement.
1 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1996. (Commission File No. 001-8988)
2 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996. (Commission File No.
001-8988)
3 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996. (Commission File No. 001-8988)
4 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1991. (Commission File No. 001-8988)
5 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1993. (Commission File No. 001-8988)
6 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995. (Commission File No.
001-8988)
7 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1994. (Commission File No. 001-8988)
8 Incorporated by reference to the Registrant's Current Report on Form 8-K
dated March 25, 1997. (Commission File No. 001-8988)
9 Incorporated by reference to the Registrant's Registration Statement on
Form 8-A dated September 4, 1996. (Commission File No. 001-8988)
-48-
<PAGE> 49
10 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1995. (Commission File No. 001-8988)
11 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997 (Commission File No.
001-8988)
12 Incorporated by reference to the Registrant's Current Report on Form 8-K
dated November 25, 1997 (Commission File No. 001-8988)
13 Incorporated by reference to Annex A of the Registrants Definitive
Schedule 14A file with the SEC on October 27, 1997 (Commission File No.
001-8988)
14 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (Commission File No. 001-8988)
15 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1997 (Commission File No. 001-8988)
(b) Reports on Form 8-K
On June 17, 1998, the Company filed a Current Report on Form 8-K, dated
June 15, 1998, to report under Item 5 (Other Events) that the Company had named
James C. Garrett as President, Chief Executive Officer and a member of the Board
of Directors.
-49-
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ECC INTERNATIONAL CORP.
By: /s/ Relland Winand
--------------------------------
Relland Winand
Vice President, Finance
Date: October 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated, by a majority of the Board of
Directors.
/s/ James C. Garrett )
- -------------------------------------------- )
James C. Garrett, President, Chief Executive )
Officer and Principal Executive Officer )
)
/s/ Relland Winand )
- -------------------------------------------- )
Relland Winand, Vice President, Finance )
and Principal Financial and Accounting Officer )
)
/s/ Ajit W. Hirani )
- -------------------------------------------- )
Ajit W. Hirani, Director )
)
/s/ Bruce A. Beda )
- -------------------------------------------- )
Bruce A. Beda, Director )
)
/s/ Julian Demora ) October 13, 1998
- -------------------------------------------- )
Julian Demora, Director )
)
/s/ Martin S. Kaplan )
- -------------------------------------------- )
Martin S. Kaplan, Director )
)
/s/ Jesse Krasnow )
- -------------------------------------------- )
Jesse Krasnow, Director )
)
/s/ Thomas E. McGrath )
- -------------------------------------------- )
Thomas E. McGrath, Director )
)
/s/ Merrill A. McPeak )
- -------------------------------------------- )
Merrill A. McPeak, Director )
-50-
<PAGE> 1
EXHIBIT 10.28
ECC INTERNATIONAL CORP.
1998 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1998 Stock Incentive Plan (the "Plan") of ECC
International Corp., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of ECC International Corp. as
defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder (the "Code").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant."
3. ADMINISTRATION, DELEGATION
(a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be
administered by the Board of Directors of the Company (the "Board"). The Board
shall have authority to grant Awards and to adopt, amend and repeal such
administrative rules, guidelines and practices relating to the Plan as it shall
deem advisable. The Board may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award in the manner and to the
extent it shall deem expedient to carry the Plan into effect and it shall be the
sole and final judge of such expediency. All decisions by the Board shall be
made in the Board's sole discretion and shall be final and binding on all
persons having or claiming any interest in the Plan or in any Award. No director
or person acting pursuant to the authority delegated by the Board shall be
liable for any action or determination relating to or under the Plan made in
good faith.
(b) DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to
<PAGE> 2
Awards and the maximum number of shares for any one Participant to be made by
such executive officers.
(c) APPOINTMENT OF COMMITTEES. To the extent permitted by
applicable law, the Board may delegate any or all of its powers under the Plan
to one or more committees or subcommittees of the Board (a "Committee"). If and
when the common stock, $.10 par value per share, of the Company (the "Common
Stock") is registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Board shall appoint one such Committee of not less than two
members, each member of which shall be a "non-employee director" as defined in
Rule 16b-3 promulgated under the Exchange Act. All references in the Plan to the
"Board" shall mean the Board or a Committee of the Board or the executive
officer referred to in Section 3(b) to the extent that the Board's powers or
authority under the Plan have been delegated to such Committee or executive
officer.
4. STOCK AVAILABLE FOR AWARDS
(a) NUMBER OF SHARES. Subject to adjustment under Section 4(b),
Awards may be made under the Plan for up to 600,000 shares of Common Stock. If
any Award expires or is terminated, surrendered or canceled without having been
fully exercised or is forfeited in whole or in part or results in any Common
Stock not being issued, the unused Common Stock covered by such Award shall
again be available for the grant of Awards under the Plan. Shares issued under
the Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.
(b) ADJUSTMENT TO COMMON STOCK. In the event of any stock split,
stock dividend, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other similar change
in capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under the Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(b) applies and Section 8(e)(1)
also applies to any event, Section 8(e)(1) shall be applicable to such event,
and this Section 4(b) shall not be applicable.
5. STOCK OPTIONS
(a) GENERAL. No option granted under the Plan shall be intended to
be an "incentive stock option" as defined in Section 422 of the Code. The Board
may grant nonstatutory stock options to purchase Common Stock (each, an
"Option") and
- 2 -
<PAGE> 3
determine the number of shares of Common Stock to be covered by each Option, the
exercise price of each Option and the conditions and limitations applicable to
the exercise of each Option, including conditions relating to applicable federal
or state securities laws, as it considers necessary or advisable.
(b) EXERCISE PRICE. The Board shall establish the exercise price
at the time each Option is granted and specify it in the applicable option
agreement.
(c) DURATION OF OPTIONS. Each Option shall be exercisable at such
times and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(d) EXERCISE OF OPTION. Options may be exercised only by delivery
to the Company of a written notice of exercise signed by the proper person
together with payment in full as specified in Section 5(e) for the number of
shares for which the Option is exercised.
(e) PAYMENT UPON EXERCISE. Common Stock purchased upon the
exercise of an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option
Agreement, by delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or by delivery by the Participant to the Company of a copy
of irrevocable and unconditional instructions to a creditworthy broker to
deliver promptly to the Company cash or a check sufficient to pay the exercise
price;
(3) to the extent permitted by the Board and explicitly
provided in an Option Agreement (i) by delivery of shares of Common Stock owned
by the Participant valued at their fair market value as determined by the Board
in good faith ("Fair Market Value"), (ii) by delivery of a promissory note of
the Participant to the Company on terms determined by the Board or (iii) by
payment of such other lawful consideration as the Board may determine; or
(4) by any combination of the above permitted forms of
payment.
6. RESTRICTED STOCK
(a) GRANTS. The Board may grant Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their issue price or other stated or
formula price (or to require forfeiture of such shares if issued at no cost)
from the recipient in the event that conditions specified
- 3 -
<PAGE> 4
by the Board in the applicable Award are not satisfied prior to the end of the
applicable restriction period or periods established by the Board for such Award
(each, a "Restricted Stock Award").
