<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27376
---------------
ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(617) 440-3333
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The registrant had 26,488,654 shares of common stock, $.01 par value,
outstanding as of July 31, 1996.
<PAGE> 2
INDEX
Part I - FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at December 31, 1995
and June 30, 1996 (unaudited)...............................................2
Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1995 and 1996 (unaudited).........................................3
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1995 and 1996 (unaudited).........................................4
Notes to Consolidated Financial Statements (unaudited)........................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................7
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.....................................................................12
ITEM 2. NONE.
ITEM 3. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................12
ITEM 5. NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................13
SIGNATURE ......................................................................................13
EXHIBITS
EXHIBIT 10.22 EMPLOYMENT AGREEMENT BY AND BETWEEN THE COMPANY AND JAMES ROUSOU
DATED APRIL 1,1996
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
</TABLE>
1
<PAGE> 3
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------------ ---------------
ASSETS (Note 2)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................................... $ 44,977 $ 24,344
Accounts receivable, net of allowance for doubtful
accounts of $1,709 and $1,661 .................................. 72,632 109,897
Inventory ......................................................... 17,270 22,155
Prepaids and other current assets ................................. 1,902 1,649
--------- ---------
Total current assets ....................................... 136,781 158,045
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software .................................... 11,629 14,601
Leasehold improvements ............................................ 1,935 2,186
Furniture, fixtures and equipment ................................. 4,130 4,710
--------- ---------
17,694 21,497
Less -- Accumulated depreciation and amortization ................. 8,740 10,471
--------- ---------
8,954 11,026
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION ........................... 28,137 27,310
OTHER ASSETS AND DEFERRED COSTS, NET OF ACCUMULATED
AMORTIZATION ...................................................... 359 664
--------- ---------
$ 174,231 $ 197,045
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ................................................... $ 45,611 $ 63,288
Accounts payable .................................................. 33,417 30,730
Accrued expenses and other current liabilities .................... 10,077 8,921
Current portion of capital lease obligations ...................... 185 109
--------- ---------
Total current liabilities .................................. 89,290 103,048
--------- ---------
OTHER DEFERRED LIABILITIES .......................................... 43 41
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ................... 48 17
--------- ---------
91 58
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; Authorized -- 10,000,000 shares --
Issued and outstanding -- None................................. -- --
Common stock, $.01 par value
Authorized -- 50,000,000 shares --
Issued and outstanding -- 25,510,297 and 26,451,760 shares .... 255 265
Additional paid-in capital ........................................ 91,113 97,886
Accumulated deficit ............................................... (6,494) (4,218)
Cumulative translation adjustment ................................. (24) 6
--------- ---------
Total stockholders' equity ................................. 84,850 93,939
--------- ---------
$ 174,231 $ 197,045
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(Note 2) (Note 2)
<S> <C> <C> <C> <C>
Net sales ................................ $ 62,436 $ 146,305 $ 105,365 $ 287,721
Cost of sales ............................ 54,409 129,265 91,607 254,336
--------- --------- --------- ---------
Gross profit ............................. 8,027 17,040 13,758 33,385
Expenses:
Selling, general and administrative .... 7,805 14,226 13,565 28,046
Research and development ............... 330 300 606 585
--------- --------- --------- ---------
Total expenses ........................... 8,135 14,526 14,171 28,631
--------- --------- --------- ---------
Operating profit (loss) .................. (108) 2,514 (413) 4,754
Interest expense ......................... (374) (962) (585) (1,769)
Interest income and other, net ........... 29 418 50 983
--------- --------- --------- ---------
Income (loss) before income taxes ........ (453) 1,970 (948) 3,968
Provision for income taxes ............... 138 818 223 1,692
========= ========= ========= =========
Net income (loss) ........................ $ (591) $ 1,152 $ (1,171) $ 2,276
========= ========= ========= =========
Net income (loss) per share .............. $ (.03) $ .04 $ (.07) $ .08
========= ========= ========= =========
Weighted average common shares outstanding 17,423 30,079 16,602 29,604
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Note 2)
<S> <C> <C>
Net income (loss) ................................................. $ (1,171) $ 2,276
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization ................................... 1,140 2,980
Provision for doubtful accounts ................................. 246 230
Other deferred liabilities ...................................... -- (2)
Changes in current assets and liabilities, net of acquisitions --
Accounts receivable ........................................... (19,469) (37,518)
Inventory ..................................................... 207 (4,901)
Prepaids and other current assets ............................. (5) 236
Accounts payable .............................................. (1,455) (2,593)
Accrued expenses, other current liabilities and other ......... (4,480) (1,094)
-------- --------
Net cash used in operating activities ...................... (24,987) (40,386)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...................... (1,117) (3,924)
Increase in other assets and deferred costs ....................... (337) (617)
Purchase of Lantec Holdings Limited ............................... (6,452) --
Other investing activities ........................................ 153 216
-------- --------
Net cash used in investing activities ....................... (7,753) (4,325)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of preferred stock ........................................... 19,063 --
Net borrowings under lines of credit .............................. 24,093 17,660
Sale of common stock .............................................. -- 6,240
Repayment of capital lease obligations ............................ (94) (107)
Proceeds from stock option exercises .............................. -- 327
Repayment of Computerware shareholder loans ....................... (5,000) --
-------- --------
Net cash provided by financing activities ................... 38,062 24,120
-------- --------
FOREIGN EXCHANGE EFFECT ON CASH ..................................... 2 (42)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................. 5,324 (20,633)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ............................................... 5,320 44,977
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 10,644 $ 24,344
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ..................................................... $ 592 $ 1,719
======== ========
Income taxes paid ................................................. $ -- $ 69
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Retirement of fully depreciated assets ............................ $ 1,304 $ --
======== ========
(See Note 2 for noncash acquisition information)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Elcom
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of June 30, 1996, and the results of operations and cash flows
for the periods ended June 30, 1995 and 1996. The results of operations for
these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the year as a whole. Certain financial
information that is normally included in financial statements prepared in
accordance with generally accepted accounting principles, but which is not
required for interim reporting purposes, has been omitted. For further
information, reference should be made to the consolidated financial statements
and accompanying notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and the Company's reports concerning the AMA
(U.K.) Limited acquisition on Form 8-K, which was filed on March 12, 1996 and
amended on May 3, 1996, as well as the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
2. ACQUISITION
AMA (U.K.) Limited
On February 29, 1996, the Company completed the acquisition of AMA
(U.K.) Limited ("AMA"), a remarketer of personal computer products in the United
Kingdom. As consideration for this acquisition, the Company issued 3,247,371
shares of common stock. The acquisition was a share-for-share exchange
transaction and has been accounted for as a pooling-of-interests. Accordingly,
the financial position and results of operations of the Company have been
combined with those of AMA in fiscal 1996 and retroactively restated for all
prior periods presented to give effect to the AMA acquisition.
