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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27376
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of exchange
Title of each class on which registered
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Common Stock, $.01 par value NASDAQ
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
----- -----
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 the 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of such stock as quoted on NASDAQ for
March 14, 1997, and reported by the National Quotation Bureau, Inc. was
approximately $122 million. For purposes of this disclosure only, the registrant
has assumed that its directors, executive officers, and beneficial owners of 5%
or more of the registrant's common stock are affiliates of the registrant.
The registrant had 26,771,877 shares of common stock, $.01 par value,
outstanding as of March 14, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1997 annual
meeting of stockholders of Elcom International, Inc. are incorporated by
reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Elcom International, Inc. (the "Company") develops and licenses proprietary
software systems which enable the conduct of interactive electronic commerce
and, through a subsidiary, uses this technology to support the sale and
marketing of PC products electronically. The Company's proprietary Personal
Electronic Catalog and Ordering System (PECOS(R)) technology enables the Company
and its licensees to create interactive electronic catalog and ordering systems
and thereby market products and services using PC-based electronic commerce
systems which operate on public and private Internet Protocol networks. PECOS is
designed to become an integral part of a customer's purchasing process by
computerizing various tasks associated with the product ordering, fulfillment
and delivery process. These tasks include gathering and searching through
product information, selecting products, checking product price and
availability, comparing and selecting shipping options, analyzing computer
system configurations, generating purchase requisitions, obtaining approvals,
and placing orders electronically from the customer's PC. The PECOS system also
can link electronically with a supplier's order entry and warehouse management
systems, thereby supporting the automation of the fulfillment of such orders.
The Company believes that its PECOS technology is the first client/server,
Windows- and transaction-based electronic marketing and ordering system to
generate substantial revenues in the emerging area of PC-based electronic
commerce. The Company, through its technology subsidiary, has signed a total of
ten license agreements for its PECOS technology and is pursuing additional
license agreements.
The Company's proprietary PECOS technology is used by Catalink Direct, Inc.
(Catalink(R)), one of the Company's wholly-owned subsidiaries, to market and
sell PC-related products electronically. Catalink's use of PECOS represents the
first utilization of this technology and the Company believes that its PECOS
system significantly differentiates Catalink from other PC remarketers while
providing Catalink with certain marketing and cost advantages. Catalink
commenced operations in December 1993 and has achieved its growth through
various marketing efforts, including the expansion of its direct sales force
nationwide and through acquisitions. The Company's PC remarketer acquisition
strategy includes utilizing an acquired company's sales force to offer PECOS to
prospective customers in those new markets and, over time, to transition the
acquired company's customers to the PECOS system, thereby generating increasing
revenues transacted through the PECOS system. Although there can be no assurance
as to the timing or success of any acquisition, the Company intends to acquire
additional companies either to expand its customer base and the use of PECOS or
to complement its Elcom Systems' PECOS technology. A certain portion of the
Company's revenues continue to be generated by several companies acquired by the
Company which have not converted their customers' orders to transact through
PECOS and these entities continue to use, in whole or in part, traditional
methods of selling and order taking. On February 29, 1996, the Company completed
the acquisition of AMA (UK) Limited, a U.K.- based PC remarketer with calendar
1995 revenues of approximately $40 million which was accounted for as a pooling
of interests. On December 6, 1996, the Company acquired Prophet Group Limited, a
U.K.- based PC remarketer with 1996 (fiscal year ended April 30) revenues of
approximately $38 million which was accounted for as a purchase. On February 21,
1997, the Company acquired Data Supplies Limited, a U.K.-based PC remarketer
with calendar 1996 revenues of approximately $21 million which was accounted for
as a purchase.
The PECOS system operates in a client/server environment supporting both a
dedicated Windows ("thick") client and World Wide Web-based browser ("thin")
client. The Windows client combines a convenient, easy to use, interactive,
graphical user interface and robust front-end client, with an integrated
back-end information and order transaction processing server system operating on
a UNIX-based platform. The PECOS servers can be designed to automatically
interact with a company's order processing system and, where applicable, with a
supplier's system, to automate various aspects of the order fulfillment process.
The PECOS "thick" front-end client includes the integrated electronic catalog
and ordering system and associated databases which, after loading, reside on the
hard disk drive of the customer's PC or its network server. Full-motion video
resides on, and is available from, a CD-ROM and provides "click-on-demand" video
advertising capability in CD-ROM based versions. PECOS is used by
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a customer on a stand-alone basis "off-line" until an "on-line" connection is
required to the Company's back-end transaction-based server system. These
on-line computer communications are conducted via short duration "Commlinks,"
which generally average only one to three minutes, during which time order
transaction and other data are exchanged. In addition, during certain Commlinks,
a customer's PECOS database can be updated automatically to reflect selective
product and pricing changes since its last Commlink. Communications between
PECOS' front-end client and back-end servers are accomplished over common
carrier telephone networks or over the Internet.
The Company's wholly-owned technology subsidiary Elcom Systems, Inc.
("Elcom Systems") has introduced and continues to develop a World Wide Web-based
front-end entitled "PECOS.net"(TM) which allows a licensee to create
interactivity between the front-end browser "thin" client and back-end servers
using Java applets to run executable program modules which download from a
server (web/home page) and execute in the front-end PC's random access memory.
In order to provide higher levels of transaction security on the Internet, Elcom
Systems has licensed security and public key encryption technology from RSA Data
Security, Inc. which is offered for sub-license as an additional PECOS module.
Although the PECOS technology is "open architecture" using TCP/IP which
interfaces to Oracle, Sybase, and other database architectures in the back-end,
a substantial amount of the software systems which operate on the front-end
client and back-end transaction server systems were designed and written by, and
are proprietary to, the Company.
Catalink offers more than 18,000 products manufactured by leading companies
such as Compaq, IBM, Toshiba, Hewlett-Packard and Apple at competitive prices.
IBM, Compaq, Digital Equipment Corporation, Novell, Microsoft, and other product
manufacturers have paid, or have committed to pay, marketing fees to Catalink to
advertise their products in PECOS. In some cases, these advertisements use full
motion video and sound presentations which activate "on demand" when a customer
clicks for information on selected products. Orders through PECOS for products
which are in stock generally are fulfilled from the inventory of Catalink or one
of Catalink's Distribution Fulfillment Partners ("DFPs"), which includes Ingram
Micro, Inc., the largest PC product distributor in the world. By outsourcing a
significant portion of its product fulfillment and shipping, in conjunction with
product return policies in place with the suppliers from which it purchases
directly, Catalink believes that it can minimize its inventory-oriented costs
and associated risks. See "-Fulfillment/Logistics/Operations". PECOS is
distributed primarily by Catalink's telemarketing and direct sales personnel to
current and potential customers at no charge on four diskettes or a single
CD-ROM, and an abbreviated version is also available to "download" from
Catalink's World Wide Web site through the Internet. Catalink operates 26 Field
Sales and Support Offices ("FSSO") in the U.S. and the U.K. and also maintains
configuration and distribution facilities in Bristol, PA; Canton, MA; Irvine,
CA; Redditch, England and Langley, England.
The Company's strategy also includes leveraging its technology in operating
units or joint ventures (in which the Company owns a minority position) to
create companies to market products in other industries. This strategy
reinforces PECOS' client/server system as a significant enabling technology for
electronic commerce while positioning Elcom Systems as a single source provider
for TCP/IP-based public and private Internet Protocol electronic commerce
systems. The Company has invested a nominal amount in, and licensed its
technology to, ShopLink Incorporated, a start-up joint venture approximately 40%
of which is owned by the Company. ShopLink Incorporated, which was in the
development stage during 1996, is a provider of personal computer-based shopping
services whereby consumers are able to use PECOS to conveniently purchase
groceries, health and beauty care products and other home consumable products
and services via the Company's electronic commerce technology and receive direct
deliveries from ShopLink's product consolidation centers or product fulfillment
partners to their homes or other specified locations. The Company is also
pursuing additional licensing agreements through its Elcom Systems subsidiary
for the PECOS technology and is investigating the creation of additional joint
ventures in other industries utilizing PECOS. Elcom Systems has begun to market
a range of PECOS system products designed to enable its customers to create and
manage their own multi-media electronic catalogs, and to build electronic
ordering systems to support remote transaction processing for their products and
services. The Company's strategy includes expanding its Internet-related
activities and services ranging from Web Site/Home Page design, to Web server
maintenance, to secure transaction-related services provided through the
Company's existing back-end, transaction-based computer server system. The
Company's strategy also includes augmenting its growth by acquiring companies
with complementary technology and expertise or existing customer bases.
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INDUSTRY OVERVIEW
Electronic Commerce. Electronic commerce involves the automation of
business transactions through the use of telecommunications and computers to
exchange and process commercial information and to conduct and record
transactions electronically. Historically, the vast majority of electronic
commerce has been conducted using electronic data interchange ("EDI")
technologies, which typically has involved the interchange of information
between large trading partners and can be both complex and expensive to
establish. More recently, PC-based and network technologies have enabled
electronic commerce to be conducted through PCs using common carrier private
(usually telephone) networks such as AT&T, MCI, Sprint, Advantis, GEIS and
others, or over a public network such as the Internet. The Company believes that
interest in conducting business through electronic commerce is increasing
rapidly as the marketplace becomes more aware of emerging technology and of the
conveniences that can be offered to consumers and the reduced transaction time,
automation of tasks, and resultant lower transaction costs that electronic
commerce can provide to marketers.
The Company believes that an interactive and integrated electronic catalog
and ordering system, such as PECOS, can provide users with demonstrable added
value through many conveniences and benefits, including immediate confirmation
of pricing and availability, automatic forms generation, one-time data entry,
reduced paperwork, electronic routing and approvals, accurate, secure and more
rapid exchange of business data, and reduced purchasing cycles. Such a system
also can provide electronic transmission of orders to suppliers for processing
and/or fulfillment, payment and shipping information, purchase order generation,
invoices, optional shipping costs, and other information directly from a
customer's PC. Hence, many redundant order processing tasks are eliminated by
transferring data entry from the seller to the customer while concurrently
increasing both parties' efficiency and overall convenience of conducting
business together. Previously, businesses communicated this information and
conducted transactions through the exchange of paper documents or verbally by
telephone. Paper-based and telephone transactions typically are more labor
intensive and prone to error. The Company believes that an integrated electronic
catalog and ordering system can reduce errors and shorten the purchasing cycle
for a typical business transaction. The use of transaction-based server systems
to communicate automatically to the computer systems of suppliers, supports the
automation of product fulfillment and delivery, increases efficiency, and
completes the electronic commerce "circle."
TECHNOLOGY
Catalink's PECOS System. Catalink's PECOS system is a proprietary
Windows-based interactive and integrated multi-media electronic catalog and
interactive ordering system that takes advantage of Windows' graphical user
interface. While the PECOS technology can be implemented in customized versions,
most of its operational characteristics and basic functionality are common to
Catalink's PECOS system. PECOS is loaded on the hard disk drive of the
customer's PC and "senses" the hardware and color display capabilities of the
customer's PC system and displays one or more messages, if necessary, to allow
the customer to maximize the sound (if available) and color display capabilities
of their PC system to enhance displayed images. In the CD-ROM version, the
front-end client interface and associated product databases are installed on the
customer's hard drive from the CD-ROM while an object database consisting of
product information (including images, sound and full motion video
advertisements) resides on the CD-ROM. PECOS operates in a client/server
architecture and its front-end client interface resides on a customer's PC's
hard disk drive along with various product-oriented databases and operates like
an "electronic" catalog with interactive and integrated communications and
ordering capabilities. Click-on icon commands allow customers to "browse"
through visual display pages to view product images and information in varying
levels of detail or to search the product pricing and description databases and,
using various parameters and criteria, compare and select products. When
combined with the Company's transaction-based, back-end server systems which
communicate with the Company's and its two primary DFPs' inventory systems,
PECOS creates a "full circle" electronic commerce system.
Products selected for purchase are copied automatically to a purchase list
or requisition form with all pertinent information and when finalized, PECOS can
(optionally) display the order in purchase order format listing all product
information, part numbers, and related information. After customers have
reviewed and compiled their
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requisitions or orders (and optionally, circulated them internally for approval
using their electronic mail system), customers can then electronically place
those orders directly to Catalink's computer system using PECOS, which, for
orders to be fulfilled through the Company or its primary DFPs, concurrently
communicates with the applicable computer system, checks product availability
and other information, and displays this information and confirms the order to
the customer in real-time.
To initiate an order, the customer enters his or her confidential password
authorization, and PECOS automatically initiates a Commlink via modem over a
toll-free number or the Internet to Catalink's back-end transaction server
system allowing information to be exchanged in real-time between the client (the
front-end client interface on the customer's PC) and the server (the back-end
transaction server systems at Catalink). Commlinks typically last one to three
minutes, depending on the extent of product data updates which are necessary,
with order-oriented information being exchanged concurrently with the computer
systems of the Company and/or its primary DFPs. A comprehensive electronic link
currently is utilized by Catalink with its two primary DFPs and electronic links
are being pursued with other DFPs. During periodic Commlinks, product
information and pricing databases on the customer's hard drive also are updated
automatically to reflect selective pricing changes, new PECOS electronic mail
messages, and other information updates, unless it has been so long since that
customer's last Commlink that it is determined that it would be more expedient
to send that customer a new set of PECOS disks. In order to refresh advertising,
product images and content, Catalink generally updates CD-ROM disks during each
quarter.
Information System. The Company has licensed software from Oracle
Corporation and other software firms to augment its developing management
information system ("IS System") which is being designed to improve management's
ability to monitor and manage the Company. The Company's IS System will include
an integrated general ledger, order entry, inventory management and reporting
system designed to operate in an Oracle-based UNIX environment and support the
future growth of the Company, both organic and via acquisition. The Company
expects the system's installation to be substantially implemented in 1997.
Although the Company believes that its technology and operating systems will be
adequate for its current needs, such systems will undoubtedly require
modification and improvement as the Company expands and evolves.
Intellectual Property. The Company's success and ability to compete is
dependent in part upon its proprietary technology. While the Company relies on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements, name
recognition and reliable product availability and distribution are of equal
importance for establishing and maintaining a leadership position. Although the
Company has an application pending to patent certain aspects of its PECOS
technology, there can be no assurance that the PECOS technology is patentable,
or that other entities will not develop, or have not developed, technologies
that are similar or superior to the Company's technology. The source code for
the Company's proprietary software is also protected both as trade secret and as
an unregistered copyrighted work. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use some portions of the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of the front-end client portion of PECOS.
The Company generally enters into confidentiality or license agreements
with its employees, consultants, licensees and certain of its vendors, and
generally controls access to and distribution of its proprietary software,
documentation and other information. In connection with the distribution of
Catalink's PECOS front-end client, Catalink employs licenses that generally are
not paid for, or manually signed by, the end-user and, therefore, could in
certain circumstances, be found unenforceable under the laws of certain
jurisdictions. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's proprietary
system or to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult. There can be
no assurance that the steps taken by the Company will prevent misappropriation
of its technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have
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a material adverse effect on the Company's business, operating results or
financial condition. The Company believes that each of the following are
proprietary features of its "front-end" client interface: the architecture
allowing for easy modification by the Company or its licensees, the capabilities
for display of certain business forms and catalog page screens, and the
interfaces to the "back-end." However, the most critical and proprietary
elements of its PECOS technology are the "back-end" transaction servers, order
processing authentication and catalog updating modules, which reside within the
computer systems in the Company's or licensee's facilities and are not available
to end-users.