(b) TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including the grant of shares based upon certain conditions, the grant of
securities convertible into Common Stock and the grant of stock appreciation
rights.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) DOCUMENTATION. Each Award under the Plan shall be evidenced by
a written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the Plan,
each type of Award may be made alone or in addition or in relation to any other
type of Award. The terms of each type of Award need not be identical, and the
Board need not treat Participants uniformly.
- 4 -
<PAGE> 5
(d) TERMINATION OF STATUS. The Board shall determine the effect on
an Award of the disability, death, retirement, authorized leave of absence or
other change in the employment or other status of a Participant and the extent
to which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) ACQUISITION EVENTS
(1) CONSEQUENCES OF ACQUISITION EVENTS. Upon the occurrence of
an Acquisition Event (as defined below), each outstanding Option or Award shall
be assumed or an equivalent option or award substituted by the successor
corporation or a parent or subsidiary of the successor corporation, unless the
successor corporation refuses to assume or substitute for the Option or Award,
in which case (i) the Participant shall have the right to exercise the Option in
full, including with respect to shares of Common Stock as to which it would not
otherwise be exercisable, (ii) all Restricted Stock Awards then outstanding
shall become free of all restrictions prior to the consummation of the
Acquisition Event; and (iii) any other stock-based Awards outstanding shall
become exercisable, realizable or vested in full, or shall be free of all
conditions or restrictions, as applicable to each such Award, prior to the
consummation of the Acquisition Event. If an Option or Award is exercisable in
lieu of assumption or substitution in the event of an Acquisition Event, the
Board shall notify the Participant in writing or electronically that the Option
or Award shall be fully exercisable for a period of not less than forty-five
(45) days from the date of such notice, and the Option or Award shall terminate
upon the expiration of such period.
Each Option or other Award assumed or substituted pursuant to the
immediately preceding paragraph shall include a provision to the effect that
such Option or Award shall become immediately exercisable (or vested) in full
if, on or prior to the first anniversary of the Acquisition Event, the
Participant terminates his or her employment for Good Reason or is terminated
without Cause by the surviving or acquiring corporation. "Good Reason" shall
mean any significant diminution in the optionee's title, authority, or
responsibilities from and after such Acquisition Event or any reduction in the
annual cash compensation payable to the Participant from and after such
Acquisition Event. "Cause" shall mean any willful misconduct by the Participant
which affects the business reputation of the Company or willful failure by the
Participant to perform his or her material responsibilities to the Company
(including, without limitation, breach by the Participant of any provision of
any employment, consulting, advisory, nondisclosure, non-competition or other
similar agreement between the Participant and the Company). The Participant
shall be considered to have been discharged for "Cause" if the Company
determines, within 30 days after the Participant's resignation, that discharge
for Cause was warranted.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto
- 5 -
<PAGE> 6
representing immediately thereafter (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than
50% of the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such merger or
consolidation; (b) any sale of all or substantially all of the assets of the
Company; or (c) the complete liquidation of the Company.
(2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may
grant Awards under the Plan in substitution for stock and stock-based awards
held by employees of another corporation who become employees of the Company as
a result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
(f) WITHHOLDING. Each Participant shall pay to the Company, or
make provision satisfactory to the Board for payment of, any taxes required by
law to be withheld in connection with Awards to such Participant no later than
the date of the event creating the tax liability. The Board may allow
Participants to satisfy such tax obligations in whole or in part in shares of
Common Stock, including shares retained from the Award creating the tax
obligation, valued at their Fair Market Value. The Company may, to the extent
permitted by law, deduct any such tax obligations from any payment of any kind
otherwise due to a Participant.
(g) AMENDMENT OF AWARD. The Board may amend, modify or terminate
any outstanding Award, including but not limited to, substituting therefor
another Award of the same or a different type and changing the date of exercise
or realization, provided that the Participant's consent to such action shall be
required unless the Board determines that the action, taking into account any
related action, would not materially and adversely affect the Participant.
(h) CONDITIONS ON DELIVERY OF STOCK. The Company will not be
obligated to deliver any shares of Common Stock pursuant to the Plan or to
remove restrictions from shares previously delivered under the Plan until (i)
all conditions of the Award have been met or removed to the satisfaction of the
Company; (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations; and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
- 6 -
<PAGE> 7
(i) ACCELERATION. The Board may at any time provide that any
Options shall become immediately exercisable in full or in part, that any
Restricted Stock Awards shall be free of all restrictions or that any other
stock-based Awards may become exercisable in full or in part or free of some or
all restrictions or conditions, or otherwise realizable in full or in part, as
the case may be.
9. MISCELLANEOUS
(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have
any claim or right to be granted an Award, and the grant of an Award shall not
be construed as giving a Participant the right to continued employment or any
other relationship with the Company. The Company expressly reserves the right at
any time to dismiss or otherwise terminate its relationship with a Participant
free from any liability or claim under the Plan, except as expressly provided in
the applicable Award.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder of such shares.
(c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become
effective on the date on which it is adopted by the Board. No Awards shall be
granted under the Plan after the completion of ten years from the date on which
the Plan was adopted by the Board, but Awards previously granted may extend
beyond that date.
(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate
the Plan or any portion thereof at any time.
(e) GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
- 7 -
<PAGE> 1
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 15th day of
June, 1998, is entered into by ECC International Corp., a Delaware corporation
(the "Company"), and James C. Garrett (the "Executive").
The Company desires to employ the Executive, and the Executive desires
to be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company hereby agrees to
employ the Executive, and the Executive hereby accepts employment with the
Company, upon the terms set forth in this Agreement, for the period commencing
on the date hereof and ending on June 28, 2001 (the "Initial Employment
Period"), unless sooner terminated in accordance with the provisions of Section
5. The Company and the Executive agree that the Executive shall commence the
undertaking of the duties and responsibilities set forth in Section 2 on June
29, 1998 (the "Commencement Date"). Without limiting any of the Company's rights
otherwise provided under this Agreement, upon the second anniversary of the
Commencement Date, within 30 days following such date, the Company shall either
(i) commence good faith negotiations with the Executive to extend the Initial
Employment Period or (ii) notify the Executive in writing that the Company does
not intend to extend the Initial Employment Period.
2. TITLE; CAPACITY. The Executive shall serve as President and
Chief Executive Officer, as elected annually by the Board of Directors (the
"Board"). The Executive shall be based at the Company's offices in Orlando,
Florida. The Executive shall be subject to the supervision of, and shall have
such authority as is delegated to him by, the Board. The Executive hereby
accepts such employment and agrees to undertake the duties and responsibilities
inherent in such position and such other duties and responsibilities as the
Board shall from time to time reasonably assign to him, which duties and
responsibilities shall be commensurate with the Executive's position. The
Executive agrees to devote his entire business time, attention and energies to
the business and interests of the Company during the term of this Agreement. The
Executive agrees to abide by the rules, regulations, instructions, personnel
practices and policies of the Company and any changes therein which may be
adopted from time to time by the Company, provided that, without the Executive's
consent, such changes shall not effect a change in this Agreement or any
agreement contemplated herein. The Executive acknowledges receipt of copies of
all such rules and policies committed to writing as of the date of this
Agreement.