The Company's unaudited pro forma condensed consolidated quarterly
statement of operations information for 1995 giving effect to the AMA
acquisition is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ..................... $42,929 $62,436 $97,898 $108,160 $311,423
Gross profit .................. 5,731 8,027 12,353 13,271 39,382
Operating profit (loss) ....... (305) (108) 1,043 1,614 2,244
Net income (loss) ............. (580) (591) (83) 350 (904)
Pro forma net income (loss) per
share ...................... $ (.04) $ (.03) $ (.--) $ .01 $ (.05)
Pro forma weighted average
common shares outstanding .. 15,781 17,423 23,201 25,386 20,001
</TABLE>
5
<PAGE> 7
3. UNDERWRITER OVER-ALLOTMENT OPTION
On January 19, 1996, the underwriters of the Company's initial public
offering exercised their over-allotment option and purchased 800,000 shares of
common stock at $11 per share. Of the 800,000 shares sold, 629,489 were sold by
the Company and 170,511 were sold by certain stockholders of the Company. Net
proceeds to the Company as a result of this transaction amounted to $6.2
million.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share during 1995 and 1996 are based on the
weighted average number of common and common equivalent shares outstanding
during each year, restated to reflect the 3,247,371 shares issued in connection
with the AMA transaction as outstanding during all periods presented. For 1995,
all shares, options and warrants issued during the 12 months immediately
preceding the Company's initial public offering in December 1995, were treated
as if they had been outstanding for all periods, calculated in accordance with
the treasury stock method. In addition, 1995 share information assumes the
conversion of preferred stock into common stock (which occurred in connection
with consummation of the Company's initial public offering) as if the conversion
occurred on the earlier of January 1, 1995 or when such stock was issued.
5. COMMITMENTS AND CONTINGENCIES
On May 30, 1996, the Company filed a complaint in the Civil Division of
the Court of Common Pleas of Bucks County Pennsylvania (Civil Action No.
96004108-22-05) against John R. Kovalcik, Sr., John R. Kovalcik, Jr., James R.
Kovalcik, Thomas M. Kovalcik and David E. Kovalcik (collectively the "Kovalciks"
or the "Defendants"), the principal former owners of Computerware Business Trust
("Computerware"), which the Company acquired by a merger in February 1995. As of
May 29, 1996, none of the Kovalciks, certain of whom had been terminated by the
Company, were employed by the Company, including John R. Kovalcik, Jr., a former
Corporate Executive Vice President and President of Catalink Direct, Inc., who
resigned from the Company's Board of Directors effective April 24, 1996. The
Company's complaint, which was subsequently amended, seeks to: (1) enforce
confidentiality agreements/obligations and prevent the misappropriation of
proprietary Company information and Company property, (2) obtain a declaration
from the Court that certain of the Kovalciks' rights under stock option
agreements are limited; (3) enforce the covenants of the merger agreement to
determine the final amount of the purchase price of Computerware, and (4)
recover damages arising from various causes including the Defendant's fraudulent
misrepresentations, and certain breaches of the merger agreement.
The Defendants have counterclaimed against the Company seeking to: (1)
rescind the merger agreement on the purported grounds that it was not legal, or
in the alternative to receive unspecified additional purchase price
consideration; (2) receive unspecified damages for: fraud, breaches of the
merger agreement and of employment and stock option agreements, wrongful
termination, conversion, misappropriation of trade secrets, unfair competition,
and defamation; and (3) have the Court declare the status of the rights of
certain Kovalciks under their stock option agreements as being more favorable
than the Company contends.
The Company believes that the Defendants' Counterclaims are without
merit and intends to vigorously defend against them. The Company, based on its
investigations and inquiries, in conjunction with consultations with its legal
counsel, has found no precedent which supports the contention that the merger
was not legal and therefore, believes that the possibility of the Computerware
merger being rescinded by the Court is remote. However, if Defendants were to
prevail on this claim, it would have a material adverse effect on the Company.
The outcome of the other Counterclaims is not predictable, however the Company
does not believe the final resolution of these Counterclaims will have a
material adverse effect on its financial position.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
To date, the Company's net sales have been derived substantially from
the sale of PC products by the Company's wholly-owned subsidiary, Catalink
Direct, Inc. ("Catalink") and its subsidiaries to corporate customers through
the Company's proprietary Personal Electronic Catalog and Ordering System
("PECOS") technology and through telephone and facsimile orders. In addition,
the Company, through its wholly-owned subsidiary, Elcom Systems, Inc. ("Elcom"),
generates revenues from licensing its PECOS technology and providing related
services to other companies.
The Company was founded in 1992, commenced operations in December 1993
and has experienced rapid growth. The Company achieved its growth by offering
its PECOS technology to its Catalink customers and via their subsequent use of
PECOS, and by various marketing efforts, including the expansion of its direct
sales force nationwide; and by the acquisition of four PC products remarketers.
In October 1994, the Company completed the acquisition of a Connecticut-based PC
products remarketer, which was accounted for on a pooling-of-interests basis.
Accordingly, the results of this entity (which was merged into Catalink in
December 1995) have been included with the Company's results since the date of
the Company's organization. In February 1995, the Company acquired Catalink
Direct (Pennsylvania), Inc., formerly known as Computerware Business Trust
("Computerware"), a Bristol, Pennsylvania-based PC products remarketer. In June
1995, the Company acquired all of the equity of a PC products remarketer in the
United Kingdom operating as Lantec Information Services Limited ("Lantec"). The
Computerware and Lantec acquisitions have been accounted for as purchase
transactions. In February 1996, the Company completed the acquisition of AMA
(U.K.) Limited ("AMA"), a remarketer of PC products in the United Kingdom, which
has been accounted for on a pooling-of-interests basis. Accordingly, AMA's
results have been included with the Company's results since the date of the
Company's organization. The Company's acquisition strategy includes utilizing an
acquired company's sales force to offer PECOS to prospective customers in those
new markets and, over a period of time, to transition the acquired company's
customers to the PECOS system. The Company intends to acquire additional
companies either to expand its customer base and the use of PECOS or to
complement its technology, although there can be no assurance as to the success
or timing of any such acquisitions.
RESULTS OF OPERATIONS
Quarter ended June 30, 1996 compared to the quarter ended June 30, 1995.