CATALINK
Catalink Direct, Inc., one of the Company's wholly-owned subsidiaries,
utilizes the PECOS system to support the sale and marketing of PC-related
products electronically. The Company commenced commercial operations in December
1993, and consummated the acquisitions of Catalink Direct (Connecticut), Inc.
(formerly known as Computer Specialties, Inc.) ("CDCI") in 1994, and Catalink
Direct (Pennsylvania), Inc. (formerly known as Computerware, Inc.)
("Computerware") and a group of companies which owned a U.K. remarketer of PC
products (collectively, "Lantec") in 1995, each of which operates as a
wholly-owned subsidiary of Catalink. As of December 31, 1995, CDCI was merged
into Catalink, and is no longer a separate entity. In February 1996, the Company
completed the acquisition of AMA (U.K.) Limited ("AMA"), a U.K.-based remarketer
of personal computer products which was accounted for as a pooling of interests.
In December 1996, Catalink acquired Prophet Group Limited, a U.K.-based PC
remarketer with 1996 revenues of approximately $38 million which was accounted
for as a purchase. On February 21, 1997 the Company acquired Data Supplies
Limited, a U.K.-based PC remarketer with 1996 revenues of approximately $21
million which was accounted for as a purchase. Catalink's acquisition strategy
is to utilize an acquired company's sales force to offer PECOS to prospective
customers in those new markets and to transition an acquired company's
customers, over time, to the PECOS technology.
PRODUCTS AND PRICING
Products. Catalink offers approximately 18,000 products from a wide variety
of manufacturers through the PECOS system. Catalink currently purchases selected
products directly from IBM, Compaq, and Toshiba. Catalink provides customers
with a large product selection, including personal computer systems, monitors,
printers, peripherals, software, accessories and supplies. Catalink markets
products sold by the following manufacturers, among others:
PERSONAL COMPUTERS
Compaq IBM Apple
NEC Digital Equipment Corp Toshiba
Hewlett-Packard AST Panasonic
PRINTERS
Hewlett-Packard Canon Lexmark
Epson QMS Tektronics
PERIPHERALS
NEC SONY Shiva
Intel Creative Labs Kingston
U.S. Robotics 3Com Farrallon
SOFTWARE
Microsoft Lotus Borland
Intuit Novell Cheyenne
Adobe Claris Symantec
Catalink has established electronic purchasing and supply relationships
with Ingram Micro, Inc. and Intelligent Electronics, Inc. as well as traditional
relationships with several other large, national PC product suppliers. The
Company's purchasing relationships with these suppliers are pursuant to
industry-standard
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arrangements with negotiated pricing based on anticipated volume levels and with
payment being made through existing floor plan financing arrangements.
In the U.K., Catalink offers a similar range of products, a majority of
which it purchases directly from manufacturers. In addition, Lantec is an
authorized product fulfillment aggregator for IBM and Compaq products. Lantec
also is in discussions with Ingram Micro (U.K.) on methods to access their
inventory electronically, although there can be no assurances that any DFP
arrangement or electronic links will be negotiated or developed with Ingram
Micro (U.K.), or if so, on what terms or timing.
FULFILLMENT/LOGISTICS/OPERATIONS
Distribution Fulfillment Partners. In the U.S., in addition to its direct
purchasing capability, Catalink also sources its products from a number of DFPs,
including Ingram Micro, Inc. and Intelligent Electronics, Inc., its primary
DFPs, from which it normally purchases a majority of domestically purchased PC
products. Ingram Micro, Inc. is the largest PC product distributor in the world
with annual revenues in excess of $8 billion which distributes over 22,000
products from over 600 manufacturers and software publishers. Intelligent
Electronics, Inc. is one of the largest product aggregators in the U.S.
Augmented by its DFPs, Catalink draws from inventories which the Company
believes are well in excess of $1.5 billion. Catalink's customers can typically
expect products that are in stock and that do not require configuration to be
immediately available for shipment.
For computer systems which require configuration, the Company operates
three configuration facilities in the U.S. and two in the U.K. The Company
purchases selected products directly from IBM, Compaq and Toshiba which are
typically shipped to these facilities and, in the U.S., sources the substantial
majority of other products from its DFPs. Although the Company believes that its
DFPs are given due consideration regarding supply of products by manufacturers
and that Catalink is given due consideration regarding supply of products by its
DFPs, constraints on certain products have been a historical problem in the PC
channel and there can be no assurance that such periodic constraints may not
have an adverse effect on the Company's business in the future. The Company has
commenced purchasing certain products directly in order to support certain
sizable fulfillment requirements. The Company believes that it can substantially
mitigate the risks associated with additional inventory positions resulting from
its direct purchasing relationships by limiting the range of models it stocks to
those in demand and by carefully monitoring items on hand relative to demand.
The Company also believes that its direct purchasing of these products will
improve its delivery time to customers and quality control of configured
systems.
The electronic links between PECOS' front-end client "interface,"
Catalink's back-end transaction server system, and its primary DFPs' computer
systems provide the customer with seamless order processing and shipment, as if
a customer's order was shipped directly from Catalink. Using PECOS, when a
customer clicks and accepts an order, if applicable, its primary DFPs' system
prints out a "pick ticket" in a distribution facility, for the product to be
picked for direct shipment to the customer or to one of the Company's
configuration centers. PECOS also can automatically select one of the Company's
configuration and distribution facilities in the U.S. (and similarly in the
U.K.) as the source and print a pick ticket there for fulfillment. In order to
provide similar electronic links with other suppliers, Catalink is in the
process of pursuing electronic price and availability links with its secondary
suppliers, primarily aggregators, for electronic inquiry of product price and
availability. Until these links are fully established, Catalink obtains some of
its product to fulfill customer orders from these aggregators and its other
suppliers using direct order entry systems provided by these companies and by
telephone and facsimile transmissions. These traditional product fulfillment
methods involve expenses associated with ordering, invoicing and product
tracking being done manually. The Company has arrangements with most of these
"traditional" suppliers so that ordered products may still be directly shipped
to the customer, or if necessary, to a Company location for configuration prior
to shipment to the customer.
PC Configuration Capabilities. Catalink offers customized configuration
services to its customers, whereby a customer can request, by clicking on an
option in PECOS, that Catalink configure their PC system, load software and test
the PC system for functionality prior to shipment. The configuration services
are offered generally on a fee basis and currently are performed primarily by
Catalink at its Bristol, PA, Canton, MA and Irvine, CA facilities and in an
outsourced facility in Hartford, CT. In addition, Catalink maintains product
distribution and
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configuration facilities in Redditch and Langley in the U.K. Catalink's
technical support staff reviews the viability of configuration orders before the
order is released for fulfillment, or on demand via PECOS' Analyze Custom
Configuration function. The DFPs process, on a fee basis, certain of the
products returned by customers under the Company's product return policies.
MARKETING AND SALES
Catalink Targeted Customer Segments. Catalink uses its telemarketing and
direct sales force to sell to targeted business and corporate accounts, its
educational and government customer base and, in the U.K., its value-added
reseller customers. As of December 31, 1996, Catalink employed approximately 258
sales representatives, account executives, telemarketers and related support
personnel to service those customer segments.
Catalink sales and support personnel currently operate from FSSOs in 19
metropolitan areas in the U.S. and 7 in the U.K. Catalink's primary locations
and FSSOs are listed below:
UNITED STATES: 19
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- Norwood, MA (Boston) - Dallas, TX
- Hartford, CT - Austin, TX
- Stamford, CT - Atlanta, GA
- New York City, NY - Phoenix, AZ
- Edison, NJ - San Francisco Bay Area, CA
- Wilmington, DE - Chicago, IL
- Bristol, PA (Philadelphia) - San Diego, CA
- Alexandria, VA (Washington, D.C.) - Irvine, CA
- Houston, TX - Pittsburgh, PA
- Allentown, PA
UNITED KINGDOM: 7
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- Langley, Berkshire - Manchester
- London (City of) - Glasgow (Scotland)
- Basingstoke, Hampshire - Birmingham
- Slough, Berkshire
The Company's strategy is to open additional FSSOs in other metropolitan
areas as it deems necessary or advantageous.
Corporate and Business Accounts. Large corporations that wish to make their
PC product procurement functions more efficient are primary target customers.
Corporate accounts typically employ purchasing agents or buyers with
above-average product knowledge who view most PC products as commodities.
Business accounts range from divisions of large corporations to businesses with
as few as fifty employees. Catalink penetrates the corporate market with both
direct sales efforts and telemarketing. The Company targets business customers
using a defined business telemarketing staff operating from certain of its U.S.
and U.K. locations whose mission is to introduce Catalink to businesses which
would not otherwise be cost effectively penetrated by Catalink's direct
corporate sales force. Catalink's direct sales efforts include on-site
presentations and PECOS demonstrations to potential corporate customers.
Telemarketers assist the sales professionals by contacting and pre-qualifying
accounts for follow-up, on-site visits by the direct sales force. Customer
support representatives and entry-level corporate sales representatives provide
day-to-day administrative and operational support in order to maximize the
selling time of the direct sales force.
Educational and Governmental Accounts. Customers in this category consist
of educational institutions at a variety of levels, including, public and
private K-12 school systems in the U.S., colleges and universities, and state
and local governmental agencies. These customers require a remarketer with
special knowledge of budgetary cycles and bid processes, and the ability to work
directly with major manufacturers to support special programs designed to serve
educational institutions. Since 1992, when Apple Computer began its Apple
Education Sales Agent ("AESA") program for sales to grade K-12 schools,
Catalink's Computerware subsidiary (and its predecessors) has operated
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under periodic contracts with Apple as the exclusive AESA in Pennsylvania, West
Virginia, Delaware and New Jersey. The current contract expires in September
1997. Under this sales agent arrangement Catalink recognizes as revenues only
the sales commissions on each sale rather than the full product sales price.
Sales to the education market also can generate sales of related products and
services. The Company has developed a specialized PECOS catalog on diskette
focused on education-oriented products and content which is being offered under
the name EdNet. Catalink serves these customers from certain FSSOs via a
separate dedicated sales force.
Fulfillment Accounts. In the U.K., Lantec acts as a product aggregator for
IBM and Compaq products, typically serving small- to medium-sized value-added
resellers and remarketers that do not maintain significant inventory themselves.
These customers demand competitive pricing and typically require next-day
delivery anywhere in the U.K. The Company believes that although its product
fulfillment business is to a different market than its core remarketer business,
this fulfillment business, which Lantec has been operating for many years,
provides Lantec with the ability to generate incremental revenues over a fixed
cost structure.
CUSTOMER AND TECHNICAL SERVICES
Catalink provides a wide range of customer service and technical support
ranging from nationwide toll-free presale and post-sale telephone-based support
to system integration support in certain markets. Catalink believes that
maintaining a direct customer and technical support link with its customers is
an important competitive factor and promotes customer satisfaction. In addition,
certain manufacturers require their remarketers to provide certain levels of
technical support as an ongoing condition to authorizing the remarketers to sell
their products.
PRODUCT WARRANTY AND SERVICE POLICIES
In addition to providing its customers with manufacturers' warranties,
Catalink offers its customers certain return policies for products which have
not been damaged. Typically, such products can be returned to Catalink for a
refund or credit within thirty days of their purchase. Catalink believes that
its product return policies are competitive with those offered by other
remarketers. Typically, manufacturer warranties are included as part of, and are
packaged with, the product. When available from manufacturers, Catalink also
offers on-site and extended-term warranty and/or service policies as ancillary
products available for sale through the PECOS system. In addition to Catalink's
telephone-based technical support and manufacturer programs, Catalink offers a
full range of on-site and depot warranty and post-warranty service options in
the U.S., through nationwide outsourcing agreements with third party service
providers. Product returns are centralized at the Company's facilities, where
the various tasks are performed that are necessary to return products to
inventory, to one of the Company's DFPs or to a manufacturer for credit.
ELCOM SYSTEMS
Elcom Systems designs, develops and licenses interactive and robust
electronic commerce software systems for private networks, Intranets and the
Internet. In addition, Elcom Systems offers a development toolset to customize
both presentation and functionality, and a full range of consulting services to
implement, support and operate its electronic commerce technology, including
complete outsourcing. The Company targets large manufacturers, distributors, and
direct marketers that wish to integrate an electronic commerce system with their
existing enterprise system to process a large number of routine orders, order
inquiries and purchase activity, and companies which need to communicate price
and product information accurately and frequently with customers.
The Company's electronic commerce system creates a "full-circle" electronic
link between its licensees and their customers which automates and supports many
key functions necessary for large-scale interactive electronic commerce
including user registration and authentication, multimedia catalog and content
management, product searching and selection, order capture and management,
security, payment processing, customer service functions, and real-time links to
a licensee's (or its supplier's) order entry and warehouse management systems
thereby facilitating the fulfillment of such orders.
8
<PAGE> 10
Elcom Systems has been developing and enhancing the PECOS(TM) family of
integrated Personal Electronic Catalog and Ordering System software systems
since 1992, and began actively marketing PECOS in mid-1995. PECOS is a complete
business solution for interactive electronic commerce, incorporating a front-end
Customer Interface for presentation and end-user functionality which operates on
a user's PC and a back-end Transaction Server System ("TSS") for transaction
processing and electronic linkage to a licensee's internal information system.
The PECOS system creates electronic marketing capabilities, including support of
"click-on" product or other marketing videos (via CD-ROM), capture of a
customer's purchasing proclivity and consumption data, while also maximizing
efficiencies and reducing operational expenses by automating routine customer
service and other information or order-associated functions.
Elcom Systems has introduced and continues to develop its PECOS technology
through the integration of a suite of Java Applet-based technologies
("PECOS.net") that will effectively provide a robust PECOS user interface over
the World Wide Web, using industry standard browsers such as Netscape Navigator
and Microsoft Explorer. When added to its other electronic commerce
technologies, the Company is able to offer a complete range of electronic
commerce technology options from full CD-ROM client/server-based video
interactivity, to a Java-enabled browser compliant front-end customer
interface.
The Company's PECOS family of systems are designed to support large numbers
of end-user customers, products and transactions. PECOS is a "true"
client/server application, utilizing local databases and computer processing
capabilities as well as the availability of server based information, including
information stored on databases connected to the World Wide Web. In addition to
the efficiency and speed available to power users of the client application,
PECOS licensees can "forward integrate" both data and processes with their
customers' internal systems, thereby elevating electronic commerce from basic
transaction-based and integrated process-based relationships. The Company's
transactional client/server architecture provides a fully scaleable foundation
for robust system performance and high transaction capacity.
In order to provide higher levels of transaction security on the Internet,
Elcom Systems has licensed RSA Data Security, Inc.'s security and public key
encryption technology which is offered by Elcom Systems for sub-license as an
additional PECOS module.
Elcom Systems markets and sells its products through a variety of direct
sales and direct marketing methodologies. Due to its focus being primarily on
Catalink's implementation of PECOS, Elcom Systems' marketing and sales
activities did not begin actively until mid-1995. Elcom Systems moved into its
own leased facility in August 1996 and commenced more active sales activities by
expanding its sales personnel. The Company hired its first sales representative
in July 1995 and as of December 31, 1996, had 6 sales personnel in the U.S. and
2 in the U.K. Elcom Systems uses the PECOS system implemented for Lantec in the
U.K. as its reference site for European marketing of PECOS licenses.