<PAGE> 2
3. COMPENSATION AND BENEFITS.
3.1 SALARY AND SIGN-ON BONUS. The Company shall pay the
Executive, in bi-weekly installments, an annual base salary (the "Base Salary")
of $250,000 for the three-year period commencing on the Commencement Date. The
Company shall pay to the Executive a cash bonus of $50,000 upon the execution of
this Agreement.
3.2 FRINGE BENEFITS. The Executive shall be entitled to
participate in all bonus and benefit programs that the Company establishes and
makes available to its executive officers, to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him eligible
to participate ("Fringe Benefits"), including, but not limited to, the programs
indicated on EXHIBITS A, C, D, AND E to this Agreement. The Executive's Fringe
Benefits shall not be reduced without the Executive's consent.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall
reimburse the Executive for all reasonable travel, entertainment and other
expenses incurred or paid by the Executive in connection with the performance of
his duties, responsibilities or services under this Agreement, upon presentation
by the Executive of documentation, expense statements, vouchers and/or such
other supporting information as the Company may require.
3.4 RELOCATION AND RELOCATION EXPENSES. The Executive
shall relocate to the Orlando, Florida metropolitan area. The Company shall
reimburse the Executive for reasonable relocation and travel expenses, including
without limitation real estate commissions, not to exceed $45,000 incurred by
him in relocating himself and his immediate family to the Orlando, Florida
metropolitan area to commence employment with the Company. The Executive agrees
to use his good faith best efforts to ensure that any and all such relocation
and travel expenses are reasonable.
3.5 TEMPORARY LIVING EXPENSES. The Company shall
reimburse the Executive for reasonable temporary living expenses in the Orlando,
Florida metropolitan area, not to exceed $5,000 per month, for the period
beginning on the Commencement Date and ending on the earlier to occur of (i) the
180th day following the Commencement Date and (ii) the date on which the
Executive has relocated himself and his immediate family to the Orlando, Florida
metropolitan area pursuant to Section 3.4. The Executive agrees to use his good
faith best efforts to ensure that any and all such temporary living expenses are
reasonable.
3.6 INCENTIVE PAYMENTS. In addition to the salary and
benefits payable pursuant to this Section 3, for fiscal years beginning after
June 30, 1998, the Executive shall be entitled to receive the following:
(a) annual cash bonuses if the Executive satisfies
agreed-upon discrete goals/objectives to be contained in an Annual Performance
Incentive Plan for
-2-
<PAGE> 3
the Executive to be established by the Board of Directors in consultation with
the Executive on an annual basis. The Annual Performance Incentive Plan for 1999
has been agreed to by the Company and the Executive as of the date hereof. The
Company shall pay to the Executive a minimum cash bonus under the Annual
Performance Incentive Plan of $50,000 for the fiscal year ending June 30, 1999.
(b) annual options to purchase shares of the
Company's Common Stock if the Company satisfies agreed-upon long-term
performance objectives to be contained in a Long-Term Incentive Plan for the
Executive to be established by the Board of Directors in consultation with the
Executive. The parties agree to establish the Long-Term Incentive Plan as soon
as practicable following the execution of this Agreement. The Company shall
grant to the Executive a minimum of 30,000 options to purchase shares of the
Company's Common Stock under the Long-Term Incentive Plan for the fiscal year
ending June 30, 1999.
4. ANCILLARY AGREEMENTS.
4.1 NON-COMPETITION AND NON-SOLICITATION AGREEMENT. On
the date hereof, the Company and the Executive shall enter into a
Non-Competition and Non-Solicitation Agreement substantially in the form
attached hereto as EXHIBIT B, and such agreement shall be incorporated herein by
this reference and made a part hereof as if set forth herein in its entirety.
4.2 STOCK PURCHASE AGREEMENT. On the date hereof, the
Company and the Executive shall enter into a Stock Purchase Agreement
substantially in the form attached hereto as EXHIBIT C.
4.3 NONSTATUTORY STOCK OPTION AGREEMENT. On the date
hereof, the Company and the Executive shall enter into a Nonstatutory Stock
Option Agreement substantially in the form attached hereto as EXHIBIT D.
4.4 INCENTIVE STOCK OPTION AGREEMENT. On the date hereof,
the Company and the Executive shall enter into an Incentive Stock Option
Agreement substantially in the form attached hereto as EXHIBIT E.
5. EMPLOYMENT TERMINATION. The employment of the Executive by the
Company pursuant to this Agreement shall terminate immediately upon the
occurrence of any of the following:
(a) Expiration without renewal of the Initial Employment
Period in accordance with Section 1;
-3-
<PAGE> 4
(b) At the election of the Company, for cause,
immediately upon written notice by the Company to the Executive. For the
purposes of this Section 5(b), cause shall mean any willful misconduct by the
Executive which affects the business reputation of the Company or willful
failure by the Executive to perform his material responsibilities to the Company
(including, without limitation, breach by the Executive of any provision of any
employment, consulting, advisory, nondisclosure, non-competition or other
similar agreement between the Executive and the Company); or
(c) By the Executive for good reason, immediately upon
written notice by the Executive to the Company. For the purposes of this Section
5(c), good reason shall mean any significant diminution in the Executive's
title, authority or responsibilities or any reduction in the Base Salary.
6. EFFECT OF TERMINATION.
6.1 EXPIRATION OF INITIAL EMPLOYMENT PERIOD. In the event
the Initial Employment Period expires without renewal in accordance with Section
1, the following severance payments and arrangements (less applicable deductions
for social security, payroll and other applicable taxes) shall be made for the
benefit of the Executive:
(a) cash payments in bi-weekly installments at the
Executive's current bi-weekly Base Salary at the time of termination for a
period of 12 months, commencing with the month immediately succeeding the month
during which the Initial Employment Period expires without renewal;
(b) normal employee medical benefits shall be
continued for the Executive for a period of 12 months, commencing with the month
immediately succeeding the month during which the Initial Employment Period
expires without renewal; and
(c) payment of bonuses otherwise earned but not yet
paid to the Executive under Section 3 through the date of termination.
6.2 TERMINATION FOR CAUSE. In the event the Executive's
employment is terminated for cause pursuant to Section 5(b), the Company shall
pay to the Executive the compensation, benefits and bonuses otherwise payable to
him under Section 3 through the date of termination.