Net Sales. Net sales for the quarter ended June 30, 1996 increased to
$146.3 million from $62.4 million in the same period of 1995, an increase of
$83.9 million or 134%. Net sales for the three months ended June 30, 1996
included a full quarter of sales for Lantec which was acquired in late June
1995. Accordingly, Lantec's sales were included in the 1995 quarter from June
22, 1995 (date of acquisition) to June 30, 1995. Net sales for Catalink alone,
excluding the results of Computerware, Lantec, Elcom Systems and AMA, grew from
$25.2 million in the 1995 quarter to $71.2 million in the 1996 quarter, a 183%
increase. This increase is generally attributable to increased sales staffing,
the use of the Company's PECOS technology to market to potential customers and
the consequent generation of incremental customers and related sales, and to a
certain extent, from increased sales to existing customers. Net sales of the
Company's United Kingdom based operations (Lantec and AMA) increased from $12.7
million in the 1995 quarter (including sales of Lantec only for the nine days it
was owned) to $38.4 million in the second quarter of 1996.
Gross Profit. Gross profit for the quarter ended June 30, 1996
increased to $17.0 million from $8.0 million in the 1995 quarter, an increase of
$9.0 million or 113%. The increase in gross profit dollars generated resulted
from the substantial growth in net sales. Gross profit, including the
contribution from acquisitions, as a percent of net sales decreased from 12.9%
in the 1995 quarter to 11.6% in the 1996 quarter. The Company anticipates that
its gross profit percentage will continue to decline because Catalink's business
strategy includes
7
<PAGE> 9
generating substantial incremental revenue from both new and existing large
volume corporate accounts which typically generate lower margins than other
customers.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the quarter ended June 30, 1996 increased
to $14.2 million from $7.8 million in the 1995 quarter, an increase of $6.4
million or 82%. This increase is attributable primarily to the increase in the
Company's work force and the expenses of the acquired companies. Other SG&A
expenses also increased as the Company continued to invest in administrative
infrastructure to support its growth, including the ongoing development and
implementation of its new management information system which was purchased and
is being implemented to allow the Company to operate more efficiently by
providing an information systems backbone for the Company and to effectuate the
consolidation of the information and other internal systems of certain
acquisitions. As a result, the Company's level of SG&A expenses in absolute
dollars and as a percentage of sales may be higher than anticipated, primarily
because the new management information system must be fully operational in order
to fully consolidate certain SG&A functions of certain acquired entities. The
Company is also maintaining various manual processes and associated personnel to
facilitate its actual and anticipated growth and will continue to do so until
its new management information system is fully functioning in 1997. Given a
phased implementation, certain redundant overheads may be eliminated prior to
such time. Nonetheless, SG&A expenses decreased as a percentage of net sales for
the quarter ended June 30, 1996 to 9.7%, from 12.5% in the comparable 1995
quarter, reflecting the impact of the increase in net sales, as the Company
transitioned out from its development stage.
Research and Development Expense. Research and development expense has
remained relatively constant between 1995 and 1996. The Company's research and
development expense is focused on developing incremental functionality and
features for its PECOS technology, including modifications to allow
communication using the Internet, the continued development of a browser
compliant version of its PECOS technology, and the development of Java enabled
applets, for license to other companies. The Company expects to continue
investing significant amounts in research and development.
Interest Expense. Interest expense for the quarter ended June 30, 1996
increased to $962,000 from $374,000 in the comparable period of 1995. Interest
expense in both years results from floor plan line of credit borrowings in
support of the Company's accounts receivable and inventory and for 1996 is
reflective of the substantial increase in the Company's net sales referred to
above and consequent borrowings required to support the increased balances of
accounts receivable and inventory.
Interest Income and Other, Net. Interest income and other, net,
increased from $29,000 in the 1995 quarter to $418,000 in the quarter ended June
30, 1996. This increase is a direct result of investment income generated by
investment of available net proceeds from both the sale of the Company's common
stock in its initial public offering in December 1995 and from the sale of
629,489 additional shares of common stock upon exercise of the underwriters'
over-allotment option in January 1996.
Income Tax Provision. The income tax provision in 1995 primarily
relates to the income taxes of AMA, while the 1996 provision primarily relates
to income taxes of AMA and Lantec.
Net Income (Loss). The Company reported net income for the quarter
ended June 30, 1996 as a consequence of the factors described herein.
Six months ended June 30, 1996 compared to the six months ended June 30, 1995.
Net Sales. Net sales for the six months ended June 30, 1996 increased
to $287.7 million from $105.4 million in the same period of 1995, an increase of
$182.3 million or 173%. Net sales for the six month period ended June 30, 1996
included sales of Computerware and Lantec which were acquired in February and
June 1995, respectively. Net sales for Catalink alone, excluding Computerware,
Lantec, Elcom Systems, and the AMA acquisition grew from $41.7 million to $132.4
or 217% for the six months ended June 30, 1996. This increase is generally
attributable to increased sales staffing, the use of the Company's PECOS
technology to market to potential customers and the consequent generation of
incremental customers and related sales, and to a certain
8
<PAGE> 10
extent, from increased sales to existing customers. Net sales of the Company's
United Kingdom based operations for the six month period ended June 30, 1996
increased to $84.0 million from $22.7 in the comparable period one year ago,
reflecting the late June 1995 acquisition of Lantec, and the inclusion of its
financial results for only nine days in the 1995 period.
Gross Profit. Gross profit for the six months ended June 30, 1996
increased from $13.8 million to $33.4 million, an increase of $19.6 million or
142% compared to the comparable period one year ago. The increase in gross
profit dollars generated resulted from the substantial growth in net sales.
Gross profit, including the contribution from acquisitions, as a percent of net
sales decreased from 13.1% in 1995 to 11.6% in 1996. The Company anticipates
that its gross profit percentage will continue to decline because Catalink's
business strategy includes generating incremental revenue from both new and
existing large volume corporate accounts which typically generate lower than
average margins.
Selling, General and Administrative Expenses. SG&A expenses for the six
months ended June 30, 1996 increased to $28.0 million from $13.6 million in the
comparable 1995 six month period, an increase of $14.4 million or 106%. This
increase is attributable primarily to the increase in the Company's work force
and the expenses of the acquired companies, and also reflects approximately
$650,000 of non-recurring expenses relative to the AMA transaction which has
been accounted for on a pooling-of-interests basis. Other SG&A expenses also
increased as the Company continued to invest in administrative infrastructure to
support its growth, including the ongoing development and implementation of its
new management information system. Until such new system is fully operational,
which is expected to occur in 1997, the Company will be required to maintain
redundant overhead of certain acquired entities, as well as additional personnel
and manual support processes to facilitate its actual and anticipated growth in
volume. Nonetheless, SG&A expenses decreased as a percentage of net sales for
the six months ended June 30, 1996 to 9.7%, from 12.9% in the comparable 1995
period, reflecting the impact of the increase in net sales and the slower growth
in expenses relative to such increase in net sales.
Research and Development Expense. Research and development expense has
remained relatively constant between 1995 and 1996. The Company's research and
development expense is focused on developing incremental functionality and
features of the proprietary PECOS technology, including modifications to allow
communication using the Internet, the continued development of a browser
compliant version of its PECOS technology, and the development of Java enabled
applets for license to other companies. The Company expects to continue
investing significant amounts in research and development.