Although license revenues to date have not been material to the Company as
a whole, Elcom Systems has signed ten license agreements and is pursuing
additional licensing opportunities for its PECOS technology. Elcom Systems'
strategy is to enhance the PECOS technology, proliferate the technology via
licenses, and develop new versions that would take advantage of communications
and publishing opportunities afforded by the growing use of the Internet. A
further element of Elcom Systems' strategy is to create or acquire additional
expertise in Web site creation and maintenance in order to expand its service
offerings and combine these services with the Company's existing transaction
processing capabilities utilizing its PECOS back-end, transaction-based servers.
Elcom Systems has signed nine (not including Catalink) third-party license
agreements to date, covering such diverse industries as banking
supplies/service, PC products distribution, stationary and office supplies,
business machines supplies, home consumable products and others. The Company's
licensing and modification fees range from $10,000 for a minimal implementation,
to over $1 million for a material license including ongoing maintenance,
transaction and other fees.
COMPETITION
Electronic Commerce Systems. The market for interactive electronic commerce
software is new and rapidly evolving and the Company expects competition to
intensify in the future. The Company competes with
9
<PAGE> 11
vendors of prepackaged electronic commerce software, vendors of software tools
for developing electronic commerce applications and system integrators. The
Company's competitors include Open Market, Inc., Connect, Inc., BroadVision,
Inc. and Netscape Communications Corp. The Company expects additional
competition from other emerging and established companies, including Microsoft
and Oracle, both of which have announced products for Internet-based electronic
commerce. The Company's potential competitors also include systems integrators
such as EDS and a number of EDI solution vendors, including Sterling Commerce,
Advantis and GEIS.
These and other competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company and thus may be able to develop or respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to the Company's detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies and
offer more attractive terms to purchasers than the Company and to bundle their
products in a manner that may discourage users from purchasing products offered
by the Company. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete effectively with competitors or that the competitive pressures
faced by the Company will not have an adverse effect on the Company's business,
results of operations and financial condition.
PC Products Marketplace. The Company has invested substantial effort and
capital to develop and implement its proprietary PECOS front- and back-end
system, including the hardware and electronic links with its DFPs. The overall
market of companies which sell PC products is highly fragmented and Catalink
operates in an extremely competitive environment which is rapidly evolving and
subject to rapid technological change. The Company believes that there are more
than 10,000 PC product remarketers of various types in the U.S. In response to
competitive pressures and lower margins, traditional computer resellers are
consolidating operations and acquiring or merging with other resellers to
increase efficiency. PC manufacturers are engaged in intense price competition
which has had a dramatic influence on the entire industry. A prospective
purchaser of personal computer products has the option to purchase directly from
a manufacturer or assembler (e.g., IBM, Dell, Gateway), from a major remarketer,
(e.g., Entex, Vanstar, MicroAge, Inacom, CompuCom), from a computer mail order
company (e.g., CDW, Micro Warehouse, Creative Computers, INMAC, PC Connection),
from a systems integrator (e.g., Andersen Consulting, EDS), from computer
superstores (e.g., CompUSA, Computer City), electronic superstores (e.g., Best
Buy, Circuit City), and local computer stores, among others. Catalink competes
with all of these entities for the sale of its PC products. Each of these
entities in the PC distribution channel competes on a wide variety of
capabilities including price, delivery performance, breadth of products,
services offered, overall convenience, and in some cases specialized and
distinct capabilities. Most of these potential competitors have substantially
greater financial, technical and marketing resources than the Company.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
between personal computers, among local area networks or on the Internet.
However, due to the increasing popularity and use of personal computers and the
Internet, it is possible that a number of laws and regulations may be adopted
with respect thereto, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of electronic commerce and/or the
Internet, which could in turn decrease the demand for the Company's products and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, operating results or financial condition.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain.
10
<PAGE> 12
ENVIRONMENTAL MATTERS
Based on the Company's experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is in
material compliance with applicable environmental laws and regulations.
PERSONNEL
As of December 31, 1996, the Company had a total of 838 personnel,
including 776 salaried and 62 hourly personnel. The Company believes that its
personnel relations are good and its personnel are not represented by any labor
union. The Company's future success depends in significant part upon the
continued service of its key technical and senior management personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel, including its sales force. Competition for highly
qualified personnel is intense and there can be no assurance that the Company
can retain its key managerial and technical personnel or that it will be able to
attract or retain additional highly qualified technical and managerial personnel
in the future.
The rapid execution necessary for the Company to fully exploit the
opportunities for its products and services and the Company's rapid growth has
presented a significant challenge to the Company's personnel and management
resources. To mitigate this challenge and manage its expected growth, the
Company will continue to implement and improve its information systems and will
continue to expand, train and manage its personnel base.
COMPANY TRADE NAMES AND TRADEMARKS
The Company has referred to a variety of other entities and products in
this Annual Report on Form 10-K, certain of which are trade names or trademarks.
Such trade names or trademarks are the property of such companies.
ITEM 2. PROPERTIES
<TABLE>
As of December 31, 1996, the Company leased the properties set forth below,
and rented 21 other smaller field sales and support offices ("FSSOs"). The
following leases vary in length remaining, from less than one year to 18 years
for the Langley, Berkshire facility and, in some cases, include options to
extend the lease terms.
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
---------------------- ------- ----------------------
<S> <C> <C>
Norwood, Massachusetts 36,000 Headquarters; Catalink Boston-area FSSO
Westwood, Massachusetts 24,000 Elcom Systems Headquarters
Canton, Massachusetts 84,000 Catalink Configuration and Distribution
Irvine, California 14,000 Catalink FSSO, Configuration and Distribution
Bristol, Pennsylvania 35,000 Catalink Administrative, FSSO, Configuration and
Distribution
Langley, Berkshire (U.K.) 40,000 U.K. Headquarters; Catalink Configuration and
Distribution; FSSO
Manchester (U.K.) 4,000 FSSO
Basingstoke, Hampshire (U.K.) 7,500 Catalink Administrative and FSSO
</TABLE>
11
<PAGE> 13
Subject to ongoing review, the Company considers its facilities to be
generally sufficient to meet its near-term space requirements in light of its
current growth plans. The Company's operations are dependent in part upon its
ability to protect its network infrastructure in its Norwood, Massachusetts
facility against damage from physical break-ins, natural disasters, operational
disruptions and other events.
In addition to the leased properties mentioned above, the Company also
owns, through Prophet Group Limited, land and a building in Redditch, Hereford
U.K. comprising administrative, distribution, configuration and FSSO facilities
of approximately 20,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
On May 30, 1996, the Company filed a complaint (Civil Action No.
96004108-22-05) in the Civil Division of the Court of Common Pleas of Bucks
County Pennsylvania (the "Court") 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
Defendants' 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.
On September 13, 1996, Defendants filed a petition with the Court, based
primarily on their rescission claim, seeking preliminary injunctive relief with
regard to the Company's ongoing reorganization and consolidation of certain
departments and functions of the former Computerware. Defendants' petition was
denied by the Court on September 30, 1996.
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 controlling precedent that 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.
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<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the NASDAQ National Market System
(Symbol: ELCO). As of December 31, 1996, there were approximately 220
stockholders of record of the Company's Common Stock. The high and low closing
sales prices reported by the NASDAQ National Market System for the period
January 1, 1996 to December 31, 1996 were: high: $14.63, and low: $5.38. For the
period from January 1, 1997 to March 14, 1997 such high and low prices were:
high: $9.00, and low: $6.38.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently does not anticipate paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The following table sets forth selected consolidated financial data for the
Company for the periods from September 4, 1992 (inception) through December 31,
1996. The historical financial data are derived from the consolidated financial
statements of the Company audited by Arthur Andersen LLP, independent public
accountants. This information should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which are included elsewhere in this Annual Report. The data for
the periods presented are not necessarily comparable because of acquisitions
throughout these periods.
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
INCEPTION YEAR ENDED DECEMBER 31,
(SEPTEMBER 4, 1992) TO --------------------------------------------------
DECEMBER 31, 1992 1993 1994 1995 1996
--------------------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (1):
Net sales $4,214 $22,387 $57,712 $311,423 $620,115
Gross profit 790 3,749 8,778 39,382 70,039
Selling, general and administrative expenses 629 4,996 10,364 36,016 57,551
Research and development expenses 68 644 1,166 1,122 1,200
------ ------- ------- -------- --------
Operating profit (loss) 93 (1,891) (2,752) 2,244 11,288
Interest and other income (expense), net (22) (116) (146) (1,909) (2,303)
------ ------- ------- -------- --------
Income (loss) before income taxes 71 (2,007) (2,898) 335 8,985
Provision for income taxes 65 266 564 1,239 3,410
------ ------- ------- -------- --------
Net income (loss) $ 6 $(2,273) $(3,462) $ (904) $ 5,575
====== ======= ======= ======== ========
Net income (loss) per share $ (0.27) $ (0.05) $ 0.19
======= ======== ========
Weighted average shares outstanding 12,749 20,001 29,739
======= ======== ========
</TABLE>
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<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Total current assets $2,602 $5,098 $20,313 $136,781 $210,185
Total assets 2,735 7,010 22,356 174,231 260,769
Total current liabilities 2,473 5,169 13,997 89,290 161,158
Long-term liabilities, net of current portion 4 401 236 91 1,008
Total stockholders' equity 258 1,440 8,123 84,850 98,603
<FN>
- ----------
(1) The information presented includes the results of operations and financial
condition of CDCI, which was acquired in October 1994 and AMA, which was
acquired in February 1996. The acquisitions of CDCI and AMA were both
accounted for on a pooling of interests basis. As a result, the Company's
results of operations have been restated back to the Company's
incorporation in September 1992 to include the results of operations of
CDCI and AMA.
</TABLE>
ITEM 7. 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, and its
subsidiaries, to corporate customers. In addition, the Company, through its
wholly-owned subsidiary, Elcom Systems, generates revenues from licensing its
PECOS technology and providing related services to other companies. On a
stand-alone presentation basis for the year ended December 31, 1996, revenues
generated from Elcom Systems' licenses, including associated professional
services and maintenance fees, were approximately $3.4 million.
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 six PC products remarketers. In
October 1994, the Company completed the acquisition of CDCI, 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
U.K. operating as Lantec. The Computerware and Lantec acquisitions have been
accounted for as purchase transactions.
In February 1996, the Company completed the acquisition of AMA, a
remarketer of PC products in the U.K., 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. In December
1996, the Company acquired Prophet Group Limited, a PC products remarketer and
in February 1997, the Company acquired Data Supplies Limited, a PC products
remarketer, both of which are located in the U.K. The Prophet Group and Data
Supplies acquisitions have been accounted for as purchase transactions. The
Company's remarketer 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 Elcom Systems' PECOS technology, although there can be no
assurance as to the success or timing of any such acquisitions.
Catalink's revenues are effected by general price reductions by PC
manufacturers, which has been substantial, particularly in the first quarter of
1997. Such price cutting requires that Catalink increase its base unit
14
<PAGE> 16
volumes, and associated peripheral product sales to existing and newly acquired
customers, in order to overcome the effect of the cost cutting and increase its
revenue volume. Consequently, in order to increase revenues, such unit volumes
of sales are required to increase substantially, which amplifies the impact of
any slowdown in corporate customer demand on Catalink's revenues.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth various items as a percentage of net sales
for each of the years in the three year period ended December 31, 1996:
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ............................. 100% 100% 100%
Gross profit .......................... 15 13 11
Selling, general and
administrative expenses ............. 18 12 9
Research and development expenses ..... 2 -- --
Operating profit (loss) ............... (5) 1 2
Interest expense ...................... -- 1 1
Interest income and other, net ........ -- -- 1
Provision for income taxes ............ 1 -- 1
Net income (loss) ..................... (6) (--) 1
</TABLE>
Year ended December 31, 1996 compared to year ended December 31, 1995
Net Sales. Net sales for the year ended December 31, 1996 increased to
$620.1 million from $311.4 million in the year ended December 31, 1995 an
increase of $308.7 million, or 99%. Net sales in the U.S. increased to $435.1
million in 1996 from $219.4 million in 1995, a 98% 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 U.K.-based
operations (Lantec and AMA) increased to $185.0 million in 1996 from $92.0
million in 1995. This increase results primarily from the inclusion of Lantec's
results for all of 1996 vs. only a portion of 1995, as well as organic growth of
the U.K. group.
Gross Profit. Gross Profit for the year ended December 31, 1996 increased
to $70.0 million from $39.4 million in the year ended December 31, 1995, an
increase of $30.6 million, or 78%. 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% in 1995 to 11% in 1996. The decrease in gross profit
percentage is due primarily to the increasing contribution of net sales
generated from large corporate customers which typically generate lower gross
profit percentages on such larger volumes. The Company anticipates that its
gross profit percentage will continue to decline as a percentage of sales
because Catalink's business strategy includes generating substantial incremental
revenue from both new and existing large volume corporate customers which
typically generate lower gross margin percentages than other customers while
minimizing variable operating costs incurred in generating such gross profit
dollars.
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses for the year ended December 31, 1996 increased
to $57.6 million from $36.0 million in the year ended December 31, 1995, an
increase of $21.6 million or 60%. This increase is attributable primarily to the
increase in the Company's work force and associated overhead as well as the
S,G&A of acquired entities, including $2.2 million of goodwill amortization.
S,G&A also reflects substantial increases in Elcom Systems' expenses required to
support the actual and expected growth of this subsidiary. Other S,G&A expenses
also increased as the Company continued to invest in administrative
infrastructure to support its growth, including the ongoing development,
augmentation, and implementation of its new management information system which
is being implemented to allow the Company to operate more efficiently by
providing an information systems backbone for the Company and to effectuate the
15
<PAGE> 17
consolidation of the information and other internal systems of certain
acquisitions. As a result, the Company's level of S,G&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 S,G&A functions of currently owned entities or
entities to be acquired in the future. The Company also is 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, which is expected to occur in the
summer and into the latter half of 1997. Given a phased implementation, certain
redundant overheads may be eliminated prior to such time. Nonetheless, S,G&A
expenses decreased as a percentage of net sales for the year ended December 31,
1996 to 9%, from 12% in 1995, reflecting the substantial 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 year ended December 31, 1996
increased to $3.8 million from $2.2 million in 1995. Interest expense in both
years results from floor plan line of credit borrowings in support of the
Company's accounts receivable and inventory balances and the increase 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, for the
year ended December 31, 1996 increased to $1.5 million from $255,000 in 1995.
This increase is a direct result of investment income generated by investment of
available net proceeds remaining from the sale of the Company's common stock in
its initial public offering in December 1995 and upon exercise of the
underwriters' over-allotment option in January 1996.
Income Tax Provision. The income tax provisions in 1995 and 1996 primarily
relate to foreign income taxes of AMA and Lantec and certain current U.S. state
income tax provisions.
Net Income (Loss). The Company reported net income of $5.6 million for the
year ended December 31, 1996 versus a net loss of $(904,000) in 1995 as a result
of the factors described herein.