6.3 TERMINATION OTHER THAN FOR CAUSE OR TERMINATION FOR
GOOD REASON. In the event the Executive's employment is terminated (i) by the
Company other than for cause or (ii) by the Employee for good reason, the
following severance payments and
-4-
<PAGE> 5
arrangements (less applicable deductions for social security, payroll and other
applicable taxes) shall be made for the benefit of the Executive:
(a) cash payments in bi-weekly installments at the
Executive's current bi-weekly Base Salary at the time of termination for a
period equal to the greater of (i) the otherwise remaining term of the Initial
Employment Period or (ii) 24 months, commencing with the month immediately
succeeding the month during which the termination occurred;
(b) normal employee medical benefits shall be
continued for the Executive for a period equal to the greater of (i) the
otherwise remaining term of the Initial Employment Period or (ii) 24 months,
commencing with the month immediately succeeding the month during which the
termination occurred; and
(c) payment of bonuses otherwise earned but not yet
paid to the Executive under Section 3 through the date of termination.
6.4 SURVIVAL. The provisions of Section 8 shall survive
the termination of this Agreement.
7. CHANGE IN CONTROL.
7.1 Notwithstanding any other provision of this
Agreement, if a Change in Control (as such term is defined below) shall have
occurred, upon the termination of employment of the Executive for any reason or
no reason after such Change in Control, the following severance payments and
arrangements (less applicable deductions for social security, payroll and other
applicable taxes) shall be made for the benefit of the Executive:
(a) cash payments in bi-weekly installments at the
Executive's current bi-weekly Base Salary at the time of termination (less
applicable deductions) for a period equal to the greater of (i) the otherwise
remaining term of the Initial Employment Period or (ii) 24 months, commencing
with the month immediately succeeding the month during which the termination
occurred;
(b) normal employee medical benefits shall be
continued for the Executive for a period equal to the greater of (i) the
otherwise remaining term of the Initial Employment Period or (ii) 24 months,
commencing with the month immediately succeeding the month during which the
termination occurred;
(c) a lump sum cash payment in an amount equal to 24
times the current monthly value of the other benefits otherwise payable to the
Executive at the time of termination;
-5-
<PAGE> 6
(d) payment of bonuses otherwise earned but not yet
paid to the Executive under Section 3 through the date of termination; and
(e) all stock options granted to the Executive which
shall not have vested as of the time of termination shall thereupon
automatically vest and be immediately exercisable in full, provided that any
such acceleration of vesting shall in every event be subject to the terms of any
stock option plan under which such stock options are granted.
7.2 For purposes of this Agreement, a "Change in Control"
shall mean:
(a) any merger or consolidation which results in the
voting securities of the Company outstanding immediately prior thereto
representing immediately thereafter (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than
50% of the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such merger or
consolidation; or
(b) any sale of all or substantially all of the
assets of the Company.
8. PROPRIETARY INFORMATION AND DEVELOPMENTS.
8.1 PROPRIETARY INFORMATION.
(a) The Executive agrees that all information,
whether or not in writing, of a private, secret or confidential nature
concerning the Company's business, business relationships or financial affairs
(collectively, "Proprietary Information") is and shall be the exclusive property
of the Company. By way of illustration, but not limitation, Proprietary
Information may include inventions, products, processes, methods, techniques,
formulas, compositions, compounds, projects, developments, plans, research data,
clinical data, financial data, personnel data, computer programs, customer and
supplier lists, and contacts at or knowledge of customers or prospective
customers of the Company. The Executive will not disclose any Proprietary
Information to any person or entity other than employees of the Company or use
the same for any purposes (other than in the performance of his duties as an
employee of the Company) without written approval by an officer of the Company,
either during or after his employment with the Company, unless and until such
Proprietary Information has become public knowledge without fault by the
Executive.
(b) The Executive agrees that all files, letters,
memoranda, reports, records, data, sketches, drawings, laboratory notebooks,
program listings, or other written, photographic, or other tangible material
containing Proprietary Information,
-6-
<PAGE> 7
whether created by the Executive or others, which shall come into his custody or
possession, shall be and are the exclusive property of the Company to be used by
the Executive only in the performance of his duties for the Company. All such
materials or copies thereof and all tangible property of the Company in the
custody or possession of the Executive shall be delivered to the Company, upon
the earlier of (i) a request by the Company or (ii) termination of his
employment. After such delivery, the Executive shall not retain any such
materials or copies thereof or any such tangible property.
(c) The Executive agrees that his obligation not to
disclose or to use information and materials of the types set forth in
paragraphs (a) and (b) above, and his obligation to return materials and
tangible property, set forth in paragraph (b) above, also extends to such types
of information, materials and tangible property of customers of the Company or
suppliers to the Company or other third parties who may have disclosed or
entrusted the same to the Company or to the Executive.
8.2 DEVELOPMENTS.
(a) The Executive will make full and prompt
disclosure to the Company of all inventions, improvements, discoveries, methods,
developments, software, and works of authorship, whether patentable or not,
which are created, made, conceived or reduced to practice by him or under his
direction or jointly with others during his employment by the Company, whether
or not during normal working hours or on the premises of the Company (all of
which are collectively referred to in this Agreement as "Developments").
(b) The Executive agrees to assign and does hereby
assign to the Company (or any person or entity designated by the Company) all
his right, title and interest in and to all Developments and all related
patents, patent applications, copyrights and copyright applications. However,
this Section 8.2(b) shall not apply to Developments which do not relate to the
present or planned business or research and development of the Company and which
are made and conceived by the Executive not during normal working hours, not on
the Company's premises and not using the Company's tools, devices, equipment or
Proprietary Information. The Executive understands that, to the extent this
Agreement shall be construed in accordance with the laws of any state which
precludes a requirement in an employee agreement to assign certain classes of
inventions made by an employee, this Section 8.2(b) shall be interpreted not to
apply to any invention which a court rules and/or the Company agrees falls
within such classes. The Executive also hereby waives all claims to moral rights
in any Developments.
(c) The Executive agrees to cooperate fully with the
Company, both during and after his employment with the Company, with respect to
the procurement, maintenance and enforcement of copyrights, patents and other
intellectual property rights (both in the United States and foreign countries)
relating to
-7-
<PAGE> 8
Developments. The Executive shall sign all papers, including, without
limitation, copyright applications, patent applications, declarations, oaths,
formal assignments, assignments of priority rights, and powers of attorney,
which the Company may deem necessary or desirable in order to protect its rights
and interests in any Development. The Executive further agrees that if the
Company is unable, after reasonable effort, to secure the signature of the
Executive on any such papers, any executive officer of the Company shall be
entitled to execute any such papers as the agent and the attorney-in-fact of the
Executive, and the Executive hereby irrevocably designates and appoints each
executive officer of the Company as his agent and attorney-in-fact to execute
any such papers on his behalf, and to take any and all actions as the Company
may deem necessary or desirable in order to protect its rights and interests in
any Development, under the conditions described in this sentence.
8.3 OTHER AGREEMENTS. The Executive hereby represents
that, except as the Executive has disclosed in writing to the Company, the
Executive is not bound by the terms of any agreement with any previous employer
or other party to refrain from using or disclosing any trade secret or
confidential or proprietary information in the course of his employment with the
Company or to refrain from competing, directly or indirectly, with the business
of such previous employer or any other party. The Executive further represents
that his performance of all the terms of this Agreement and as an employee of
the Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by the Executive in
confidence or in trust prior to his employment with the Company, and the
Executive will not disclose to the Company or induce the Company to use any
confidential or proprietary information or material belonging to any previous
employer or others.