Interest Expense. Interest expense for the six month period ended June
30, 1996 increased to $1.8 million from $.6 million in the comparable period of
1995. Interest expense in both years results from floor plan borrowings in
support of the Company's accounts receivable and inventory and the substantial
increase in 1996 over 1995 is reflective of the substantial increase in the
Company's net sales activity referred to above, and consequent borrowings
required to support the increased balances of accounts receivable and inventory.
Interest Income and Other, net. Interest income and other, net for the
six months ended June 30, 1996 increased to $983,000 from $50,000 in the same
period of 1995. This increase is a direct result of the investment income
generated from the available net proceeds of both the sale of the Company's
common stock in its initial public offering in December 1995 and from the sale
of 629,489 additional shares of common stock upon exercise of the underwriters'
over-allotment option in January 1996.
Income Tax Provision. The income tax provision in 1995 primarily
relates to the income taxes of AMA, while the 1996 provision relates to income
taxes of AMA and Lantec, as well as certain current state income taxes payable
by the Company.
Net Income (Loss). The Company reported net income for the six month
period ended June 30, 1996 as a consequence of the factors described herein.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six month period ended
June 30, 1996 was $40.4 million, including $37.5 million relating to increases
in accounts receivable, resulting from the Company's increase in net sales
during the 1996 period. Net cash used for investing activities was $4.3 million,
consisting of $3.9 million in additions to property, equipment and software and
an increase of $.6 million in other assets and deferred costs. Net cash provided
by financing activities was $24.1 million, including $6.2 million in net
proceeds from the Company's sale of common stock to the underwriters upon
exercise of their over-allotment option, $327,000 in proceeds from the exercise
of stock options and a $17.7 million net increase in borrowings under floor plan
lines of credit.
Net cash used in operating activities for the six month period ended
June 30, 1995 was $25.0 million and included the net operating cash impact of
Computerware and Lantec after they were acquired, which occurred in February and
June 1995, respectively. Net cash used in operating activities also included
$19.5 million relating to increases in accounts receivable. Net cash used in
1995 investing activities was $7.8 million and included $6.5 million related to
the purchase of Lantec and $1.1 million of additions to property, equipment and
software. The Company received a net total of $38.1 million from financing
activities in the first half of 1995, including $19.1 million from the sale of
Series B Convertible Preferred Stock and $24.1 million from a net increase in
borrowings under the Company's floor plan lines of credit. Financing activities
in 1995 also reflect a $5 million repayment of loans to the former shareholders
of Computerware.
At June 30, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $24.3 million and floor plan lines of credit from
Deutsche Financial Services Corporation ("DFSC"). The DFSC facility remains
available, and has been increased to $100 million, and effective July 1, 1996
the interest rate has been reduced to the prime rate, all subject to negotiation
of final covenants and agreements. Availability of borrowings is based on DFSC's
determination as to eligible accounts receivable and inventory. At June 30,
1996, the Company's borrowings from DFSC on its floor plan line of credit were
$59.6 million, which approximated the Company's availability based on eligible
accounts receivable and inventory at that date. During the first half of 1996,
interest was payable monthly at the prime rate (8.25% at June 30, 1996) plus 1%,
although approximately one-half of the Company's initial borrowings do not bear
interest until after 30 days have lapsed. The DFSC line of credit is secured
primarily by the Company's inventory and accounts receivable, although
substantially all of the Company's other assets are also pledged in support of
the facility. The Company is dependent upon the DFSC line of credit to finance
increases in its eligible accounts receivable arising from sales of PC products
as well as its inventory purchases and hence, the Company expects that its
borrowings under such facility will need to continue to increase substantially
in order to support the Company's anticipated growth. There can be no assurance,
however, that the DFSC line of credit will continue to be available, or be
increased to support the Company's requirements. The DFSC line of credit limits
borrowings to defined percentages of eligible inventory and accounts receivable
and contains customary covenants, including financial covenants with respect to
the Company's net worth and debt-to-equity ratios, and customary default
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company also has a $2 million floor plan
financing agreement with IBM Credit Corporation ("IBMCC") to support purchases
of IBM products. The DFSC and IBMCC borrowing facilities relate to domestic
operations only. At June 30, 1996, the Company's borrowings from IBMCC on its
floor plan line of credit were $1.7 million.
Lantec maintains a financing facility with Kellock Limited, an
affiliate of the Bank of Scotland, which provides for borrowings of up to
approximately $7 million. Borrowings bear interest at the Bank of Scotland base
rate (5.75% at June 30, 1996) plus 1.375% and are primarily secured by accounts
receivable.
As of June 30, 1996, the Company had borrowings aggregating
approximately $63.3 million outstanding under the aforementioned facilities.
The Company is evaluating a possible public offering of common stock of
Elcom Systems, Inc., its wholly-owned technology subsidiary which developed and
licenses its PECOS electronic commerce enabling
10
<PAGE> 12
software technology. The offering would only be made pursuant to a prospectus
included in a registration statement which would be filed with the Securities
and Exchange Commission. There can be no assurances as to the likelihood, the
success, the valuation, the timing or the size of any such possible offering. In
order to support such a possible offering, the Company would likely be required
to continue to invest higher than anticipated amounts in additional sales and
support staffing of Elcom Systems.
The Company has filed a complaint against the principal former owners
of Computerware, who in turn have filed counterclaims against the Company. The
Company believes that this complaint will be settled out of court and does not
anticipate that the final resolution of this matter will have a material adverse
effect on its financial position, although there can be no assurance thereof.
See Part II, Item 1. Legal Proceedings, and Note 5 to the Consolidated Financial
Statements.
The Company's principal commitments consist of leases on its office
facilities, obligations under lines of credit, which are demand facilities and
are treated as current liabilities, and capital leases. Future growth of the
Company will require ongoing investment in property, equipment and software.
The Company believes that its cash and cash equivalents, together with
its existing sources of liquidity and cash generated from operations, will be
sufficient to meet its working capital and capital expenditure requirements for
the next year, so long as its financing sources continue to make lines of credit
available. However, as the Company's business strategy includes growth through
acquisitions, additional sources of financing may be required to accomplish the
Company's growth plans.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q are forward looking statements
that involve a number of risks and uncertainties which could cause the Company's
future results of operations to differ materially from those anticipated,
including: the continued acceptance of the Company's PECOS technology, the
impact of competitive products and pricing, business conditions and growth in
the PC industry, the results of pending litigation, general economic and stock
market conditions and the other risks detailed from time to time in this
Quarterly Report on Form 10-Q and in the Company's SEC reports, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
the prospectus included as part of the S-1 Registration Statement declared
effective under the Securities Act of 1933 on December 19, 1995.