Year Ended December 31, 1995 compared to year ended December 31, 1994
Net Sales. Net sales for the year ended December 31, 1995 increased to
$311.4 million from $57.7 million in the year ended December 31, 1994, an
increase of $253.7 million, or 440%. Net sales for Catalink alone, excluding the
results of Computerware, Lantec, Elcom Systems and AMA grew from $28.8 million
in 1994 to $122.8 million in 1995, a 326% increase. This increase is
attributable to increased sales staffing, and the consequent generation of new
customers and related sales, and to a lesser extent, from increased sales to
existing customers.
Gross Profit. Gross profit for the year ended December 31, 1995 increased
to $39.4 million from $8.8 million in the year ended December 31, 1994, an
increase of $30.6 million, or 348%. Gross profit, including the contribution
from acquisitions, as a percent of net sales decreased from 15% in 1994 to 13%
in 1995. The increase in gross profit dollars generated resulted from the
substantial growth in net sales. The decrease in gross profit percentage
reflects a higher portion of net sales in 1995 to large dollar volume corporate
accounts which generally yield lower gross profit percentages than lower dollar
volume accounts. The Company anticipates that the gross profit percentage will
continue to decline because Catalink's business strategy includes generating
incremental revenues from both new and existing large volume corporate accounts.
16
<PAGE> 18
Selling, General and Administrative Expenses. S,G&A expenses for the year
ended December 31, 1995 increased to $36.0 million from $10.4 in the year ended
December 31, 1994, an increase of $25.6 million or 246%. The substantial
increase is primarily attributable to the increase in the Company's work force
and the expenses of the acquired companies, including $1.5 million of 1995
goodwill amortization expense. Other selling, general and administrative
expenses also increased, as the Company continued to invest in administrative
infrastructure to support its growth. Selling, general and administrative
expenses decreased as a percentage of net sales from 18% in 1994 to 12% in 1995,
reflecting the impact of the substantial increase in net sales.
Research and Development Expense. Research and development expense
decreased from approximately $1.2 million in 1994 to $1.1 million in 1995. This
decline reflects the Company's earlier stage investments in developing the PECOS
operating system and a shift in emphasis by the Company to market and implement
its proprietary electronic commerce technology in other industries. The Company
expects to continue investing significant amounts in research and development.
Interest Expense. Interest expense for the year ended December 31, 1995
increased to $2.2 million from $.2 million in 1994. Interest expense in 1995
primarily results from the floor plan borrowings in support of the Company's
accounts receivable and inventory. Interest expense in 1994 related to both bank
borrowings in support of the Company's asset acquisitions and other operating
cash requirements, as well as floor plan borrowings in support of the Company's
accounts receivable and inventory. Generally, bank borrowings in 1994 were
repaid from equity funds raised.
Income Tax Provision. The income tax provision in 1995 relates to foreign
income taxes of Lantec and certain current state income taxes payable by the
Company. In 1994, the tax provision related to the separate profitable
operations of CDCI prior to its acquisition by the Company.
Net Loss. The net loss for 1995 was reduced by $2.6 million or 74%, from
$(3.5 million) in 1994 to $(904,000), reflecting the impact of the factors
described above.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended December 31, 1996
was $56.3 million, including $71.1 million relating to increases in accounts
receivable, resulting from the Company's increase in net sales during 1996. Net
cash used for investing activities was $15.4 million, consisting primarily of
$6.5 million in additions to property, equipment and software and $8.3 million
of cash paid for acquisitions. Net cash provided by financing activities was
$49.6 million, including $6.2 million in net proceeds from the Company's sale of
common stock to the underwriters of its initial public offering upon exercise of
their over-allotment option and a $43.0 million net increase in borrowings under
floor plan lines of credit.
Net cash used in operating activities for the year ended December 31, 1995
was $39.4 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 $34.6 million
relating to increases in accounts receivable. Net cash used in 1995 investing
activities was $12.3 million and included $6.5 million related to the purchase
of Lantec and $5.8 million of additions to property, equipment and software. The
Company received a net total of $91.4 million from financing activities in 1995,
$40.1 million from the Company's sale of stock in its initial public offering
and related exercise of common stock warrants, $19.1 million from the sale of
Series B Convertible Preferred Stock and $37.5 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 Computerware loans to the former
shareholders of Computerware.
Net cash used in operating activities for the year ended December 31, 1994
was $9.4 million, including $9.9 million relating to increases in accounts
receivable. Net cash used in investing activities was $0.7 million, of which
$0.6 million was used for additions to property, equipment and software. Net
cash provided by financing activities was $14.9 million including approximately
$10.1 million from the sale of Series B Preferred Stock, and $4.9 million from a
net increase in borrowings under the Company's lines of credit.
17
<PAGE> 19
At December 31, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $23.3 million and floor plan lines of credit from
Deutsche Financial Services Corporation ("DFSC"). The DFSC facility provides for
aggregate borrowings of up to $100 million, and as of July 1, 1996, the interest
rate was reduced to the prime rate. Availability of borrowings is based on
DFSC's determination as to eligible accounts receivable and inventory. At
December 31, 1996, the Company's borrowings from DFSC on its floor plan line of
credit were $71.4 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 plus 1%, and
thereafter at the prime rate (8.25% at December 31, 1996), although
approximately one-half of the Company's initial borrowings do not bear interest
until after 30 days have lapsed. As of March 1, 1997, the interest rate was
reduced to prime minus 1%. 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 also are 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 $9.5 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
December 31, 1996, the Company's borrowings from IBMCC on its floor plan line of
credit were $4.3 million.
Lantec maintains a financing facility with Kellock Limited, an affiliate of
NatWest Bank, PLC, which provides for borrowings of up to approximately $15.4
million. Borrowings bear interest at the Bank of Scotland base rate (6.0% at
December 31, 1996) plus 1.2% and are primarily secured by accounts receivable.
AMA maintains a factoring agreement with International Factors Limited
(IFL), under which IFL acts as AMA's factor for a portion of its accounts
receivable. The factoring charges amount to the Lloyds Bank base rate (6.0% at
December 31, 1996) plus 1.75% of the accounts receivable assigned, in addition
to certain administration charges, as defined.
Prophet Group maintains a financing arrangement with Confidential Invoice
Discounting Limited, a financing company, which provides for borrowings up to
the lesser of the security value of accounts receivable, as defined, or
$6,850,000. Borrowings bear interest at the Lloyds Bank base rate (6.0% at
December 31, 1996) plus 1.25%.
As of December 31, 1996, the Company had borrowings aggregating
approximately $90 million outstanding under the aforementioned facilities, which
approximated its availability thereunder.
Based upon ongoing analyses, and the requirement that it establish a direct
purchasing relationship with a major PC manufacturer to support fulfillment
requirements under a recently awarded contract, the Company has decided to begin
purchasing products directly from selected manufacturers. The Company believes
that it can substantially mitigate the risks associated with additional
inventory positions by limiting the range of models it stocks to those in demand
and by carefully monitoring items on hand relative to demand. The Company
believes that this change should improve its delivery time to customers and the
quality control of configured systems and, over time, may increase the
profitability of the Company. The Company also will continue to maintain
electronic links, logistical and traditional relationships with selected
distributors and/or aggregators.
In order to augment its capital position, focus attention on its PECOS
technology, and establish a market value for its technology subsidiary, the
Company is conducting discussions with selected investment banks to evaluate 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 software technology. The
18
<PAGE> 20
offering would only be made pursuant to a prospectus included in a registration
statement which would be filed with the Securities and Exchange Commission.
Although discussions and consideration of such an offering are ongoing, the
timing thereof has been deferred due to what the Company believes are
unfavorable market conditions. There can be no assurances as to the likelihood,
the success, the valuation, the timing or the size of any such possible capital
offering. In order to support such a possible capital offering, the Company is
likely to continue to invest greater 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 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 I, Item 3. Legal Proceedings, and Note 6 to the
Consolidated Financial Statements contained in Part II, Item 8., herein.
The Board of Directors of the Company has authorized the purchase of up to
600,000 shares of common stock to be held as treasury stock specifically for
reissuance in connection with acquisitions. The Company anticipates that it may
acquire shares in the open market under this authorization from time to time.
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, 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.
SEASONALITY AND IMPACT OF INFLATION
Due to its growth, the Company historically has not experienced observable
seasonality in its business. Generally, however, sales in the PC remarketer
industry slow in the summer months and are stronger in the fourth calendar
quarter in the U.S. and somewhat weaker in the first calendar quarter, while
sales are generally strong in the first calendar quarter in the U.K. Due to its
current size and the nature of its customer base, it is likely that the sales of
Catalink will be impacted by general industry seasonality in the future. Elcom
Systems' net sales are not seasonal in nature.
Inflation has been relatively low in recent years and, accordingly the
Company has not been significantly impacted by the effects of general inflation.
However, in the latter half of 1996 the Company has been increasingly impacted
by the low unemployment in certain of its markets, particularly in the Northeast
U.S. and the U.K., which has resulted in significant increases in salaries for a
variety of personnel (particularly technical personnel) in order for the Company
to remain competitive in the employment marketplace.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K could include forward-looking
information. All statements other than statements of historical fact, including,
without limitation, those with respect to the Company's objectives, plans and
strategies set forth herein and those preceded by or that include the words
"believes," "expects," "anticipates," or similar expressions, are
forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, it can give no assurance that the
Company's expectations are correct. These forward-looking statements 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, the success and timing of implementing the
Company's new management
19
<PAGE> 21
information system, risks associated with acquisitions of companies, business
conditions and growth in the PC industry, the results of pending litigation and
the other risks detailed from time to time in this Annual Report on Form 10-K
and in the Company's other SEC reports, including the Company's prospectus
included as part of the S-1 Registration Statement declared effective on
December 19, 1995 under the Securities Act of 1933.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements beginning on page F-1.
Supplemental quarterly financial information for the Company is included in Note
10 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is set forth in the
definitive Proxy Statement ("the Proxy Statement") to be sent to stockholders in
connection with the Company's 1997 Annual Meeting of Stockholders to be held
June 10, 1997, under the heading "Election of Directors", which information is
incorporated herein by reference. Information concerning each executive officer
of the Company is set forth in the Proxy Statement under the heading "Management
- - Executive Officers", which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Stockholders and Management Ownership", which information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions",
which information is incorporated herein by reference.
20
<PAGE> 22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The following documents are filed as part of this Annual Report on Form 10-K:
(a) (1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(2) Consolidated Financial Statement Schedules for each of the
Three Years in the Period Ended December 31, 1996:
Report of Independent Auditors on Schedule II Valuation and
Qualifying Accounts Schedule II Valuation and Qualifying
Accounts
See Index to Schedule on page S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Index to Exhibits:
The exhibits filed as part of this form 10-K are listed on the
Index to Exhibits beginning on page E-1, which Index to Exhibits is incorporated
herein by reference. The Company's current management contracts and executive
compensation plans and arrangements are listed in the Index to Exhibits
incorporated herein by reference at exhibit numbers 10.1; 10.2; 10.3; 10.19;
10.20; 10.22; 10.23; 10.29; 10.36; 10.37 and 10.38.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company filed a current
report on Form 8-K dated December 6, 1996 reporting pursuant to Item 2 thereof
the acquisition of Prophet Group Limited, a U.K. based remarketer of personal
computer products.
(c) Exhibits:
See Index to Exhibits beginning on page E-1.
---------------------------------------
The Company will provide copies of the Consolidated Financial Statement Schedule
and Index to Exhibits to stockholders upon request.
21
<PAGE> 23
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.
Elcom International, Inc.
(Registrant)
Date: March 21, 1997 By: /s/ Robert J. Crowell
------------------------------------
ROBERT J. CROWELL
Chairman and Chief Executive Officer
<TABLE>
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 DATE INDICATED.
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Robert J. Crowell Chairman of the March 21, 1997
- ------------------------------------- Board of Directors
ROBERT J. CROWELL and Chief Executive Officer
(Principal Executive Officer)
/s/ Laurence F. Mulhern Corporate Executive March 21, 1997
- ------------------------------------- Vice President,
LAURENCE F. MULHERN Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
/s/ William W. Smith Vice Chairman and Director March 21, 1997
- -------------------------------------
WILLIAM W. SMITH
/s/ James Rousou Corporate Executive March 21, 1997
- ------------------------------------- Vice President and Director
JAMES ROUSOU
/s/ J. Richard Cordsen Director March 21, 1997
- -------------------------------------
J. RICHARD CORDSEN
/s/ Richard J. Harries, Jr. Director March 21, 1997
- -------------------------------------
RICHARD J. HARRIES, JR.
/s/ John W. Ortiz Director March 21, 1997
- -------------------------------------
JOHN W. ORTIZ
</TABLE>
22
<PAGE> 24
ELCOM INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Agreement for the sale and purchase of shares in the capital of
Prophet Group Limited dated December 6, 1996, by and among Lantec
(Management) Limited (a subsidiary of the Registrant) and the
Vendors (as defined therein). (3)
2.2 Agreement and Plan of Merger by and among the Registrant, Catalink
Acquisition Sub, Inc. and Computerware Business Trust
(Computerware) and its former shareholders, dated February 6, 1995.
(1)
2.3 Lantec Share Purchase Agreement by and among the Registrant and the
former shareholders of Lantec, dated June 12, 1995. (1)
2.4 Agreement for the exchange of shares in the capital of AMA (UK)
Limited for shares in the Registrant, dated February 29, 1996, by
and among the Registrant and the Vendors (as defined therein). (2)
2.5 Agreement for the sale and purchase of shares in the capital of
Data Supplies Limited dated February 21, 1997, by and among Elcom
Group Limited (a subsidiary of the Registrant), the Vendor (as
defined therein) and Mr. Savage. (4)
3.3 Second Restated Certificate of Incorporation of the Registrant. (5)
3.4 By-Laws of the Registrant, amended as of November 6, 1995. (1)
4.4 Specimen certificate of the Registrant's Common Stock. (1)
4.5 Form of 8% Series A Cumulative Convertible Preferred ("Series A")
Stock Purchase Agreement, with attached list of purchasers and
number of shares purchased, as of December 10, 1993. (1)
4.8 Form of Series B Preferred Stock Purchase Agreement for Closings
held on April 15, June 21 and August 11, 1994, with attached list
of purchasers and number of shares purchased. (1)
4.9 Form of Series B Preferred Stock Purchase Agreement for Closings
held on December 30, 1994 and February 6, 1995, with attached list
of purchasers and number of shares purchased. (1)
4.10 Form of Series C Preferred Stock Purchase Agreement for Closings
held on June 22 and June 30, 1995, with attached list of purchasers
and number of shares purchased. (1)
4.12 Securities Agreement, dated September 1, 1993, as amended February
1, 1994, by and among the Registrant, Robert J. Crowell, and 19
other listed purchasers, as of June 2, 1995 (1) and list of other
assignees of certain registration rights thereunder. (x)
4.13 Securities Agreement, dated October 28, 1994, by and among the
former stockholders of CSI and the Registrant. (1)
E-1
<PAGE> 25
Exhibit No. Description
- ----------- -----------
4.14 Computerware Stockholders' Agreement, dated February 6, 1995, by
and among the Registrant, Robert J. Crowell and the former
shareholders of Computerware. (1)
4.15 Amended and Restated Lantec Stockholders' Agreement, dated April 6,
1996, by and among the Registrant, Robert J. Crowell and the former
shareholders of Lantec. (6)
4.16 Form of Lantec Warrant Agreement, dated June 22, 1995, with
attached list of holders and number of warrants held. (1)
4.17 AMA Securities Agreement, dated February 29, 1996, by and among the
Registrant and the former stockholders of AMA (UK) Limited. (x)
10.1 Form of Indemnity Agreement for Executive Officers and/or Directors
of the Registrant, with attached list of other Director and/or
Executive Officer Indemnitees. (1)(*)
10.2 Stock Option Plan of the Registrant dated February 23, 1993, as
amended June 3, 1994 and November 6, 1995. (1) (*)
10.3 1995 (Computerware) Stock Option Plan of the Registrant, dated
February 6, 1995 (1), as amended by Amendment No. 1 dated August
19, 1996. (x) (*)
10.4 $100,000,000 Business Credit and Security Agreement Dated as of
March 1, 1997 among Catalink Direct, Inc., Catalink Direct
(Pennsylvania), Inc. and Deutsche Financial Services Corporation
("Deutsche"). (x)
10.5 Lease Agreement for the Registrant's Headquarters, dated July 5,
1993, by and among Oceana Way Associates and the Registrant. (1)
10.6 Lease Agreements for Lantec Headquarters, among Allied Dunbar
Assurance PLC to Businessland (UK) Limited and Businessland Inc.,
dated November 23, 1988, with Licenses to Assign to Lantec
Information Services Ltd., and Supplemental Deed dated November 4,
1993. (1)
10.13 Lock Box Agreement, dated May 1, 1994, by and among Deutsche, Fleet
Bank of Massachusetts and the Registrant; and Storage Agreement by
and between Ingram Micro and Deutsche. (1)
10.15 Guaranty by the Registrant in favor of Deutsche, dated November 6,
1995, as amended, guarantying Computerware's indebtedness to
Deutsche (1) as ratified by a Reaffirmation of Guaranty dated March
1, 1997. (x)