9. ATTORNEYS' FEES AND EXPENSES. The Company shall pay, on the
Commencement Date, the reasonable costs and expenses of one counsel to the
Executive, in connection with the preparation of this Agreement and the other
agreements contemplated hereby, up to a maximum of $2,000.
10. NOTICES. Any notice required to be given pursuant to the
provisions of this Agreement shall be in writing and, if mailed, sent by
registered or certified mail, postage prepaid, with a copy delivered by an
overnight courier service of recognized standing, to the party named at the
address set forth below, or at such other address as each party may hereafter
designate in writing to the other party:
Employer: ECC International Corp.
2001 West Oak Ridge Road
Orlando, FL 32809-3803
Attn: Merrill A. McPeak,
Chairman of the Board
-8-
<PAGE> 9
With a copy to: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: Martin S. Kaplan, Esq.
Executive: James C. Garrett
3118 Hyde Park Drive
Clearwater, FL 33761
With a copy to: Jack J. Geller, Esq.
2560 Gulf to Bay Boulevard
Suite 300
Clearwater, FL 33765
Any such notices shall be deemed to have been delivered when served
personally, or 48 hours after being mailed in the manner specified above.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.
12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Executive.
13. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the laws of the State of Delaware.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Executive are personal and shall not be assigned by him.
15. MISCELLANEOUS.
(a) No delay or omission by the Company or the Executive
in exercising any right under this Agreement shall operate as a waiver of that
or any other right. A waiver or consent given by the Company or the Executive on
any one occasion shall be
-9-
<PAGE> 10
effective only in that instance and shall not be construed as a bar or waiver of
any right on any other occasion.
(b) The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.
(c) In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
16. LEGAL FEES. In the event that legal proceedings are commenced
by the Executive against the Company, or by the Company against the Executive,
in connection with this Agreement or the transactions contemplated hereby, the
party or parties which do not prevail in such proceedings shall pay the
reasonable attorneys' fees and other costs and expenses, including investigation
costs, incurred by the prevailing party in such proceedings.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
ECC INTERNATIONAL CORP.
By: /s/ Merrill A. McPeak
-------------------------------
Name: Merrill A. McPeak
Title: Chairman of the Board
EXECUTIVE
/s/ James C. Garrett
-----------------------------------
James C. Garrett
-10-
<PAGE> 1
EXHIBIT 10.30
ECC INTERNATIONAL CORP.
Stock Purchase Agreement
Under 1998 Stock Incentive Plan
-------------------------------
AGREEMENT made as of this 15th day of June, 1998 (the "Effective Date")
between ECC International Corp., a Delaware corporation (the "Company"), and
James C. Garrett (the "Purchaser").
For valuable consideration, receipt of which is acknowledged, the
parties hereto agree as follows:
1. PURCHASE OF SHARES. On the Effective Date, the Company shall
issue and sell to the Purchaser, and the Purchaser shall purchase from the
Company, subject to the terms and conditions set forth in this Agreement and the
Company's 1998 Stock Incentive Plan (the "Plan"), 50,000 shares (the "Shares")
of common stock, $.10 par value per share, of the Company ("Common Stock"), at a
purchase price of $3.125 per share. The aggregate purchase price for the Shares
shall be paid by the Purchaser as follows: (i) $10,000 by check payable to the
order of the Company, and (ii) $146,250 by delivery of a promissory note of the
Purchaser to the Company in the form attached hereto as EXHIBIT A. Upon receipt
of payment by the Company for the Shares, the Company shall issue to the
Purchaser one or more certificates in the name of the Purchaser for the Shares.
2. RESTRICTIVE LEGEND. All certificates representing Shares shall
have affixed thereto a legend in substantially the following form:
"The shares of stock represented by this certificate are
subject to the terms and conditions set forth in a certain
Stock Purchase Agreement dated as of June 15, 1998 between the
corporation and the registered owner of these shares (or his
predecessor in interest), and such Agreement is available for
inspection without charge at the office of the Secretary of
the corporation."
3. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, and each other provision of this
Agreement shall be severable and enforceable to the extent permitted by law.
4. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the Company and the Purchaser and their respective heirs,
executors, administrators, legal representatives, successors and assigns.
<PAGE> 2
5. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties, and supersedes all prior agreements and
understandings, relating to the subject matter of this Agreement.
6. PROVISIONS OF THE PLAN. This Agreement is subject to the
provisions of the Plan, a copy of which is furnished to the Participant with
this Agreement.
7. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
ECC INTERNATIONAL CORP.
By: /s/ Merrill A. McPeak
-------------------------------
Name: Merrill A. McPeak
Title: Chairman of the Board
PURCHASER
/s/ James C. Garrett
-----------------------------------
James C. Garrett
-2-
<PAGE> 3
EXHIBIT A
PROMISSORY NOTE
$_____________ June ___, 1998
FOR VALUE RECEIVED, James C. Garrett (the "Maker"), promises to pay to
ECC International Corp., a Delaware corporation (the "Company"), or order, at
the offices of the Company or at such other place as the holder of this Note may
designate, the principal sum of $__________, together with interest on the
unpaid principal balance of this Note from time to time outstanding at the rate
of 5.58% per year until paid in full. Except as otherwise set forth below,
principal and interest shall be paid in full on June ___, 2001.
Interest on this Note shall be computed on the basis of a year of 365
days for the actual number of days elapsed. All payments by the Maker under this
Note shall be in immediately available funds.
This Note shall become immediately due and payable without notice or
demand upon the occurrence at any time of any of the following events of default
(individually, an "Event of Default" and collectively, "Events of Default"):
(1) default in the payment or performance of this or any other
liability or obligation of the Maker to the holder, including
the payment when due of any principal, premium or interest
under this Note;
(2) the institution against the Maker or any indorser or guarantor
of this Note of any proceedings under the United States
Bankruptcy Code or any other federal or state bankruptcy,
reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally, which proceeding
is not dismissed within thirty (30) days of filing;
(3) the institution by the Maker or any indorser or guarantor of
this Note of any proceedings under the United States
Bankruptcy Code or any other federal or state bankruptcy,
reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally or the making by
the Maker or any indorser or guarantor of this Note of a
composition or an assignment or trust mortgage for the benefit
of creditors;
(4) the sale, transfer or other disposal of any or all of the
shares of common stock, $.10 par value per share, of the
Company (the "Shares") issued and sold to the Maker by the
Company pursuant to that certain Stock Purchase Agreement,
dated as of June ___, 1998, by and between the Company and the
Maker, provided that the death of the Maker shall not be
deemed to be a sale, transfer or other disposal of any or all
of the Shares; and
<PAGE> 4
(5) the failure of the Maker to commence the undertaking of the
duties and responsibilities of President and Chief Executive
Officer of the Company on or before June 30, 1998 pursuant to
that certain Employment Agreement, dated as of June ___, 1998,
by and between the Company and the Maker.