11
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 30, 1996, the Company filed a complaint in the Civil Division of
the Court of Common Pleas of Bucks County Pennsylvania (Civil Action No.
96004108-22-05) against John R. Kovalcik, Sr., John R. Kovalcik, Jr., James R.
Kovalcik, Thomas M. Kovalcik and David E. Kovalcik (collectively the "Kovalciks"
or the "Defendants"), the principal former owners of Computerware Business Trust
("Computerware"), which the Company acquired by a merger in February 1995. As of
May 29, 1996, none of the Kovalciks, certain of whom had been terminated by the
Company, were employed by the Company, including John R. Kovalcik, Jr., a former
Corporate Executive Vice President and President of Catalink Direct, Inc., who
resigned from the Company's Board of Directors effective April 24, 1996. The
Company's complaint, which was subsequently amended, seeks to: (1) enforce
confidentiality agreements/obligations and prevent the misappropriation of
proprietary Company information and Company property, (2) obtain a declaration
from the Court that certain of the Kovalciks' rights under stock option
agreements are limited; (3) enforce the covenants of the merger agreement to
determine the final amount of the purchase price of Computerware, and (4)
recover damages arising from various causes including the Defendant's fraudulent
misrepresentations, and certain breaches of the merger agreement.
The Defendants have counterclaimed against the Company seeking to: (1)
rescind the merger agreement on the purported grounds that it was not legal, or
in the alternative to receive unspecified additional purchase price
consideration; (2) receive unspecified damages for: fraud, breaches of the
merger agreement and of employment and stock option agreements, wrongful
termination, conversion, misappropriation of trade secrets, unfair competition,
and defamation; and (3) have the Court declare the status of the rights of
certain Kovalciks under their stock option agreements as being more favorable
than the Company contends.
Pursuant to a stipulation filed with the Court on June 5, 1996, the
Defendants agreed to: (1) maintain the confidentiality of proprietary Company
information; (2) return all Company property in their possession; (3) not
solicit Company employees or customers; and (4) reprogram a sales software
application to permanently eliminate a "functionality interruption" which had
been programmed into this sales software application by a Defendant to disable
the functionality of that software application at a specific time after this
Defendant had left the employ of the Company.
The Company believes that the Defendants' Counterclaims are without
merit and intends to vigorously defend against them. The Company, based on its
investigations and inquiries, in conjunction with consultations with its legal
counsel, has found no precedent which supports the contention that the merger
was not legal and therefore, believes that the possibility of the Computerware
merger being rescinded by the Court is remote. However, if Defendants were to
prevail on this claim, it would have a material adverse effect on the Company.
The outcome of the other Counterclaims is not predictable, however the Company
does not believe the final resolution of these Counterclaims will have a
material adverse effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company's stockholders was held on May 30,
1996 at which the nominees for election to the Company's Board of Directors were
voted on and duly elected by a majority of stockholders present in person or by
proxy and entitled to vote thereon. The following individuals were elected for a
three year term ending at the 1999 Annual Meeting by the following margins:
Number of Shares
--------------------------------------------------
For Withheld
---------------------- -----------------------
John W. Ortiz 18,170,078 1,600
James Rousou 18,170,078 1,600
Following the meeting, each of Messrs. Crowell, Cordsen, Smith and
arries also continued as Directors of the Company.
12
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(10.22) Employment Agreement by and between the Company and James
Rousou dated April 1, 1996
(11) Statement re: computation of per share earnings.
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K.
On May 3, 1996, the Company filed a Form 8-K/A-1 to include certain
financial statements and pro forma financial information related to the
acquisition of AMA (U.K.) Limited. This amended a Current Report on
Form 8-K which was originally filed by the Company on March 12, 1996.
SIGNATURE
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.
Elcom International, Inc.
(Registrant)
Date: August 13, 1996 By: /s/ Laurence F. Mulhern
------------------------------
Laurence F. Mulhern
Chief Financial Officer and Treasurer
13
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and effective as of the 1st day of
April, 1996, by and between Elcom International, Inc. ("Elcom" or the
"Company"), a Delaware corporation with its principal place of business at Ten
Oceana Way, Norwood, Massachusetts 02062 (the "Company"), and James Rousou,
currently residing in temporary quarters in the Boston, Massachusetts area (the
"Executive").
WITNESSETH:
WHEREAS, the Executive wishes to become employed by the
Company as the Chief Executive Officer of one of its subsidiaries; and
WHEREAS, the Company desires to employ Executive consistent
with the terms of this Agreement, and to ensure, to the extent possible, that
certain knowledge gained by the Executive in association with his employment
with the Company is not used to the detriment of the Company; and
WHEREAS, the Executive and the Company (the "Parties") desire
to enter into an agreement expressly indicating the terms and conditions of
their relationship.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the Company and the Executive agree as follows:
1. Duties. The Company hereby employs Executive to be Chief
Executive Officer of Catalink Direct, Inc. ("Catalink"), and Corporate Executive
Vice President of the Company. Executive shall report directly to Robert J.
Crowell the Chairman and Chief Executive Officer of the Company and Chairman of
Catalink ("Chairman"). During the course of his employment, Executive shall have
the responsibility to perform such duties, consistent with such position, as
generally described below and as may be assigned to him by the Chairman of
Catalink and/or the Chairman and Chief Executive Officer ("CEO") of Elcom
International, Inc. ("EI") and/or the Board of Directors of the Company. During
the Employment Period, Executive agrees to devote full business time and best
efforts to the business activities and welfare of the Company.
<PAGE> 2
Executive will assume direct line responsibilities for
Catalink. The Chairman reserves the right to reassign duties of the Executive as
appropriate or necessary. It is anticipated that Executive may be assigned
additional responsibilities by the Chairman and CEO of Elcom if appropriate as
determined by the Chairman and/or by the Board of Directors.
2. Term. This Agreement's term shall begin on the date hereof
and continue for eighteen months (the "Term") and terminate on September 30,
1997 but will automatically renew each term unless the Executive or the Company
notifies the other party six months prior to the end of each employment year
(ending April 1st).
3. Salary. During the course of employment for the term
specified in Section 2, unless sooner terminated hereunder (the "Employment
Period"), the Company will pay Executive for his performance of the duties
specified herein an annual base salary of at least $190,000 per year payable in
the manner that the Company normally pays its employees.
4. Board of Directors. Notwithstanding any other provision
herein contained, the Company shall cause Executive to be nominated for election
to serve as a Director of, the Board of Directors of the Company. There can be
no assurance however, that the shareholders of the Company will vote Executive
on the Board.