10.19 Employment Agreement by and between the Registrant and Robert J.
Crowell dated September 20, 1995. (1) (*)
10.20 Employment Letter Agreement by and between Elcom Systems, Inc. and
David Wolf, dated February 23, 1993, as amended April 21, 1993. (1)
(*)
10.22 Employment Agreement by and between the Registrant and James
Rousou, dated April 1, 1996. (7 (*)
10.23 Employment Letter Agreement by and between Elcom Systems and Andres
Escallon, dated February 23, 1993, as amended April 21, 1993. (1)
(*)
E-2
<PAGE> 26
Exhibit No. Description
- ----------- -----------
10.25 Invoice Discounting Agreement by and between Kellock Limited and
Lantec Information Services, dated August 17, 1993, as amended
February 14, 1995. (1)
10.28 Software License and Support Agreement by and between the
Registrant and Spectrum Associates, Inc., dated June 30, 1995. (1)
10.29 1995 Non-Employee Director Stock Option Plan of the Registrant,
dated October 9, 1995. (1) (*)
10.33 Guaranty by the Registrant in favor of Deutsche, dated November 6,
1995, guarantying Catalink's indebtedness to Deutsche (1) as
ratified by a Reaffirmation of Guaranty dated March 1, 1997. (x)
10.36 The 1996 Stock Option Plan of Elcom International, Inc. (8) (*)
10.37 Employment Agreement by and between Registrant and Laurence F.
Mulhern dated July 1, 1996. (8) (*)
10.38 The 1996 Stock Option Plan of Elcom Systems, Inc. (x) (*)
11.1 Statement regarding computation of pro forma income (loss) per
common share. (x)
21.1 List of the Registrant's Subsidiaries. (x)
23.1 Consent of Arthur Andersen LLP. (x)
23.2 Consent of Deloitte & Touche. (x)
27 Financial Data Schedule. (x)
- --------------
(1) Previously filed as an exhibit to Registration Statement No. 33-98866 on
Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to Current Report on Form 8-K (date of
report February 29, 1996) filed March 14, 1996, and incorporated herein by
reference.
(3) Previously filed as an exhibit to Current Report on Form 8-K (date of
report December 6, 1996) filed December 19, 1996, and incorporated herein
by reference.
(4) Previously filed as an exhibit to Current Report on Form 8-K (date of
report February 21, 1997) filed March 6, 1997, and incorporated herein by
reference.
(5) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, and incorporated herein by
reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
E-3
<PAGE> 27
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
The following consolidated financial statements of Elcom International,
Inc. are included in response to Item 8:
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Reports of Other Auditors F-3 to F-4
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-5
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 F-8
Notes to Consolidated Financial Statements F-9 to F-21
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Elcom International, Inc.:
We have audited the accompanying consolidated balance sheets of Elcom
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. The consolidated statements give retroactive effect to
the merger with AMA (UK) Limited on February 29, 1996, which has been accounted
for as a pooling of interests as described in Notes 1 and 2. These consolidated
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 did not audit the financial statements of Elcom International
Limited and AMA (UK) Limited, both of which are wholly-owned subsidiaries, which
statements, in the aggregate, reflect total assets constituting $56,625,000 and
$98,879,000 of the related 1995 and 1996 consolidated financial statement
totals, respectively, and which statements reflect net income of $774,000,
$1,224,000 and $4,301,000 of the 1994, 1995 and 1996 consolidated financial
statement totals, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
amounts included for Elcom International Limited and AMA (UK) Limited is based
solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits, and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Elcom International, Inc. and
subsidiaries as of December 31, 1995 and 1996 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 21, 1997
F-2
<PAGE> 29
REPORT OF OTHER AUDITORS
AUDITORS' REPORT TO THE DIRECTORS OF
ELCOM INTERNATIONAL LIMITED
(FORMERLY ELCOM HOLDINGS LIMITED)
(FORMERLY PCO 138 LIMITED)
We have audited the financial statements of Elcom International Limited (not
separately presented herein) which have been prepared under the accounting
policies set out in the notes to the accounts.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 of the financial statements the company's directors are
responsible for the preparation of financial statements. It is our
responsibility to form an independent opinion, based on our audit, on those
statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1995 and 1996 and of its profit for
the years then ended.
DELOITTE & TOUCHE
Chartered Accountants
London
21 March 1997
F-3
<PAGE> 30
REPORT OF OTHER AUDITORS
AUDITORS' REPORT TO THE DIRECTORS OF
AMA (UK) LIMITED
We have audited the financial statements of AMA (UK) Limited (not separately
presented herein) which have been prepared under the accounting policies set out
in the notes to the accounts.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 2 of the financial statements the company's directors are
responsible for the preparation of financial statements. It is our
responsibility to form an independent opinion, based on our audit, on those
statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1995 and 1996 and of its profit for
each of the three years in the period ended 31 December 1996.
DELOITTE & TOUCHE
Chartered Accountants
London
21 March 1997
F-4
<PAGE> 31
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 44,977 $ 23,259
Accounts receivable, net of allowance for doubtful
accounts of $1,709 and $ 4,312................................. 72,632 151,344
Inventory........................................................ 17,270 34,718
Prepaids and other current assets................................ 1,902 864
-------- ---------
Total current assets...................................... 136,781 210,185
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software................................... 11,629 17,577
Land, buildings and leasehold improvements....................... 1,935 3,415
Furniture, fixtures and equipment................................ 4,130 6,202
-------- ---------
17,694 27,194
Less -- Accumulated depreciation and amortization................ 8,740 13,308
-------- ---------
8,954 13,886
-------- ---------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION......... 28,496 36,698
-------- ---------
$174,231 $ 260,769
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit.................................................... $ 45,611 $ 89,469
Accounts payable................................................... 33,417 36,987
Accrued expenses and other current liabilities..................... 10,077 34,405
Current portion of capital lease obligations....................... 185 252
Current portion of long-term debt.................................. -- 45
-------- ---------
Total current liabilities................................... 89,290 161,158
-------- ---------
OTHER DEFERRED LIABILITIES........................................... 43 32
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION.................... 48 556
LONG-TERM DEBT, NET OF CURRENT PORTION............................... -- 420
-------- ---------
91 1,008
-------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
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 26,663,512 shares..... 255 267
Additional paid-in capital......................................... 91,113 98,483
Accumulated deficit................................................ (6,494) (919)
Treasury stock, at cost -- 0 and 37,546 shares.................... -- (366)
Cumulative translation adjustment.................................. (24) 1,138
-------- ---------
Total stockholders' equity.................................. 84,850 98,603
-------- ---------
$174,231 $ 260,769
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 32
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Net sales............................... $57,712 $311,423 $620,115
Cost of sales........................... 48,934 272,041 550,076
------- -------- --------
Gross profit............................ 8,778 39,382 70,039
Expenses:
Selling, general and administrative... 10,364 36,016 57,551
Research and development.............. 1,166 1,122 1,200
------- -------- --------
Total expenses.......................... 11,530 37,138 58,751
------- -------- --------
Operating profit (loss)................. (2,752) 2,244 11,288
Interest expense........................ (208) (2,164) (3,837)
Interest income and other, net.......... 62 255 1,534
------- -------- --------
Net income (loss) before income taxes... (2,898) 335 8,985
Provision for income taxes.............. 564 1,239 3,410
------- -------- --------
Net income (loss)....................... $(3,462) $ (904) $ 5,575
======= ======== ========
Net income (loss) per share............. $ (0.27) $ (0.05) $ 0.19
======= ======== ========
Weighted average shares outstanding..... 12,749 20,001 29,739
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 33
ELCOM INTERNATIONAL, INC
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------- -------------------------- ADDITIONAL
NUMBER $ 01 PAR NUMBER $ 01 PAR PAID-IN
OF SHARES VALUE OF SHARES VALUE CAPITAL
--------------------------- -------------------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 as previously reported 244,444 $ 2 5,869,345 $ 59 $ 3,469
Pooling of interests with AMA (U.K.) Limited........... -- -- 3,247,371 32 6
--------------------------- -------------------------- -------
BALANCE, DECEMBER 31, 1993, RESTATED................... 244,444 2 9,116,716 91 3,475
Conversion of Series A convertible preferred
stock and reversal of dividend..................... 244,444 2 -- -- 6
Sale of Series B convertible
preferred stock, net of offering
costs of approximately $666........................ 2,963,287 30 -- -- 10,046
Net loss............................................. -- -- -- -- --
Cumulative translation adjustment.................... -- -- -- -- --
--------------------------- -------------------------- -------
BALANCE, DECEMBER 31, 1994............................. 3,452,175 34 9,116,716 91 13,527
Sale of Series B convertible
preferred stock, net of offering
costs of approximately $159........................ 1,482,736 15 -- -- 5,200
Sale of Series C convertible
preferred stock, net of offering
costs of approximately $651........................ 3,052,385 31 -- -- 13,817
Purchase of Computerware............................. -- -- 1,326,417 13 4,795
Purchase of Lantec................................... -- -- 2,899,820 29 13,745
Exercise of common stock options..................... -- -- 9,963 -- 12
Conversion of Series B convertible
preferred stock into common stock................. (4,934,911) (49) 4,934,911 49 --
Conversion of Series C convertible
preferred stock into common stock................. (3,052,385) (31) 3,052,385 31 --
Proceeds from sale of common stock, net of
offering costs of approximately $4,558............ -- -- 4,000,000 40 39,402
Exercise of warrants................................. -- -- 170,085 2 615
Net loss............................................. -- -- -- -- --
Cumulative translation adjustment.................... -- -- -- -- --
--------------------------- -------------------------- -------
BALANCE, DECEMBER 31, 1995............................. -- -- 25,510,297 255 91,113
Proceeds from sale of common stock, net of
offering costs of approximately $200.............. -- -- 629,489 6 6,234
Exercise of common stock options..................... -- -- 523,726 6 920
Tax effect of AMA (U K.) Limited pooling............. -- -- -- -- 216
Net income........................................... -- -- -- -- --
Cumulative translation adjustment.................... -- -- -- -- --
--------------------------- -------------------------- -------
BALANCE, DECEMBER 31, 1996............................. -- $ -- 26,663,512 $267 $98,483
=========================== ========================== =======
<CAPTION>
TREASURY CUMULATIVE TOTAL
ACCUMULATED STOCK, TRANSLATION STOCKHOLDERS'
DEFICIT AT COST ADJUSTMENT EQUITY
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 as previously reported...... $(2,867) $ -- $ -- $ 663
Pooling of interests with AMA (U.K.) Limited........... 739 -- -- 777
------- ----- ------ -------
BALANCE, DECEMBER 31, 1993, RESTATED................... (2,128) -- -- 1,440
Conversion of Series A convertible preferred
stock and reversal of dividend..................... -- -- -- 8
Sale of Series B convertible
preferred stock, net of offering
costs of approximately $666........................ -- -- -- 10,076
Net loss............................................. (3,462) -- -- (3,462)
Cumulative translation adjustment.................... -- -- 61 61
------- ----- ------ -------
BALANCE, DECEMBER 31, 1994............................. (5,590) -- 61 8,123
Sale of Series B convertible
preferred stock, net of offering
costs of approximately $159........................ -- -- -- 5,215
Sale of Series C convertible
preferred stock, net of offering
costs of approximately $651........................ -- -- -- 13,848
Purchase of Computerware............................. -- -- -- 4,808
Purchase of Lantec................................... -- -- -- 13,774
Exercise of common stock options..................... -- -- -- 12
Conversion of Series B convertible
preferred stock into common stock................. -- -- -- --
Conversion of Series C convertible
preferred stock into common stock................. -- -- -- --
Proceeds from sale of common stock, net of
offering costs of approximately $4,558............ -- -- -- 39,442
Exercise of warrants................................. -- -- -- 617
Net loss............................................. (904) -- -- (904)
Cumulative translation adjustment.................... -- -- (85) (85)
------- ----- ------ -------
BALANCE, DECEMBER 31, 1995............................. (6,494) -- (24) 84,850
Proceeds from sale of common stock, net of
offering costs of approximately $200.............. -- -- -- 6,240
Exercise of common stock options..................... -- (366) -- 560
Tax effect of AMA (U K.) Limited pooling............. -- -- -- 216
Net income........................................... 5,575 -- -- 5,575
Cumulative translation adjustment.................... -- -- 1,162 1,162
------- ----- ------ -------
BALANCE, DECEMBER 31, 1996............................. $ (919) $(366) $1,138 $98,603
======= ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 34
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(3,462) $ (904) $ 5,575
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization........................ 637 3,101 6,704
Provision for doubtful accounts...................... 360 472 2,586
Other deferred liabilities........................... -- -- (11)
Changes in current assets and liabilities, net
of purchase acquisitions --
Accounts receivable................................ (9,892) (34,596) (71,095)
Inventory.......................................... (615) 4,357 (13,955)
Prepaids and other current assets.................. 127 (1,011) 1,064
Accounts payable................................... 2,920 (1,181) (6,858)
Accrued expenses and other current liabilities..... 567 (9,675) 19,695
------- -------- --------
Net cash used in operating activities........... (9,358) (39,437) (56,295)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software.............. (617) (5,880) (6,506)
Increase in other assets and deferred costs............... (102) (105) (795)
Purchase of Computerware, net of cash acquired............ -- 153 --
Purchase of Lantec........................................ -- (6,452) --
Tax effect of AMA (U.K.) Limited Pooling.................. -- -- 216
Purchase of Prophet Group, net of cash acquired........... -- -- (8,331)
------- -------- --------
Net cash used in investing activities............... (719) (12,284) (15,416)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit...................... 4,946 37,457 43,009
Sale of common stock, net of offering costs............... -- 39,442 6,240
Sale of preferred stock................................... 10,076 19,063 --
Repayment of capital lease obligations and long-term debt. (165) (153) (215)
Exercise of common stock options.......................... -- 12 560
Exercise of common stock warrants......................... -- 617 --
Repayment of Computerware stockholders' loans............. -- (5,000) --
------- -------- --------
Net cash provided by financing activities........... 14,857 91,438 49,594
------- -------- --------
FOREIGN EXCHANGE EFFECT ON CASH............................. 8 (60) 399
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................... 4,788 39,657 (21,718)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....................................... 532 5,320 44,977
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,320 $ 44,977 $ 23,259
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid............................................. $ 199 $ 1,964 $ 3,711
======= ======== ========
Income taxes paid......................................... $ 426 $ 526 $ 523
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations..................... $ 42 $ -- $ 787
======= ======== ========
Retirement of fully depreciated assets.................... $ -- $ 1,304 $ --
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 35
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Elcom International, Inc. (the Company) is a developer of electronic
commerce applications (primarily the Personal Electronic Catalog and Ordering
System, hereinafter referred to as "PECOS") utilizing interactive
computer-to-computer based electronic catalog marketing and procurement
technologies. These technologies are licensed to third parties and are also
utilized by certain subsidiaries in the direct marketing and remarketing of
personal computer products. The Company commenced development operations in
September 1992, and began commercial operations in December 1993, as a
remarketer of personal computer products.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
(b) Restatement of Prior Periods
The accounting and reporting policies of the Company conform with generally
accepted accounting principles. As a result of the pooling of interests with AMA
(UK) Limited discussed in Note 2, these consolidated financial statements
reflect the Company's consolidated results as if the pooling occurred on
December 31, 1993.