Upon the occurrence of an Event of Default, the holder shall have then,
or at any time thereafter, all of the rights and remedies afforded by the
Uniform Commercial Code as from time to time in effect in the State of Delaware
or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate which is
one (1) percentage point above the rate per year specified in the first
paragraph of this Note. Such interest on overdue amounts under this Note shall
be payable on demand and shall accrue and be compounded monthly until the
obligation of the Maker with respect to the payment of such interest has been
discharged (whether before or after judgment).
In no event shall any interest charged, collected or reserved under
this Note exceed the maximum rate then permitted by applicable law and if any
such payment is paid by the Maker, then such excess sum shall be credited by the
holder as a payment of principal.
All payments by the Maker under this Note shall be made without set-off
or counterclaim and be free and clear and without any deduction or withholding
for any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law. The Maker shall pay and save the
holder harmless from all liabilities with respect to or resulting from any delay
or omission to make any such deduction or withholding required by law.
Whenever any amount is paid under this Note, all or part of the amount
paid may be applied to principal, premium or interest in such order and manner
as shall be determined by the holder in its discretion.
No reference in this Note to any guaranty or other document shall
impair the obligation of the Maker, which is absolute and unconditional, to pay
all amounts under this Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such right or of any other right of
such holder, nor shall any delay, omission or waiver on any one occasion be
deemed a bar to or waiver
-2-
<PAGE> 5
of the same or any other right on any future occasion. The Maker and every
indorser or guarantor of this Note regardless of the time, order or place of
signing waives presentment, demand, protest and notices of every kind and
assents to any extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of collateral, and to the
addition or release of any other party or person primarily or secondarily
liable.
This Note may be prepaid in whole or in part at any time or from time
to time, with the giving of such consent to be in the sole discretion of the
holder. Any such prepayment shall be without premium or penalty.
None of the terms or provisions of this Note may be excluded, modified
or amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the State of
Delaware and this Note is executed as an instrument under seal.
ATTEST:
By:
----------------------------- -----------------------------------
Name: James C. Garrett
-3-
<PAGE> 1
EXHIBIT 10.31
PROMISSORY NOTE
$146,250 June 15, 1998
FOR VALUE RECEIVED, James C. Garrett (the "Maker"), promises to pay to
ECC International Corp., a Delaware corporation (the "Company"), or order, at
the offices of the Company or at such other place as the holder of this Note may
designate, the principal sum of $146,250, together with interest on the unpaid
principal balance of this Note from time to time outstanding at the rate of
5.58% per year until paid in full. Except as otherwise set forth below,
principal and interest shall be paid in full on June 15, 2001.
Interest on this Note shall be computed on the basis of a year of 365
days for the actual number of days elapsed. All payments by the Maker under this
Note shall be in immediately available funds.
This Note shall become immediately due and payable without notice or
demand upon the occurrence at any time of any of the following events of default
(individually, an "Event of Default" and collectively, "Events of Default"):
(1) default in the payment or performance of this or any other
liability or obligation of the Maker to the holder, including
the payment when due of any principal, premium or interest
under this Note;
(2) the institution against the Maker or any indorser or guarantor
of this Note of any proceedings under the United States
Bankruptcy Code or any other federal or state bankruptcy,
reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally, which proceeding
is not dismissed within thirty (30) days of filing;
(3) the institution by the Maker or any indorser or guarantor of
this Note of any proceedings under the United States
Bankruptcy Code or any other federal or state bankruptcy,
reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally or the making by
the Maker or any indorser or guarantor of this Note of a
composition or an assignment or trust mortgage for the benefit
of creditors;
(4) the sale, transfer or other disposal of any or all of the
shares of common stock, $.10 par value per share, of the
Company (the "Shares") issued and sold to the Maker by the
Company pursuant to that certain Stock Purchase Agreement,
dated as of June 15, 1998, by and between the Company and the
Maker, provided that the death of the Maker shall not be
deemed to be a sale, transfer or other disposal of any or all
of the Shares; and
<PAGE> 2
(5) the failure of the Maker to commence the undertaking of the
duties and responsibilities of President and Chief Executive
Officer of the Company on or before June 30, 1998 pursuant to
that certain Employment Agreement, dated as of June 15, 1998,
by and between the Company and the Maker.
Upon the occurrence of an Event of Default, the holder shall have then,
or at any time thereafter, all of the rights and remedies afforded by the
Uniform Commercial Code as from time to time in effect in the State of Delaware
or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate which is
one (1) percentage point above the rate per year specified in the first
paragraph of this Note. Such interest on overdue amounts under this Note shall
be payable on demand and shall accrue and be compounded monthly until the
obligation of the Maker with respect to the payment of such interest has been
discharged (whether before or after judgment).
In no event shall any interest charged, collected or reserved under
this Note exceed the maximum rate then permitted by applicable law and if any
such payment is paid by the Maker, then such excess sum shall be credited by the
holder as a payment of principal.
All payments by the Maker under this Note shall be made without set-off
or counterclaim and be free and clear and without any deduction or withholding
for any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law. The Maker shall pay and save the
holder harmless from all liabilities with respect to or resulting from any delay
or omission to make any such deduction or withholding required by law.
Whenever any amount is paid under this Note, all or part of the amount
paid may be applied to principal, premium or interest in such order and manner
as shall be determined by the holder in its discretion.
No reference in this Note to any guaranty or other document shall
impair the obligation of the Maker, which is absolute and unconditional, to pay
all amounts under this Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
-2-
<PAGE> 3
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such right or of any other right of
such holder, nor shall any delay, omission or waiver on any one occasion be
deemed a bar to or waiver of the same or any other right on any future occasion.
The Maker and every indorser or guarantor of this Note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any extension or postponement of the time of payment
or any other indulgence, to any substitution, exchange or release of collateral,
and to the addition or release of any other party or person primarily or
secondarily liable.
This Note may be prepaid in whole or in part at any time or from time
to time, with the giving of such consent to be in the sole discretion of the
holder. Any such prepayment shall be without premium or penalty.
None of the terms or provisions of this Note may be excluded, modified
or amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the State of
Delaware and this Note is executed as an instrument under seal.
ATTEST:
By: /s/ James C. Garrett
--------------------------- -----------------------------------
Name: James C. Garrett
-3-
<PAGE> 1
EXHIBIT 10.32
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement"), made as of the 1st day of
April, 1998, is entered into by ECC International Corp., a Delaware corporation
with its principal place of business at 175 Strafford Avenue, Suite 116, Wayne,
Pennsylvania 19087 (the "Company"), and George W. Murphy, residing at 907
Ivycroft Road, Wayne, Pennsylvania 19087 (the "Consultant").
WHEREAS, the Company desires to retain the services of the Consultant
and the Consultant desires to perform certain services for the Company;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
agree as follows:
1. SERVICES. The Consultant agrees to perform such consulting,
advisory and related services to and for the Company as may be reasonably
requested from time to time by the Company.