5. Benefits.
A. Vacations/Time Off. During the course of employment,
Executive shall be entitled to accrue five (5) weeks of time off for vacations,
to be taken at a time or times acceptable to the Chairman and otherwise
consistent with the terms and conditions of this Agreement.
B. Additional Compensation. Executive shall be eligible to
participate in a bonus program, designed by the Chairman after consultations
with Executive, whereby Executive shall have the opportunity to earn a bonus of
up to 30% of his then-current annual base salary based on goals and objectives
assigned by the Chairman, with a (preliminary) bi-annual advance of such bonus
to be paid to Executive based on progress towards achievement of such goals as
determined by the Chairman and/or the Compensation Committee. This bonus program
shall be superseded when the Company implements its Executive Profit Performance
Bonus Plan in which Executive shall be eligible to participate and in which
Executive shall have the opportunity to achieve bonus levels no less than those
in effect at such time; provided that no guarantee of the achievement of such
bonus opportunities shall be inferred. The Executive shall also be eligible to
participate in incentive, profit-sharing, annual cash bonus, deferred
compensation,
2
<PAGE> 3
incentive stock options, supplemental retirement and any other similar plans, if
any, maintained by the Company for the benefit of its executives generally, in
accordance with the eligibility and other terms thereof and at the discretion of
the Board of Directors and/or the Compensation Committee thereof.
C. Other Executive Fringe Benefits. The Executive shall be
included to the extent eligible thereunder in Company benefit plans providing
group life insurance, hospitalization, medical, pension, financial services and
any and all other similar or comparable benefits at least to the extent they may
be in effect for other executives of the Company generally from time to time
during the Employment Period.
D. Fringe Benefits. Nothing in this Agreement shall adversely
affect the rights of the Executive or his beneficiaries under the present or any
future retirement, profit-sharing, insurance, or other fringe benefit or
compensation plans or arrangements which the Company now has or may adopt for
its employees in which Executive is a participant, and no rights of the
Executive thereunder shall be forfeited by any action set forth in this
Agreement unless so provided in such plans or arrangements.
E. Payment of Compensation. The annual base salary described
in Section 3 hereof shall be paid throughout the term of this Agreement subject
to the following:
i. Such compensation shall terminate upon the
Executive's death, disability (as defined in
Section 6.B), resignation, or upon the
termination of the Executive's employment by
the Company "For Cause" as described in
Section 6.E hereof; and
ii. Such compensation shall not terminate, but
rather shall continue to be paid in
accordance with Section 7 for a period of
twelve months upon the termination of the
Executive's employment by the Company
"Without Cause" (defined as other than For
Cause or Death or "Disability" (as defined
in Section 6.B)).
6. Termination of Employment.
A. Death.
If the Executive shall die during the term of this Agreement,
the duties of the Company and the Executive, one to the other, under this
Agreement shall terminate as of the date of the Executive's death.
3
<PAGE> 4
B. Disability.
If the Executive shall become "disabled" (as herein defined)
during the term of this Agreement, the duties of the Company and the Executive,
one to the other, under this Agreement shall terminate as of the date the
Executive is determined to be disabled, except that the provisions of Sections 9
through 13 hereof shall survive any such termination. The term "disabled" as
used in this Agreement shall mean Executive's inability, due to a mental or
physical condition, to continue to provide services to the Company substantially
consistent with past practice for a period of at least ninety (90) consecutive
days, as evidenced by a written certification as to such condition from a
physician (which shall not be Executive's physician) mutually acceptable to the
Executive and the Company's Board of Directors, using reasonable good faith
judgment.
C. Continuation of Executive Benefits.
The death, disability or other termination of employment of
the Executive, whether or not voluntary shall not adversely affect the Executive
or his beneficiaries' rights to any then-vested benefits under any life
insurance, death benefit, pension, profit sharing, stock option, medical,
deferred compensation, supplemental executive retirement plan or other employee
benefit plan or arrangement except as may be provided in such plan or
arrangement, and if termination of employment occurs by reason of Executive's
death, such continued benefits shall be paid to his estate or designated
beneficiaries.
D. Resignation.
If the Executive voluntarily leaves the employ of the Company
during the term of this Agreement, the duties of the Company and the Executive,
one to the other, under this Agreement shall terminate as of the date of the
Executive's termination of employment, except as provided in Section 6.F and
except that the provisions of Sections 9 through 13 hereof shall survive any
such termination.
4
<PAGE> 5
E. Termination by Company.
The Company may terminate the Executive's employment at any
time "For Cause" (as hereafter defined), in which case the duties of the Company
and the Executive, one to the other, under this Agreement shall terminate as of
the date of the Executive's termination of employment, except that the
provisions of Sections 9 through 13 hereof shall survive any such termination.
Executive may not be terminated "without cause" without a majority vote of the
outside members of the Board of Directors in which case, the duties of the
Company and the Executive, one to the other, under this Agreement shall
terminate as of the date of the Executive's termination of employment subject to
the Company providing any continuing payments specified in Section 5, and except
that the provisions of Sections 9 through 13 hereof shall survive any such
termination.
As used herein, the words "For Cause" shall be deemed to mean
the following: (i) the Executive's alleged involvement in any felony, or crime,
via indictment or written complaint, or any alleged crime in connection with his
employment by the Company (including theft of Company assets) which may cause
the Company or any affiliated company a detriment determined by the Chairman or
the Board of Directors; or (ii) the Executive's refusal to submit to a medical
examination within forty-five (45) days of being directed to do so in writing by
the Board of Directors to determine whether the Executive is disabled under
Section 6.B hereof; or (iii) gross insubordination or the Executive's failure to
take actions permitted by law and necessary to preserve the welfare of the
Company, implement strategies or policies of the Company which the Chairman has
communicated to him and which are consistent with his position and duties,
following 24 hours written warning of such failure; or (iv) any condition which
either resulted from the Executive's drunkenness or use of any drug or narcotic,
or resulted from any injury which drunkenness or drug or narcotic use or self
inflicted injury has adversely affected the Executive's performance; or (v)
acting in breach or contravention of the confidentiality, non-competition,
non-disclosure or non-solicitation covenants set forth in Sections 10, 11 and 12
hereof.
F. Notice of Termination.
Any termination of the Executive's employment by the Company
or by the Executive under Sections 6.D or E above shall be communicated by
written Notice of Termination to the other party hereto, which shall set forth
the effective date and time of such termination (not earlier than the date of
mailing, or delivery by other means, of the notice).
5
<PAGE> 6
7. Compensation Upon Involuntary Termination Other Than For
Cause. If the Executive's employment with the Company shall be terminated (i)
during the Employment Period by the Company other than For Cause or Death or
Disability (as defined in Section 6.B); then the Executive shall be entitled to
the severance payment provided below:
i. the Company shall pay the Executive the
amount described in Section 5. E (ii)
hereof, determined as of the date of his
termination of employment, on otherwise
normal payment dates through the date that
is twelve months after the date of
termination; and
ii. twelve months base salary in a lump sum; and
iii. any accrued performance bonus (which has
been granted) through the date of
termination of Executive's employment.