(c) 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 amounts reported in the financial statements and
accompanying notes. Actual results may differ from such estimates.
(d) Cash and Cash Equivalents
Cash equivalents at December 31, 1995 and 1996 consisted of U.S. Government
obligations with maturities of three months or less. These securities,
classified as held-to-maturity, are carried at cost plus accrued interest, which
approximates fair value in accordance with Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial Instruments,
and SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Since held-to-maturity securities are short-term in nature, changes
in market interest rates would not have a significant impact on the fair value
of these securities. Interest earned on all securities is included in interest
income and other, net in the Consolidated Statements of Operations.
At December 31, 1995, the Company held approximately $14,925,000 in escrow
as custodian for the benefit of the selling stockholders who participated in the
Company's initial public offering, which was completed on December 26, 1995.
These funds are not included in the accompanying consolidated financial
statements as of December 31, 1995. These funds, along with the selling
stockholder proceeds relating to the underwriters' over-allotment option (See
Note 5 (e)), were distributed to the selling stockholders in February 1996.
(e) Inventory
Inventory consists of purchased personal computer products, peripherals and
accessories available for resale. Inventories are stated at the lower of cost
(first-in, first-out) or market. The Company periodically reviews its inventory
for potential excess, slow-moving, nonsalable or obsolete inventory. To date,
the Company has not provided any material inventory reserves.
F-9
<PAGE> 36
(f) Prepaids and Other Current Assets
Consistent with the provisions of the American Institute of Certified
Public Accountants' Statement of Position (SOP) No. 93-7, Reporting on
Advertising Costs, the costs of maintaining, reproducing and mailing the
Company's PECOS front-end software, which constitute direct-response advertising
costs, are deferred and charged to operations over the estimated periods during
which related sales are expected to be realized, which is estimated to be five
months. Such net capitalized costs totaled $456,000 and $521,000 at December 31,
1995 and 1996, respectively. For each year in the three-year period ended
December 31, 1996 the Company charged approximately $225,000, $767,000 and
$839,000 respectively, of these costs to operations, none of which represented
write-downs to net realizable value of the capitalized costs.
(g) Depreciation and Amortization
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate the cost
of property, equipment and software over their estimated useful lives of three
to five years. Buildings are depreciated over a useful life of fifty years. The
capitalized cost of leased equipment and leasehold improvements are amortized
over the estimated life of the related assets.
(h) Goodwill and Other Assets
The excess of the purchase price over the fair value of net assets acquired
in each acquisition accounted for as a purchase is classified as goodwill and
included in the accompanying consolidated balance sheets. Goodwill is amortized
on a straight-line basis over an estimated useful life of 15 years. Goodwill
(net of accumulated amortization of $1,132,000 and $3,021,000) was $26,525,000
and $34,649,000 at December 31, 1995 and 1996, respectively. Other intangible
assets (net of accumulated amortization of $329,000 and $724,000) associated
with acquisitions amounted to $1,612,000 and $1,517,000 at December 31, 1995 and
1996, respectively, and have been assigned a five year life. Amortization of
goodwill and such other intangibles amounted to $1,461,000 and $2,210,000 for
the years ended December 31, 1995 and 1996, respectively.
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
evaluates the realizability of goodwill based on profitability expectations,
using the undiscounted cash flow method, for each subsidiary having a material
goodwill balance. Based on its most recent analysis, the Company believes that
no impairment of goodwill exists at December 31, 1996.
The Company generally expenses research and development costs as incurred.
However, in accordance with SFAS No. 86, Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed, the Company capitalizes
certain software development costs, consisting primarily of personnel costs,
subsequent to the establishment of technological feasibility until the product
is available for general product release. Costs incurred prior to the
establishment of technological feasibility are charged to operations.
Development costs associated with product enhancements that extend the original
product's life or significantly improve the original product's marketability are
also capitalized, as incurred, after technological feasibility has been
achieved. Capitalized software development costs are amortized over their
estimated useful lives of two years. Net capitalized costs amounted to $230,000
and $461,000 as of December 31, 1995 and 1996, respectively. Amortization
expense amounted to $28,000, $62,000 and $195,000 for each of the three years in
the period ended December 31, 1996, respectively.
The Company has capitalized certain costs that are associated with the
organization of the corporation totaling $152,000. The costs are being amortized
over an estimated useful life of five years. Amortization expense for each of
the three years in the period ended December 31, 1996 amounted to approximately
$33,000, $29,000 and $35,000, respectively.
F-10
<PAGE> 37
(i) Revenue Recognition
The Company derives substantially all of its revenue from sales of personal
computer products, peripherals and accessories. The Company provides for
estimated returns at the time of sale. Revenue from product sales is recognized
upon shipment.
The Company recognizes software license revenue in accordance with the
provisions of SOP No. 91-1, Software Revenue Recognition. Revenue from the
licensing of software is recognized upon shipment of the software if there are
no significant post delivery obligations and collectibility of the revenue is
assured. If an acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period,
unless an additional performance target is mandated, in which case revenue is
recognized upon satisfaction of that target, in each case, as defined in the
applicable software license agreement.
The Company also offers maintenance contracts and training. Maintenance and
training revenues are recognized ratably over the terms of the related
contracts. Amounts received in advance for maintenance agreements are deferred
and included in accrued expenses and other current liabilities in the
accompanying consolidated balance sheets.
(j) Postretirement Benefits
The Company has no material obligations for postretirement benefits. The
Company and an indirect UK subsidiary each maintain separate defined
contribution benefit plans covering all eligible employees, as defined.
(k) Foreign Currency Translation
The accounts of the Company's indirect UK subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, assets
and liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date. Income and expense
accounts are translated using an average rate of exchange during the period.
Foreign currency translation adjustments are accumulated as a separate component
of stockholders' equity.
(l) Income Taxes
The Company provides for income taxes in accordance SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
reverse.
(m) Stock Options
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. In October, 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation, which is effective for
1996. SFAS No. 123 establishes a fair value based methodology for accounting for
stock-based compensation plans. The Company has adopted the disclosure only
alternative under SFAS No. 123, which requires disclosure of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted
as well as certain other information. (See Note 5.)
(n) Net Income (Loss) Per Share
Net Income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during each year assuming the
conversion of the preferred stock discussed in Note 5 below. All shares, options
and warrants issued during the 12 months immediately preceding the Company's
initial public
F-11
<PAGE> 38
offering were treated as if they had been outstanding for all periods, in
accordance with the treasury stock method. Common stock equivalents (certain
stock options and warrants) issued in earlier periods have not been included in
determining the 1994 and 1995 net loss per share, as the effect would have been
antidilutive.
(2) ACQUISITIONS
<TABLE>
The Company has consummated the following acquisitions:
<CAPTION>
METHOD OF
ENTITY DATE CONSIDERATION ACCOUNTING
------ ---- ------------- ----------
<S> <C> <C> <C>
Computer Specialties, Inc. October 1994 510,345 shares of common stock Pooling of
Interests
Computerware, Inc. February 1995 1,326,417 shares of common stock Purchase
Lantec June 1995 2,899,820 shares of common stock Purchase
and $6.4 million of cash
AMA (UK) Limited February 1996 3,247,371 shares of common stock Pooling of
Interests
Prophet Group Limited December 1996 $8.4 million of cash and up to $5.0 Purchase
million of additional purchase
price subject to 1997 earnings.
</TABLE>
For the acquisitions accounted for as pooling of interests, previously
issued financial information, including the financial position and results of
the operations of the Company, have been retroactively restated for all prior
periods presented to give effect to those acquisitions. For acquisitions
accounted for as purchases, the purchase prices were allocated based on the fair
value of the tangible and intangible assets acquired and liabilities assumed.
(See Note 1(h)). Results of operations of those companies are included from
their respective date(s) of acquisition.
The following is unaudited pro forma financial information for the years
ended December 31, 1995 and 1996 as if the purchase acquisitions noted above
were effective on January 1, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
----------------------------------------------------------------------------------
ELCOM PROPHET
INTERNATIONAL, GROUP PRO FORMA
INC. COMPUTERWARE LANTEC LIMITED ADJUSTMENT COMBINED
---- ------------ ------ ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $311,423 $7,330 $51,496 $33,170 $ -- $403,419
======== ====== ======= ======= ======= ========
Net income (loss).......... $ (904) $ (201) $ 2,012 $ 894 $(2,200) $ (399)
======== ====== ======= ======= ======= ========
Pro forma net loss
per share............... $ (0.05) (a) (a) (a) (a) (0.02)
======== ====== ======= ======= ======= ========
Pro forma weighted average
shares outstanding....... 20,001 (a) (a) (a) 1,519 21,520
======== ====== ======= ======= ======= ========
</TABLE>
F-12
<PAGE> 39
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
----------------------------------------------
ELCOM PROPHET
INTERNATIONAL, GROUP PRO FORMA
INC. LIMITED ADJUSTMENT COMBINED
------------- ------- ---------- --------
<S> <C> <C> <C> <C>
Net sales................. $620,115 $33,566 $ -- $653,681
======== ======= ===== ========
Net income................ $ 5,575 $ 1,017 $(566) $ 6,026
======== ======= ===== ========
Pro forma net income
per share.............. $ 0.19 (a) (a) $ 0.20
======== ======= ===== ========
Pro forma weighted average
shares outstanding..... 29,739 (a) (a) 29,739
======== ======= ===== ========
</TABLE>
(a) Not presented as the data is not meaningful.
On February 21, 1997, the Company completed the acquisition of Data
Supplies Limited, a U.K.-based remarketer of personal computer products. The
acquisition, to be accounted for under the purchase method, included a cash
payment of $1.6 million and an interest bearing note in the amount of $752,000.
(3) LINES OF CREDIT
At December 31, 1996, the Company had a $100 million floor plan and
accounts receivable line of credit available from Deutsche Financial Services
Corporation (DFSC). The DFSC line of credit provides for direct payment by the
lender to certain Company vendors. In the case of certain product purchases, the
borrowings bear interest immediately, and the borrowings related to the
remaining purchases bear interest after the lapse of the applicable
interest-free periods, which vary generally from 30 to 90 days. The DFSC line of
credit limits the borrowings to defined percentages of eligible inventories and
accounts receivable. The DFSC line of credit agreement also contains certain
covenants relating to net income and debt-to-equity ratios. As of December 31,
1996, the Company was in compliance with all such covenants. Interest is payable
monthly at the prime rate (8.25% at December 31, 1996). As of December 31, 1996,
the Company had $71,375,000 outstanding under this line of credit, which
approximated the Company's availability as of that date. As of December 31, 1996
the Company also had a $3,000,000 unsecured demand note outstanding with DFSC on
which Interest is payable monthly, at a rate of prime plus 1%. In January 1997,
the unsecured demand note was paid off.
The Company also has a $9.5 million floor plan financing agreement with IBM
Credit Corporation (IBMCC) to support purchases of IBM products. The Company's
purchases under this arrangement bear interest at the prime rate (8.25% at
December 31, 1996) plus 6.25% after the lapse of interest-free periods, which
vary generally from 30 to 90 days. The Company typically repays this facility
upon the lapse of the interest-free periods. As of December 31, 1996, there was
approximately $4,282,000 outstanding under this line of credit.
At December 31, 1996, Lantec had a financing arrangement with Kellock
Limited, an affiliate of NatWest Bank, PLC, which provides for borrowings of up
to $15,413,000. Borrowings bear interest at the Bank of Scotland base rate (6%
at December 31, 1996) plus 1.2% and are primarily secured by accounts
receivable. As of December 31, 1996, there was approximately $5,713,000 of
outstanding loans under this line of credit.
AMA has a factoring agreement with International Factors Limited (IFL),
under which IFL acts as AMA's factor for a portion of its accounts receivable.
The factoring charges amount to the Lloyds Bank base rate (6.0% at December 31,
1996) plus 1.75% of the accounts receivable assigned, in addition to certain
administration charges, as defined. As of December 31, 1996, AMA had $4,872,000
outstanding under this agreement.
F-13
<PAGE> 40
Prophet Group has a financing arrangement with Confidential Invoice
Discounting Limited, a financing company, which provides for borrowings up to
the lesser of the security value of accounts receivable, as defined, or
$6,850,000. Borrowings bear interest at the Lloyds Bank base rate (6.0% at
December 31, 1996) plus 1.25%. As of December 31, 1996, there were no borrowings
outstanding under this line of credit.
Prophet Group has a short-term financing arrangement with Allied Irish Bank
related to the purchase of computer equipment. The note is payable in monthly
installments including principal and interest through April 1997. As of December
31, 1996, the outstanding balance under this arrangement was $227,000.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
---------- -----------
<S> <C> <C>
Mortgage payable to a bank, interest at the
greater of the bank's base rate (6% at December
31, 1996) plus 3% or 8.75%, due in monthly
installments of principal plus interest through
June 2020, secured by certain land and buildings $-- $465,000
Less current portion -- 45,000
--- --------
$-- $420,000
=== ========
</TABLE>
(5) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized 50,000,000 shares of $.01 par value common
stock.
(b) Preferred Stock
The Company has authorized 10,000,000 shares of $.01 par value preferred
stock. The Company had designated 5,000,000 of such shares as Series B
convertible preferred stock (Series B preferred stock) and in June 1995, the
Company designated 3,150,000 shares as Series C convertible preferred stock
(Series C preferred stock). All Series B and Series C preferred stock converted
into common stock prior to or upon completion of the Company's initial public
offering on December 26, 1995. The Company has amended its Certificate of
Incorporation to restore all previously issued preferred stock to authorized and
unissued status, with the Board of Directors authorized to fix the rights,
privileges, preferences and restrictions of any series thereof as it may
designate.