2. TERM. This Agreement shall commence on the date hereof and
shall continue until the first anniversary of the date hereof (such period being
referred to as the "Consultation Period"), unless sooner terminated in
accordance with the provisions of Section 4.
3. Compensation.
3.1 CONSULTING FEES. The Company shall pay to the
Consultant aggregate consulting fees of $100,000 for his services during the
Consultation Period, payable as follows: $50,000 upon the execution and delivery
of this Agreement; and $50,000 on December 28, 1998.
3.2 REIMBURSEMENT OF EXPENSES. The Company shall
reimburse the Consultant for all reasonable and necessary expenses incurred or
paid by the Consultant in connection with, or related to, the performance of his
services under this Agreement. The Consultant shall submit to the Company
itemized quarterly statements, in a form satisfactory to the Company, of such
expenses incurred in the previous quarter. The Company shall pay to the
Consultant amounts shown on each such statement within 15 days after receipt
thereof.
3.3 BENEFITS. The Consultant shall not be entitled to any
benefits, coverages or privileges made available to employees of the Company,
including, without limitation, social security, unemployment, medical or pension
payments, by reason of this Agreement.
<PAGE> 2
3.4 DEATH. Notwithstanding any other provision of this
Agreement, if the Consultant dies during the term of this Agreement, the
Consultant's spouse at the time of death shall be entitled to receive the cash
payment payable on December 28, 1998 as set forth in Section 3.1 above, provided
she is alive on such date.
4. TERMINATION. The Company may terminate the Consultation
Period, effective immediately upon receipt of written notice, if the Consultant
breaches any provision of Sections 1 or 6 of this Agreement or the
Non-Competition and Non-Solicitation Agreement of even date herewith by and
between the Company and the Consultant. In the event of such termination, the
Consultant shall be entitled to payment for services performed on a pro rata
basis and expenses paid or incurred prior to the effective date of termination.
Such payments shall constitute full settlement of any and all claims of the
Consultant of every description against the Company.
5. COOPERATION. The Consultant shall use his best efforts in the
performance of his obligations under this Agreement. The Company shall provide
such access to its information and property as may be reasonably required in
order to permit the Consultant to perform his obligations hereunder. The
Consultant shall cooperate with the Company's personnel, shall not interfere
with the conduct of the Company's business and shall observe all rules,
regulations and security requirements of the Company concerning the safety of
persons and property.
6. INVENTIONS AND PROPRIETARY INFORMATION.
6.1 INVENTIONS.
(a) All inventions, discoveries, computer programs,
data, technology, designs, innovations and improvements (whether or not
patentable and whether or not copyrightable) ("Inventions") related to the
business of the Company which are made, conceived, reduced to practice, created,
written, designed or developed by the Consultant, solely or jointly with others
and whether during normal business hours or otherwise, during the Consultation
Period or thereafter if resulting or directly derived from Proprietary
Information (as defined below), shall be the sole property of the Company. The
Consultant hereby assigns to the Company all Inventions and any and all related
patents, copyrights, trademarks, trade names and other industrial and
intellectual property rights and applications therefor, in the United States and
elsewhere and appoints any officer of the Company as his duly authorized
attorney to execute, file, prosecute and protect the same before any government
agency, court or authority. Upon the request of the Company and at the Company's
expense, the Consultant shall execute such further assignments, documents and
other instruments as may be necessary or desirable to fully and completely
assign all Inventions to the Company and to assist the Company in applying for,
obtaining and enforcing patents or copyrights or other rights in the United
States and in any foreign country with respect to any Invention.
(b) The Consultant shall promptly disclose to the
Company all Inventions and will maintain adequate and current written records
(in the form of notes,
-2-
<PAGE> 3
sketches, drawings and as may be specified by the Company) to document the
conception and/or first actual reduction to practice of any Invention. Such
written records shall be available to and remain the sole property of the
Company at all times.
6.2 PROPRIETARY INFORMATION.
(a) The Consultant acknowledges that his relationship
with the Company is one of high trust and confidence and that in the course of
his service to the Company he will have access to and contact with Proprietary
Information. The Consultant agrees that he will not, during the Consultation
Period or at any time thereafter, disclose to others, or use for his benefit or
the benefit of others, any Proprietary Information or Invention.
(b) For purposes of this Agreement, "Proprietary
Information" shall mean, by way of illustration and not limitation, all
information (whether or not patentable and whether or not copyrightable) owned,
possessed or used by the Company, including, without limitation, any Invention,
formula, vendor information, customer information, apparatus, equipment, trade
secret, process, research, report, technical data, know-how, computer program,
software, software documentation, hardware design, technology, marketing or
business plan, forecast, unpublished financial statement, budget, license,
price, cost and employee list that is communicated to, learned of, developed or
otherwise acquired by the Consultant in the course of his service as a
consultant to the Company.
(c) The Consultant's obligations under this Section
6.2 shall not apply to any information that (i) is or becomes known to the
general public under circumstances involving no breach by the Consultant or
others of the terms of this Section 6.2, (ii) is generally disclosed to third
parties by the Company without restriction on such third parties, or (iii) is
approved for release by written authorization of the Board of Directors of the
Company.
(d) Upon termination of this Agreement or at any
other time upon request by the Company, the Consultant shall promptly deliver to
the Company all records, files, memoranda, notes, designs, data, reports, price
lists, customer lists, drawings, plans, computer programs, software, software
documentation, sketches, laboratory and research notebooks and other documents
(and all copies or reproductions of such materials) relating to the business of
the Company.
(e) The Consultant represents that his retention as a
consultant with the Company and his performance under this Agreement does not,
and shall not, breach any agreement that obligates him to keep in confidence any
trade secrets or confidential or proprietary information of his or of any other
party or to refrain from competing, directly or indirectly, with the business of
any other party. The Consultant shall not disclose to the Company any trade
secrets or confidential or proprietary information of any other party.
-3-
<PAGE> 4
(f) The Consultant acknowledges that the Company from
time to time may have agreements with other persons or with the United States
Government, or agencies thereof, that impose obligations or restrictions on the
Company regarding inventions made during the course of work under such
agreements or regarding the confidential nature of such work. The Consultant
agrees to be bound by all such obligations and restrictions that are known to
him and to take all action necessary to discharge the obligations of the Company
under such agreements.
6.3 REMEDIES. The Consultant acknowledges that any breach
of the provisions of this Section 6 shall result in serious and irreparable
injury to the Company for which the Company cannot be adequately compensated by
monetary damages alone. The Consultant agrees, therefore, that, in addition to
any other remedy it may have, the Company shall be entitled to enforce the
specific performance of this Agreement by the Consultant and to seek both
temporary and permanent injunctive relief (to the extent permitted by law)
without the necessity of proving actual damages.
7. INDEPENDENT CONTRACTOR STATUS. The Consultant shall perform
all services under this Agreement as an "independent contractor" and not as an
employee or agent of the Company. The Consultant is not authorized to assume or
create any obligation or responsibility, express or implied, on behalf of, or in
the name of, the Company or to bind the Company in any manner.
8. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 8.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.
10. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Consultant.
11. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the internal laws of the State of Delaware,
without regard to conflict of laws principles.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon,
and inure to the benefit of, both parties and their respective successors and
assigns, including any corporation with which, or into which, the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Consultant are personal and shall not be assigned by him.
-4-
<PAGE> 5
13. MISCELLANEOUS.
13.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other right.
A waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
13.2 The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.
13.3 In the event that any provision of this Agreement
shall be invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
ECC INTERNATIONAL CORP.
By: /s/ Merrill A. McPeak
-------------------------------
Name: Merrill A. McPeak
Title: Chairman of the Board
CONSULTANT
/s/ George W. Murphy
-----------------------------------
George W. Murphy
-5-
<PAGE> 1
EXHIBIT 10.33
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
This Non-Competition and Non-Solicitation Agreement (the "Agreement"),
made as of the 1st day of April, 1998, is entered into by and between ECC
International Corp., a Delaware corporation with its principal place of business
at 175 Strafford Avenue, Suite 116, Wayne, Pennsylvania 19087 (hereinafter
referred to collectively with its subsidiaries as the "Company"), and George W.
Murphy, residing at 907 Ivycroft Road, Wayne, Pennsylvania 19087 ("Murphy").
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
agree as follows:
1. NON-COMPETITION.
(a) During the term of this Agreement, Murphy will not
directly or indirectly:
(i) as an individual proprietor, partner,
stockholder, officer, employee, director, joint venturer, investor, lender,
consultant or in any other capacity whatsoever (other than as the holder of not
more than one percent of the combined voting power of the outstanding stock of a
publicly held company), develop, design, produce, market, sell or render (or
assist any other person in developing, designing, producing, marketing, selling
or rendering) products or services competitive with those developed, designed,
produced, marketed, sold or rendered by the Company, including, without
limitation, advanced technology simulators and trainers used to support military
weapons systems; or
(ii) solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the clients,
customers or accounts of the Company, or prospective clients, customers or
accounts, of the Company that are known to him.
(b) If Murphy violates the provisions of Section 1(a), he
shall continue to be bound by the restrictions set forth in Section 1(a) until a
period of five years has expired without any violation of such provisions.
<PAGE> 2
2. NON-SOLICITATION.
(a) During the term of this Agreement, Murphy will not
directly or indirectly recruit, solicit or hire any employee of the Company, or
induce or attempt to induce any employee of the Company to terminate his/her
employment with, or otherwise cease his/her relationship with, the Company.
(b) If Murphy violates the provisions of Section 2(a), he
shall continue to be bound by the restrictions set forth in Section 2(a) until a
period of five years has expired without any violation of such provisions.
3. CONSIDERATION. In consideration of the covenants and
obligations of Murphy herein contained, the Company shall pay to Murphy cash
payments of $12,500 per quarter, payable in arrears on the last day of each
calendar quarter until the quarter ending March 31, 2003. Payment for any
partial quarter shall be prorated.
4. DEATH. Notwithstanding any other provision of this Agreement,
if Murphy dies during the term of this Agreement and prior to April 1, 2003,
Murphy's spouse at the time of death ("Spouse") shall be entitled to receive the
cash payments set forth in Section 3 above until the earlier to occur of (i)
April 1, 2003 and (ii) Spouse's death.
5. MISCELLANEOUS.
(a) NO CONFLICT. Murphy represents that the execution and
performance by him of this Agreement does not and will not conflict with or
breach the terms of any other agreement by which he is bound.
(b) NOT EMPLOYMENT CONTRACT. Murphy acknowledges that
this Agreement does not constitute a contract of employment.
(c) INTERPRETATION. If any restriction set forth in
Sections 1 or 2 is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too great
a range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which it may be enforceable.
(d) SEVERABILITY. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
(e) WAIVER OF RIGHTS. No delay or omission by the Company
in exercising any right under this Agreement will operate as a waiver of that or
any other right. A waiver or consent given by the Company on any one occasion is
effective only
-2-
<PAGE> 3
in that instance and will not be construed as a bar to or waiver of any right on
any other occasion.
(f) EQUITABLE REMEDIES. The restrictions contained in
this Agreement are necessary for the protection of the business and goodwill of
the Company and are considered by Murphy to be reasonable for such purpose.
Murphy agrees that any breach of this Agreement is likely to cause the Company
substantial and irrevocable damage and therefore, in the event of any such
breach, Murphy agrees that the Company, in addition to such other remedies which
may be available, shall be entitled to specific performance and other injunctive
relief.
(g) ASSIGNABILITY. The Company may assign this Agreement
to any other corporation or entity which acquires (whether by purchase, merger,
consolidation or otherwise) all or substantially all of the business and/or
assets of the Company.
(h) GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Delaware,
without regard to conflicts of law principles. Any action, suit or other legal
proceeding which is commenced to resolve any matter arising under or relating to
any provision of this Agreement shall be commenced only in a court of the State
of Delaware (or, if appropriate, a federal court located within Delaware), and
the Company and Murphy each consents to the jurisdiction of such a court.
MURPHY ACKNOWLEDGES THAT HE HAS CAREFULLY READ THIS AGREEMENT AND
UNDERSTANDS AND AGREES TO ALL OF THE PROVISIONS IN THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first set forth above.
ECC INTERNATIONAL CORP.
By: /s/ Merrill A. McPeak
-------------------------------
Name: Merrill A. McPeak
Title: Chairman of the Board
/s/ George W. Murphy
-----------------------------------
George W. Murphy
-3-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
ECC International Corp. and Subsidiaries (the "Company") of Forms S-8
(Registration Nos. 2-85483, 33-02768, 33-11904, 33-37224, 33-46671, 333-10725,
333-41861 and 333-53383) of our report dated October 12, 1998, which includes an
explanatory paragraph relating to substantial doubt about the Company's ability
to continue as a going concern, on our audits of the consolidated financial
statements of the Company as of June 30, 1998 and 1997, and for the fiscal years
ended June 30, 1998, 1997 and 1996, which report is included in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,830
<SECURITIES> 0
<RECEIVABLES> 8,097
<ALLOWANCES> 0
<INVENTORY> 5,202
<CURRENT-ASSETS> 41,388
<PP&E> 56,047
<DEPRECIATION> 35,053
<TOTAL-ASSETS> 64,358
<CURRENT-LIABILITIES> 30,003
<BONDS> 0
0
0
<COMMON> 832
<OTHER-SE> 33,437
<TOTAL-LIABILITY-AND-EQUITY> 64,358
<SALES> 52,618
<TOTAL-REVENUES> 52,618
<CGS> 48,915
<TOTAL-COSTS> 48,915
<OTHER-EXPENSES> 17,478
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,129
<INCOME-PRETAX> (14,604)
<INCOME-TAX> (2,195)
<INCOME-CONTINUING> (12,409)
<DISCONTINUED> (407)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,816)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