Nothing in this Agreement shall be construed as amending any
compensation or fringe benefit plan or arrangement of the Company. All rights of
the Executive under any such plans or arrangements upon his termination of
employment must be determined under the terms of such plans or arrangements at
the time of the Executive's termination of employment. Executive expressly
agrees not to discuss, except with his official advisors, any information or
aspects of his employment regarding the Company or his termination circumstances
and further, in addition to the Company immediately canceling any and all
remaining severance payments, agrees that injunctive relief may be granted.
8. Expenses. The Company shall reimburse Executive for
reasonable business expenses incurred by him on behalf of the Company and
documented according to the Company's policies in the performance of his duties
as specified herein. Executive shall furnish the Company with the documentation
in connection with such expenses required by the Internal Revenue Code and the
regulations promulgated thereunder.
In connection with Executive's relocation to the Boston area,
the Company shall reimburse Executive for reasonable relocation costs and
expenses including the following:
- closing costs on Boston area residence, including up
to one point for a Boston area mortgage.
- actual moving costs.
- reasonable temporary residence costs (which costs
must be pre-approved by the Chairman).
- reasonable "house hunting" costs which are
pre-approved by the Chairman. Such costs shall
include trips to the Boston area to review
residential housing prospects and/or locations and
associated costs thereof.
6
<PAGE> 7
In addition, the Executive shall be entitled to receive four
(4) business class round trip flights to the United Kingdom for his wife, Linda
Rousou. In addition, the Executive shall be reimbursed up to Two Thousand
Dollars ($2,000) per year for filing United States tax returns for any year.
9. It shall be part of the normal duties of the Executive at
all times to consider in what manner and by what new methods or devices the
products, services, processes, equipment or systems of the Company and each
Group Company might be improved and promptly to give to the Board full details
of any invention, discovery, design or improvement which he may from time to
time make or discover in the course of his duties and to further the interests
of the Company's undertaking with regard thereto and the Executive hereby agrees
that the sole ownership of any invention, discovery, design or improvement
aforesaid and all proprietary rights therein discovered or made by him (whether
alone or jointly with others) at any time during his engagement hereunder, shall
belong free of charge and exclusively to the Company or as it may direct.
10. Noncompetition. Executive agrees that during the
twenty-four (24) month period commencing on the date of his/her cessation of
employment with the Company, or the last date on which he is paid by the
Company, (the "Noncompetition Period") (which for purposes of Sections 9, 10 and
11, 12, of this Agreement shall mean the Company and any affiliates controlling,
controlled by or under common control with EI, including their predecessors), he
or she will not, without prior written consent of the Chairman of the Company,
either directly or indirectly, in any capacity whatsoever, (a) compete with the
Company by soliciting the sale of personal computer products (such as computers,
printers, monitors, software, etc.) to any customer (including affiliates of
such customer) of the Company by whatever method or (b) operate, control,
advise, be employed and/or engaged by, perform any consulting services for,
invest in (other than the purchase of no more than 5 percent of the publicly
traded securities of a company whose securities are traded on a national stock
exchange) or otherwise become associated with, any person, company or other
entity who or which, at any time during the Noncompetition Period, competes with
the Company via the use of an electronic ordering methodology as defined herein.
As used in clause (b) above, "compete" is defined as the
marketing, distribution or sale of desktop, laptop, notebook or other commonly
called "personal computer" equipment, software, services, peripherals or
accessories by any company or entity or subdivision thereof in the geographical
area in which the Company maintains offices, sales
7
<PAGE> 8
agents, or otherwise conducts business. The Executive further expressly
represents and understands that if Executive's employment is terminated, the
Noncompetition Agreement will prohibit the Executive from future employment with
companies that compete with the Company, as defined in this Noncompetition
Agreement, and as such, might theoretically constrain some of the Executive's
overall possibilities for future employment. By Executive's signature to this
Noncompetition Agreement, Executive expressly represents that his or her
training, education and background are such that his or her ability to earn a
living shall not be impaired by the restrictions in this Noncompetition
Agreement. The definition of compete can be modified by mutually agreed
addendum, if and when the Company enters additional types of lines of
businesses.
11. Nondisclosure. Executive agrees during the ten year period
(the "Nondisclosure Period") commencing on the date of his cessation of
employment with the Company, or the date on which he is last paid by the
Company, whether or not under this Agreement at all times to hold as secret and
confidential (unless disclosure is required pursuant to court order, subpoena,
in a governmental proceeding, arbitration, or pursuant to other requirement of
law) any and all knowledge, technical information, business information,
developments, trade secrets, know-how and confidences of the Company or its
business, including, without limitation, (a) any information or business secrets
relating to the products, customers, strategies, business, conduct or operations
of the Company, its subsidiaries or any of their respective clients, customers,
consultants, providers, licensors or licensees (collectively, "Company
Affiliates"); (b) any information regarding any current or prior employees of
the Company or any of its affiliates (except where a job reference has been
requested by an ex-employee in writing and the employee asked to give such
reference consents; (c) the existence or betterment of, or possible new uses or
applications for, any of the Company's products or services or those of any
Company Affiliates; (d) any of the Company's customer lists, pricing and
purchasing information or policies of the Company or any Company Affiliates; and
(e) any methods, ways of business etc., used in the use, sale or marketing of
the Company's products or services or those of any Company Affiliates,
(collectively, "Confidential Information") of which he or she has acquired
knowledge during or after his or her employment with the Company, to the extent
that such matters (i) have not previously been officially made public or are not
thereafter made public, or (ii) do not otherwise become available to Executive,
in either case, via a source not bound by any confidentiality obligations to the
Company or Company Affiliates. The phrase "made public" as used in this
Agreement shall apply to matters within the domain of the general public or the
Company's industry. During the Nondisclosure Period, Executive agrees
8
<PAGE> 9
not to use, directly or indirectly, such knowledge for his/her own benefit or
for the benefit of others and agrees not to disclose any of such Confidential
Information without prior written consent of the Company. At the cessation of
employment with the Company, the Executive agrees to promptly return all Company
property to the Company as well as any and all Confidential Information which
relates in any way to any of the foregoing items covered in this paragraph and
to destroy any transcripts or copies the Executive may have of such Confidential
Information unless an alternative method of disposition is approved by the
Company.