In April 1994, the Company issued 488,888 shares of Series B preferred
stock and warrants to acquire an aggregate of 122,222 shares of the Company's
common stock, in exchange (on a two shares for one share basis) for all the
issued and outstanding shares of Series A 8% cumulative convertible preferred
stock (Series A preferred stock). All shares previously designated as Series A
preferred stock were retired and redesignated as Series B preferred stock during
1994. In addition, the Series A preferred stock provided for cumulative
dividends at a rate of 8%, payable annually in arrears, with the first dividend
payment due on December 31, 1995. In conjunction with the conversion of the
Series A preferred stock into Series B preferred stock, the stockholders waived
any accumulated dividends, which amounts were restored to additional paid-in
capital.
All holders of preferred stock prior to conversion entered into stock
purchase agreements with the Company. Pursuant to the terms of the original
preferred stock purchase agreements, holders of common stock resulting from
conversion of preferred stock maintain limited registration rights.
F-14
<PAGE> 41
(c) Stock Options
The Company's stockholders have approved the adoption of two stock option
plans, as amended (the "Option Plans"). The Option Plans provide that an
aggregate of up to 6,000,000 incentive stock options (ISOs) and nonqualified
options may be granted to key personnel of the Company, as determined by the
Compensation Committee of the Board of Directors (the Compensation Committee).
Under the terms of the Option Plans, ISOs are granted at not less than the
estimated fair market value of the Company's common stock on the date of grant.
The Option Plans also provide that the options are exercisable at varying dates,
as determined by the Compensation Committee, and have terms not to exceed 10
years.
In November 1995, stockholders also approved the adoption of the 1995
Nonemployee Director Stock Option Plan (the "1995 Nonemployee Director Plan").
The 1995 Nonemployee Director Plan provides that an aggregate of up to 250,000
nonqualified stock options to acquire the Company's common stock are reserved
for grant to outside directors of the Company. Under the terms of the 1995
Nonemployee Director Plan, the options are granted at not less than the fair
market value of the Company's common stock on the date of grant. The 1995
Nonemployee Director Plan also provides that the options vest over three years
and have terms not to exceed 10 years. Upon joining the Board of Directors, any
new nonemployee director is automatically granted 5,000 nonqualified stock
options. All nonemployee directors are granted an additional 5,000 nonqualified
stock options annually on each June 1, thereafter, while remaining on the Board
of Directors.
In August 1996, the Board of Directors adopted the 1996 Stock Option Plan
of Elcom International, Inc. (the "1996 Option Plan"). The 1996 Option Plan
provides that an aggregate of up to 2,400,000 ISOs and nonqualified options to
acquire the Company's common stock may be granted to key personnel of the
Company, as determined by the Compensation Committee. Under the terms of the
1996 Option Plan, the options are granted at not less than fair market value of
the Company's common stock on the date of grant. The 1996 Option Plan also
provides that the options are exercisable at varying dates, as determined by the
Compensation Committee, and have terms not to exceed 10 years. To the extent the
1996 Option Plan is not ratified by the Company's stockholders at its 1997
Annual Meeting, all ISOs granted theretofore will be deemed to be nonqualified
options, and only nonqualified options may be granted under the 1996 Option Plan
thereafter.
Information relating to the Company's stock option plans during the three
years in the period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OPTION PRICE AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1993...... 1,725,800 $ .11 - 3.00 $0.37
Granted............................. 460,600 3.00 - 3.63 3.27
Terminated.......................... (101,913) .11 - 3.63 1.22
Exercised........................... -- -- --
--------- ------------- -----
Outstanding, December 31, 1994...... 2,084,487 $ .11 - 3.63 $0.99
Granted............................. 2,170,485 3.63 - 10.28 4.70
Terminated.......................... (70,683) .11 - 5.99 4.12
Exercised........................... (9,963) .39 - 3.63 1.22
--------- ------------- -----
Outstanding, December 31, 1995...... 4,174,326 $ .11 - 10.28 $3.17
Granted............................. 3,101,975 5.31 - 14.25 6.63
Terminated.......................... (323,461) .11 - 10.28 5.90
Exercised........................... (523,726) .11 - 5.99 1.77
--------- ------------- -----
Outstanding, December 31, 1996...... 6,429,114 $ .11 - 14.25 $4.64
========= ============= =====
Exercisable, December 31, 1994...... 729,781 $ .11 - 3.00 $0.55
========= ============= =====
Exercisable, December 31, 1995...... 1,321,739 $ .11 - 3.63 $0.92
========= ============= =====
Exercisable, December 31, 1996..... 2,032,325 $ .11 - 10.28 $2.72
========= ============= =====
</TABLE>
F-15
<PAGE> 42
The weighted average fair value per share of options granted during
1994, 1995 and 1996 were $1.72, $2.57 and $3.48, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------
Weighted Weighted Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 1,004,551 6.15 years $ 0.11 956,492 $0.11
0.39 - 3.63 634,367 6.51 2.40 597,850 2.46
4.00 1,194,856 8.14 4.00 157,103 4.00
4.75 216,250 8.48 4.75 47,675 4.75
5.06-5.68 611,800 9.15 5.26 211,500 5.21
5.81 1,252,200 9.30 5.81 -- --
5.99 - 7.50 977,520 9.17 7.20 20,524 6.03
7.56 - 13.50 510,520 9.12 8.58 41,181 8.59
13.56 7,050 9.41 13.56 -- --
14.25 20,000 9.41 14.25 -- --
---------- --------- -----
6,429,114 2,032,325 $2.72
========== ========= =====
</TABLE>
As of December 31, 1996, 8,116,308 shares of common stock have been
reserved for issuance under the Company's stock option plans and 750,000 shares
have been reserved for issuance pursuant to warrants issued in connection with
the Lantec purchase as described below.
As described in Note 1, the Company adopted the disclosure only alternative
under SFAS No. 123. Had compensation costs for awards in 1995 and 1996 under the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates consistent with the method set forth in SFAS No. 123, the
effect on the Company's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
(in thousands, except per
share data)
<S> <C> <C>
Net income (loss):
As reported $ (904) $5,575
Pro forma $ (1,581) $3,330
Net income (loss) per share:
As reported $ (0.05) $0.19
Pro forma $ (0.08) $0.11
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may be greater as additional options are granted.
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Volatility 53.52% 53.52%
Risk-free interest rate 6.25% 6.2%
Expected life of options 5 years 5 years
</TABLE>
F-16
<PAGE> 43
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The Company's wholly owned technology subsidiary, Elcom Systems, Inc., also
maintains a stock option plan (the "Systems Plan") pursuant to which 187,500
shares of its common stock are reserved for issuance. The Systems Plan has
provisions similar to the Company's Option Plans, and none of the options issued
thereunder were exercisable as of December 31, 1996. Elcom Systems, Inc. has 2.5
million common shares outstanding, all of which are owned by the Company.
(d) Warrants
In conjunction with the conversion of Series A preferred stock described
above and the sale of Series B preferred stock in 1994, the Company issued
warrants to purchase 170,085 shares of the Company's common stock at $3.63 per
share. In conjunction with the Company's initial public offering of common stock
in December, 1995, all warrants were exercised.
In June 1995, the Company issued warrants to purchase 750,000 shares of the
Company's common stock at $4.75 per share in connection with the purchase of
Lantec (see Note 2). As of December 31, 1996, all of these warrants were
exercisable.
(e) Initial Public Offering and Underwriter Over-allotment Option
On December 19, 1995, the Company's S-1 registration statement was declared
effective and on December 26, 1995, the underwriters closed on the purchase of
5,500,000 shares of the Company's common stock at $11 per share. Of the shares
sold, 4,000,000 were sold by the Company and 1,500,000 were sold by certain
stockholders of the Company. Net proceeds to the Company upon closing were
approximately $39.4 million.
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
approximately $6.2 million.
(f) Open Market Stock Purchase Plan
On February 23, 1996, the Board of Directors of the Company authorized the
purchase of up to an aggregate of 600,000 shares of common stock to be held as
treasury stock specifically for reissuance in connection with acquisitions.
Subject to legal requirements, the purchases may be made from time to time in
the open market based on then-existing market conditions. As of December 31,
1996, the Company has not acquired any treasury stock pursuant to this
authorization.
(6) LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company has entered into capital leases for various software,
furniture, computer, telephone and other equipment. The lease terms range from
three to four years and, upon expiration, all leases provide purchase options at
a nominal price. Property, equipment and software includes assets under capital
leases of $582,000 and $1,369,000 and related accumulated amortization of
$387,000 and $617,300 as of December 31, 1995 and 1996, respectively.
Amortization of leased assets is included in depreciation expense.
F-17
<PAGE> 44
The Company has entered into operating leases for office space, software,
computer, autos and other equipment. The period covered by the leases ranges
from one to twenty-five years. Certain leases for office space require payment
of all related operating expenses of the building, including real estate taxes
and utilities.
Future minimum rental payments as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
1997 .............................. $343,000 $3,163,000
1998............................... 244,000 2,389,000
1999............................... 244,000 1,897,000
2000............................... 156,000 1,545,000
2001............................... -- 1,072,000
Thereafter......................... -- 7,408,000
-------- -----------
Total Minimum lease payments....... $987,000 $17,474,000
===========
Less - Amounts representing interest 179,000
--------
Present value of net minimum lease payments $808,000
Current portion..................... 252,000
--------
Long term portion................... $556,000
========
</TABLE>
Rent expense for operating leases for each of the three years ended
December 31, 1994, 1995 and 1996 amounted to approximately $220,000, $1,654,000
and $2,808,000, respectively.
(b) Employment Contracts
The Company has employment contracts with certain key executives which
provide for annual salary and incentive payments as well as severance
arrangements.
(c) 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.
F-18
<PAGE> 45
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 legal
counsel, has found no controlling precedent that 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.
(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Prior to the Company's acquisition of Lantec in June 1995 and AMA (UK)
Limited in February 1996, substantially all of the net sales, net income (loss)
and identifiable assets of the Company related to operations in the U.S. Net
sales, net income (loss) and identifiable assets (adjusted for allocation of
goodwill and related amortization for the Lantec acquisition) for the Company's
U.S. and U.K. operations for the years ended December 31, 1995 and 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM ELIMINATIONS CONSOLIDATED
------ ------- ------------ ------------
Year Ended
December 31, 1995
-----------------
<S> <C> <C> <C> <C>
Net sales $219,396 $ 92,027 $ -- $311,423
======== ======== ======= ========
Net income (loss) $(2,128) $ 1,224 $ -- $ (904)
======== ======== ======= ========
Identifiable assets $119,675 $ 56,625 $(2,069) $174,231
======== ======== ======= ========
Year Ended
December 31, 1996
-----------------
Net sales $435,133 $184,982 $ -- $620,115
======== ======== ======= ========
Net income $ 1,274 $ 4,301 $ -- $ 5,575
======== ======== ======= ========
Identifiable assets $161,890 $ 98,879 $ -- $260,769
======== ======== ======= ========
</TABLE>
All revenues, net income and identifiable assets relate substantially to
the remarketing of personal computer products and related services.
(8) INCOME TAXES
The Company's income tax provision consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
State Income Taxes $188,000 $ 150,000 $ 718,000
Foreign Income Taxes 376,000 1,089,000 2,692,000
-------- ---------- ----------
$564,000 $1,239,000 $3,410,000
======== ========== ==========
</TABLE>
F-19
<PAGE> 46
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets --
Depreciation $ -- $ 228,000
Nondeductible reserves 724,000 358,000
Other temporary differences 400,000 1,121,000
Foreign net operating loss carryforwards 659,000 --
Net federal and state operating loss 2,746,000 1,619,000
carryforwards
---------- ----------
4,529,000 3,326,000
---------- ----------
Deferred tax liabilities --
Depreciation 170,000 --
Other temporary differences 671,000
--
---------- ----------
170,000 671,000
---------- ----------
Valuation allowance 4,359,000 2,655,000
---------- ----------
$ -- --
========== ==========
</TABLE>
The federal income tax provision varied from the amounts computed using the
statutory U.S. income tax rates because of the effect of net operating losses,
foreign tax adjustments, state income taxes and travel and entertainment
expenses.
Due to the uncertainty surrounding the realization of the benefit of its
favorable tax attributes in future tax returns, the Company placed a full
valuation allowance against its net deferred tax asset. The valuation allowance
decreased during 1996 by approximately $1,704,000, reflecting realization of
certain net operating loss carryforwards. Prior to December 1993, two of the
Company's entities (Catalink and Elcom Systems) and, prior to its February 1995
acquisition, Computerware (See Note 2) had elected to be taxed as S corporations
under Section 1362 of the Internal Revenue Code. Therefore, until such elections
were terminated, the taxable income or loss of each entity was reported on their
stockholders' tax returns.
The Federal and State net operating loss carryforwards relative to the
Company's operations as a C corporation cumulatively amount to approximately
$4,000,000 at December 31, 1996. The Federal and State net operating loss
carryforwards will begin to expire in 2008.
The Tax Reform Act of 1986 limits the amount of federal net operating
losses that companies may utilize in any one year in the event of cumulative
changes in ownership over a three-year period in excess of 50%. The Company
believes that such an ownership change occurred during the year ended December
31, 1994; however, the Company does not believe that the impact is significant
as any unused amounts from any year are carried forward to future years within
the existing carryforward period.
U.S. income taxes have not been provided on the undistributed net earnings
of the foreign subsidiary (Lantec). As of December 31, 1996, determining the tax
liability that would arise if these earnings were remitted is not practicable.
The Company plans to reinvest substantially all such earnings outside of the
U.S., thus indefinitely postponing the remittance of taxes on such earnings.
F-20
<PAGE> 47
(9) RELATED PARTY TRANSACTIONS
(a) Notes Payable
During 1993 and 1994, the Company's principal stockholder and Chief
Executive Officer made loans to the Company pursuant to demand and term
promissory notes. Demand note advances were charged interest at 7%, while term
promissory note advances were charged interest at 9%. Substantially all 1993
advances were converted to common stock during 1993, and all remaining 1993
advances were repaid as of December 31, 1993. In the first quarter of 1994, the
Company's principal stockholder and Chief Executive Officer made a demand note
advance to the Company, which was repaid within 30 days. Interest expense
related to these loans amounted to approximately $25,000 for the year ended
December 31, 1993 and it was not significant for the year ended December 31,
1994.
(b) Transactions with Affiliated Company
The Company owns approximately 40% of ShopLink Incorporated ("ShopLink"), a
development stage company that licensed the PECOS electronic commerce system to
service the home grocery and consumables market. The Company accounts for this
investment under the equity method, with its losses limited to its $4,000
investment. Accounts receivable from ShopLink at December 31, 1996 were
$326,135, which were substantially paid subsequent to year end.
(c) Employee Loans
In certain instances, the Company periodically makes loans to certain of
its officers and employees. These loans are included in accounts receivable in
the accompanying consolidated balance sheets and amounted to $1,625,000 at
December 31, 1996. Generally, these loans are collateralized by the employees'
shares of common stock.