12. Nonsolicitation/Noninterference. Executive agrees that
during the two (2) year period (the "Nonsolicitation Period"), commencing on the
date of his/her cessation of employment with the Company, or the last date on
which he is paid by the Company, he or she will not at any time, without prior
written consent of the Company, discuss employment opportunities with an
employee, directly or indirectly solicit, induce, or attempt to solicit or
induce any employee, former employee (as herein defined), agent, consultant, or
other representative or associate of the Company for the purpose of providing
employment opportunities with any entity or to terminate his/her relationship
with the Company. Executive further covenants and agrees that, during the
Nonsolicitation Period, he or she will not, without the prior written consent of
the Company, directly or indirectly, induce or attempt to induce any actual or
prospective licensors, licensees, customers or suppliers of the Company to
terminate, alter or change its relationship with the Company or otherwise
interfere with any relationship between the Company and any of its actual or
prospective licensors, licensees, suppliers or customers or their employees or
former employees. A "former employee" shall mean any person who was employed by
the Company at any time during the one (1) year period prior to Executive's
cessation of employment with the Company.
13. Severability. In the event that Sections 10, 11, and 12
hereof shall be found by a court of competent jurisdiction to be invalid or
unenforceable as written as a matter of law, the parties hereto agree that such
court(s) may exercise its discretion in reforming such provision(s) to the end
that Executive shall be subject to noncompetition, nondisclosure and
nonsolicitation/noninterference covenants that are reasonable under the
circumstances and enforceable by the Company.
14. Merger, Reconstruction or Acquisition. In the event that
the Company shall merge with another company and shall not be the surviving
corporation, the Executive shall be entitled to, and have the option to accept,
a position with the acquiring or surviving company on terms not less favorable
in all material respects than the
9
<PAGE> 10
term of this Agreement. If the acquirer or surviving corporation does not wish
to employee Executive under materially the same terms of this Agreement, or if
the Executives elects not to accept an offer by the acquiror or surviving
entity, for any reason, then the acquiring company or surviving corporation
shall be obligated to pay two (2) year's base salary in a lump sum
15. Acknowledgment. Executive specifically acknowledges that
the covenants set forth herein restricting competition, disclosure and
solicitation/interference are reasonable, appropriate and necessary as to
duration, scope and geographic area in view of the nature of the relationship
between Executive and the Company and the investment by the Company of
significant time and resources in the training, development and employment of
Executive. Executive warrants and represents that in the event that any of the
restrictions set forth in these covenants become operative, he will be able to
engage in other activities for the purpose of earning a livelihood, and shall
not be impaired by these restrictions.
Executive further acknowledges that the remedy at law for any
breach of these covenants, including monetary damages to which the Company may
be entitled, will be inadequate and that the Company, its successors and/or
assigns, shall be entitled to injunctive relief against any breach without bond.
Such injunctive relief shall not be exclusive, but shall be in addition to any
other rights or remedies which the Company may have for any such breach.
Executive acknowledges and agrees that the references in the
foregoing Sections 10, 11, and 12 to the "Company" are intended to be applicable
to, and for the benefit of, any affiliated entity controlling, controlled by or
under common control with the Company and any predecessors thereof, and such
term for all purposes thereof shall include any such entities.
16. Governing Law. This Agreement shall be governed and
performed in accordance with, and only to the extent permitted by, the laws of
the Commonwealth of Massachusetts applicable to contracts made and to be
performed entirely within such Commonwealth of Massachusetts.
17. Assignment. This Agreement shall inure to the benefit of,
and shall be binding upon, the Company, its successors and assigns subject to
the conditions cited in Sections 6.D and 6.E giving rise to the Executive's
right to terminate this Agreement. If substantially all the assets of the
Company are sold or otherwise transferred to another corporation or party, it
shall be a condition to such sale or transfer that the transferee agrees to
expressly assume the obligations hereunder such that the provisions of this
agreement shall be binding upon and inure to the benefit of the
10
<PAGE> 11
corporation to which such assets shall be sold or transferred and this provision
shall apply in the event of any subsequent sale or transfer. Neither the Company
nor Executive shall assign this Agreement without the prior written consent of
the other party hereto.
18. Entire Agreement; Amendments; Waivers. This Agreement
contains the entire agreement between the parties hereto with respect to the
subject matter hereof and replaces or supersedes any previous agreement on such
subject matter. It may not be changed orally, but only by agreement, in writing,
signed by each of the parties hereto. The terms or covenants of this Agreement
may be waived only be a written instrument specifically referring to this
Agreement, executed by the party waiving compliance. The failure of the Company
at any time, or from time to time, to require performance of any of Executive's
obligations under this Agreement shall in no manner affect the Company's right
to enforce any provisions of this Agreement at a subsequent time; and the waiver
by the Company of any right arising out of any breach shall not be construed as
a waiver of any right arising out of any subsequent breach.
19. Headings. The headings in this Agreement are intended
solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
20. Counterparts. This Agreement may be executed in multiple
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first above written.
ELCOM INTERNATIONAL, INC.
"Company"
/s/ Robert J. Crowell
---------------------
Robert J. Crowell
Chairman and CEO
"Executive"
/s/ James Rousou
---------------------
James Rousou
11
<PAGE> 1
EXHIBIT 11
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (591) $ 1,152 $ (1,171) $ 2,276
======== ======== ======== ========
Weighted Average Common Stock and Common
Equivalent Shares Outstanding During the Period 15,557 26,363 14,736 26,192
Dilutive Effect of Common Equivalent Shares (1) 1,866 3,716 1,866 3,412
-------- ======== ======== --------
Weighted Average Common Shares Outstanding 17,423 30,079 16,602 29,604
======== ======== ======== ========
Net Income (Loss) Per Share $ (.03) $ .04 $ (.07) $ .08
======== ======== ======== ========
</TABLE>
- --------------------
(1) Pursuant to Securities and Exchange Staff Accounting Bulletin No. 83, stock
options issued at prices below the initial public offering price per share
("cheap stock") during the twelve month period immediately preceding a
company's initial public offering have been included as outstanding for the
1995 periods presented. The dilutive effect of the common and common
equivalent shares were computed in accordance with the treasury stock
method in the periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000900096
<NAME> ELCOM INTERNATIONAL INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 24,344
<SECURITIES> 0
<RECEIVABLES> 109,897
<ALLOWANCES> 1,661
<INVENTORY> 22,155
<CURRENT-ASSETS> 158,045
<PP&E> 21,497
<DEPRECIATION> 10,471
<TOTAL-ASSETS> 197,045
<CURRENT-LIABILITIES> 103,048
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 93,674
<TOTAL-LIABILITY-AND-EQUITY> 197,045
<SALES> 287,721
<TOTAL-REVENUES> 287,721
<CGS> 254,336
<TOTAL-COSTS> 254,336
<OTHER-EXPENSES> 28,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,769
<INCOME-PRETAX> 3,968
<INCOME-TAX> 1,692
<INCOME-CONTINUING> 2,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,276
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