<TABLE>
(10) QUARTERLY INFORMATION FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
YEAR ENDED DECEMBER 31, 1995
<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)
Net income (loss) per share.......... $ (.04) $ (.03) $ (--) $ .01 $ (.05)
Weighted Average Shares Outstanding.. 15,781 17,423 23,201 25,386 20,001
YEAR ENDED DECEMBER 31, 1996
Net sales............................ $141,416 $146,305 $156,851 $175,543 $620,115
Gross profit......................... 16,345 17,040 17,332 19,322 70,039
Operating profit (loss).............. 2,240 2,514 2,736 3,798 11,288
Net income (loss) ................... 1,124 1,152 1,310 1,989 5,575
Net income (loss) per share.......... $ .04 $ .04 $ .04 $ .07 $ .19
Weighted Average Shares Outstanding.. 29,142 30,079 29,435 29,950 29,739
</TABLE>
F-21
<PAGE> 48
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
INDEX TO SCHEDULE
Page
Reference
Report of Independent Public Accounts on Schedule S-2
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1994, 1995 and 1996 S-3
S-1
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Elcom International, Inc.
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets of Elcom International, Inc. and subsidiaries as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996, included in this Form 10-K, and have issued
our report thereon dated March 21, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in the index to schedule is the responsibility of the
Company's management and is presented for the purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 21, 1997
S-2
<PAGE> 50
SCHEDULE II
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance Balance
Beginning End
Allowance for Doubtful Accounts of Period Additions Other (1) of Period
- ------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994 $ -- $ 360 $ -- $ 360
========= ====== ========= ======
Year ended December 31, 1995 $ 360 $ 472 $ 877 $1,709
========= ====== ========= ======
Year ended December 31, 1996 $ 1,709 $2,586 $ 17 $4,312
========= ====== ========= ======
</TABLE>
(1) Includes allowances for doubtful accounts acquired through acquisition,
net of write-offs.
<TABLE>
<CAPTION>
Balance Balance
Beginning End
Deferred Tax Valuation Accounts of Period Additions Utilization of Period
- ------------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994 $ 50 $ 1,923 $ -- $1,973
====== ========== ======== ======
Year ended December 31, 1995 $1,973 $ 2,386 $ -- $4,359
====== ========== ======== ======
Year ended December 31, 1996 $4,359 $ -- $ (1,704) $2,655
====== ========== ======== ======
</TABLE>
S-3
<PAGE> 1
EXHIBIT 4.12
CERTAIN REGISTRATION RIGHTS UNDER
SECURITIES AGREEMENT BETWEEN
ELCOM INTERNATIONAL AND ROBERT J. CROWELL,
Assigned to:
------------------------------------------
<TABLE>
<CAPTION>
As to Number of
Shares of
Assignee Common Stock
-------- ---------------
<S> <C>
Linda M. Crowell 347,078
Christopher Crowell and Kathy Cioffi, as Co-Trustees of the
KMC Trust No. 1
158,677
Robert J. Crowell, as Trustee of the KMC Trust No. II 188,401
</TABLE>
<PAGE> 1
EXHIBIT 4.17
AMA SECURITIES AGREEMENT
THIS AGREEMENT is effective as of the 29th day of February, 1996, among
Elcom International, Inc., a Delaware corporation (the "Company"), and Michael
Peter David Allpress, Robert John Atkins and Kevin John Meakings (such persons
being hereinafter referred to, as the context requires, individually as
"Stockholder" and collectively as "Stockholders"), as the former stockholders of
AMA (as hereinafter defined).
RECITALS
A. The Stockholders are together the record and beneficial owners of
all of the ordinary share capital (the "Stock") of AMA (UK) Limited, a
corporation organized under the laws of England ("AMA"); and
B. The Company desires to acquire, and the Stockholders desire to sell,
all of the Stock to the Company (the "Acquisition") in consideration for
3,247,371 shares of common stock, $.01 par value per share (the "Elcom Shares,"
which term encompasses any securities hereafter issued in respect of or in
exchange for the Elcom Shares in connection with a stock split, stock dividend,
combination or exchange of shares, exchange for other securities,
reclassification, reorganization, redesignation, merger, consolidation,
recapitalization, spin-off, split-off, split-up or other such change), of the
Company in accordance with the terms and subject to the conditions of a Sale and
Purchase Agreement dated of even date herewith (the "Purchase Agreement") among
the Company and the Stockholders; and
C. The Company and the Stockholders have agreed that the issuance of
the Elcom Shares pursuant to the Purchase Agreement shall be pursuant to the
exemption from registration under the Securities Act of 1933, as amended (the
"Act"), provided by Regulation S promulgated pursuant to the Act; and
D. On even date herewith, the Company, the Stockholders and an escrow
agent entered into an Escrow Agreement (the "Escrow Agreement") pursuant to
which a portion of the Elcom Shares are held in escrow to secure the obligations
of the Stockholders under the Purchase Agreement and which shares, upon
distribution from said escrow, shall continue to be subject to this Agreement;
and
E. The Company and Stockholders have further agreed that Stockholders
shall have, under the terms and conditions herein set forth, certain rights to
include the Elcom Shares received by such Stockholders in a Company registration
of securities under the Act with the Securities and Exchange Commission ("SEC");
and
F. The Company and Stockholders desire that the Acquisition be treated
as a pooling-of-interest for accounting purposes;
<PAGE> 2
In consideration of the premises and mutual covenants contained herein
and in the Purchase Agreement, the parties hereby agree as follows:
ARTICLE 1 DEFINITIONS
When used in this Agreement, the following terms in all of their tenses
and cases shall have the meanings assigned to them below or elsewhere in this
Agreement as indicated below:
"Acquisition" is defined in Recital B.
"Act" is defined in Recital C.
"AMA" is defined in Recital A.
"Company" is defined in the Introductory paragraph.
"Elcom Shares" is defined in Recital B.
"Escrow Agreement" is defined in Recital D.
"Person" means an individual, trust, corporation, partnership, joint
venture, or other entity.
"Piggy-Back Holders" is defined in Section 4.1.
"Purchase Agreement" is defined in Recital B.
"Registration Statement" is defined in Section 4.1.
"SEC" is defined in Recital E.
"Shares" means shares of voting and nonvoting common stock, par value
$.01 per share, of the Company (whether presently or hereafter issued).
"Stock" is defined in Recital A.
"Stockholder" is defined in the Introductory paragraph.
"Transfer" means sell, give, assign, pledge, bequeath, exchange,
dispose of, hypothecate, or otherwise transfer whether by testamentary
disposition, survivorship arrangement or otherwise, encumber in any respect, or
grant any interest in (whether voluntarily or involuntarily or by operation of
law and whether with or without consideration), and specifically includes all
transfers upon divorce, in bankruptcy or by way of execution, seizure, or sale
by legal process.
2
<PAGE> 3
ARTICLE 2 EXEMPTION FROM REGISTRATION;
LIMITS ON TRANSFER
2.1 Regulation S. Each Stockholder acknowledges that he is not a "U.S.
person" (as defined in Regulation S promulgated under the Act) and that the
Elcom Shares acquired in connection with the Acquisition have not been
registered under the Act and may not be offered or sold in the United States or
to "U.S. persons" unless the Elcom Shares are registered under the Act, or an
exemption from the registration requirements of the Act is available.
2.2 Information Received. Each Stockholder acknowledges that he or she
has had, at a reasonable time prior to the date of this Agreement, the
opportunity to ask questions of and receive answers from the Company concerning
the terms and conditions of the Elcom Shares and the business of the Company and
to obtain any additional information which the Company possesses that each
Stockholder has deemed necessary or desirable.
2.3 Limitations on Resale. Each Stockholder is aware that the Elcom
Shares have not been registered under the Act and that he or she must hold such
shares indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available. Each Stockholder is acquiring the
Elcom Shares for his or her own account, for investment and not with a view to
the distribution thereof. Each Stockholder acknowledges and agrees that the
certificates representing the Elcom Shares to be received by him or her shall
bear a legend stating the substance of such restrictions.
2.4 Speculative Nature of Investment. Each Stockholder is aware that
the investment in the Elcom Shares is a speculative one and involves a high
degree of risk, that the amount realized on the investment may not equal the
original amount invested, and in evaluating such investment each Stockholder has
consulted with his or her own investment and/or legal and/or tax advisers and
has concluded that the proposed investment in the Company is appropriate in
light of his or her overall investment objectives and financial situation.
ARTICLE 3 POOLING-OF-INTERESTS ACCOUNTING
Each Stockholder acknowledges and agrees that the Company intends that
the Acquisition shall be accounted for on a pooling-of-interests basis and that
such Stockholder will not, in addition to any other restriction on transfer of
Elcom Shares otherwise contained herein, Transfer any of the Elcom Shares
received by such Stockholder pursuant to the Acquisition (other than as
specifically contemplated in the Purchase Agreement) until such time as
financial results covering at least thirty (30) days of the combined operations
of AMA and the Company shall have been published by the Company in a Form 8-K or
a Form 10-Q filed with the SEC, which shall not be later than June 15, 1996.
3
<PAGE> 4
ARTICLE 4 REGISTRATION RIGHTS
4.1 "Piggy-Back" Registration Rights. If, at any time within seven (7)
years after the date hereof, the Company shall file with the SEC a registration
statement under the Act with respect to a public offering for cash of any of the
Company's common stock by the Company or any of its stockholders, other than a
registration filed on Form S-4 or S-8 or any successor form to such forms or
filed in connection with an exchange offer or an offering of securities solely
to the existing stockholders or employees of the Company, then the Company will,
at least forty-five (45) days prior to filing such registration statement (a
"Registration Statement"), notify the Stockholders in writing of its intention
to make such filing. Upon the written request by each Stockholder, stating the
number of Elcom Shares desired to be registered by such Stockholder, given
within thirty (30) days after mailing such notice by the Company in accordance
with Section 6.1 hereof, and subject to the approval of the managing underwriter
of the Company's common stock to be sold under such filing and subject to any
required adjustments (all in accordance with Section 4.8 hereof), the Company
shall, subject to the provisions of this Article 4, use its best efforts to
cause to be included in such Registration Statement for registration under the
Act, all of the Elcom Shares that each such Stockholder has requested to be
registered; provided, however, that unless the Company's Board of Directors and
managing underwriter agree to an increased limit, all Piggy-Back Holders (as
hereinafter defined) shall be entitled to have registered in the aggregate no
more than 20% of the total number of shares of common stock offered in any such
public offering (exclusive of any over-allotment option). The right of any
Stockholder to request the inclusion of a registration of any Elcom Shares
pursuant to this Section 4.1 shall not apply to any Elcom Shares held by a
Stockholder to whom the Company shall deliver an opinion of its counsel that
such Elcom Shares which such Stockholder proposes to sell may lawfully be sold
or distributed publicly without registration within a period of six months
commencing on the date which is sixty (60) days after the date of such
Stockholder's registration request or any Elcom Shares subject to the Escrow
Agreement and included as part of the Indemnity Escrow Fund (as defined in the
Escrow Agreement).
Whenever required under this Article 4 to use its best efforts to
effect the registration of any Elcom Shares, the Company shall, as expeditiously
as reasonably possible (i) prepare and file with the SEC the Registration
Statement with respect to such Elcom Shares and use its best efforts to cause
such Registration Statement to become and remain effective; provided, however,
that the Company shall in no event be obligated to cause any such registration
to remain effective for more than ninety (90) days, or such shorter period as is
required to dispose of all securities covered by such Registration Statement,
(ii) prepare and file with the SEC such amendments and supplements to such
Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
Registration Statement, (iii) furnish to the Stockholders such number of copies
of a prospectus in conformity with the requirements of the Act, and such other
documents as they may reasonably request in order to facilitate the disposition
of the Elcom Shares owned by them, and (iv) use its best efforts to register and
qualify the securities covered by such Registration Statement under
4
<PAGE> 5
such other securities or Blue Sky laws of such jurisdictions as shall be
reasonably appropriate for the distribution of the securities covered by the
Registration Statement, provided that the Company shall not be required in
connection therewith or as a condition thereto to register any of the Elcom
Shares under any securities laws of any state in which the Company is not
otherwise registering its securities in connection with such registration or to
qualify to do business or to file a general consent to service of process in any
state or jurisdiction. Notwithstanding the foregoing, all Elcom Shares desired
to be sold by the holders thereof may not necessarily be included in the
Registration Statement pursuant to this Article 4, because of the procedures set
forth in Section 4.8. As used herein, all holders of piggy-back registration
rights with respect to Company securities (which currently apply to a
substantial majority of the Company's outstanding common stock) shall be
referred to as "Piggy-Back Holders."
The Company shall have the right to terminate or withdraw any
registration initiated by it under this Article 4 prior to the effectiveness of
such registration without any liability to the Stockholders who would have
participated in such registration in the event it had not been terminated or
withdrawn by the Company.
4.2 Stockholders' Condition; Obligation to Furnish Information. It
shall be a condition precedent to the obligations of the Company to take any
action pursuant to Article 4 hereof that the Stockholders shall furnish to the
Company such information regarding them, the Shares held by them, and the
intended method of disposition of such securities as the Company shall
reasonably request or as shall be necessary in order to properly enable the
Company to take any such actions (including, but not limited to, completion and
execution of all customary documentation relating to their intended inclusion of
Elcom Shares for registration, such as by way of example only, a Power of
Attorney, Custody Agreement, "Lock-up" Agreement and Underwriting Agreement).
4.3 Expenses of Registration. All registration and qualification fees,
printers' and accounting fees, and underwriters' discounts and commissions and
brokerage or dealer commissions incurred in connection with a registration
pursuant to this Article 4 shall be borne pro rata among the Company and each
Piggy-Back Holder in the proportion that the securities included in the
registration by the Company or a Piggy-Back Holder relate to all of the
securities included in the registration. Fees and disbursements of legal counsel
for the Company and other expenses of the Company shall be borne exclusively by
the Company. Fees and disbursements of legal counsel to Piggy-Back Holders
participating in the registration and other expenses of such Piggy-Back Holders
shall be borne on a pro rata basis exclusively among such participating
Piggy-Back Holders or as mutually agreed among such Piggy-Back Holders.
4.4 Delay of Registration. No Stockholder shall have any right to take
any action to restrain, enjoin or otherwise delay any Registration Statement
under this Article 4 as the result of any controversy that might arise with
respect to the interpretation or implementation of this Article 4.
4.5 Indemnification. In the event any Elcom Shares of Stockholders are
included in a Registration Statement under this Article 4:
5
<PAGE> 6
4.5.1 Indemnification of Stockholders. To the extent permitted by
law, the Company will indemnify and hold harmless each Stockholder requesting or
joining in any in Registration Statement under this Article 4, and each person,
if any, who controls such Stockholder within the meaning of the Act, against any
losses, claims, damages or liabilities, joint or several, to which they may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
on any untrue statement of any material fact contained in such Registration
Statement, including any prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or arise out of any violation by the Company
of any rule or regulation promulgated under the Act applicable to the Company
and relating to action or inaction required by the Company in connection with
any such registration; and will reimburse each such Stockholder or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Subsection 4.5.1 shall be subject to Subsection 4.5.3, shall not apply to
amounts (including expenses) paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld) nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
(including expenses) to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in connection with such Registration Statement, any prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by or on behalf of the Stockholder or controlling person. It is
expressly understood among the parties to this Agreement that in no event shall
the Company be obligated to agree to indemnify or indemnify, in any respect, any
underwriter, broker, dealer or other entity or person effecting the sale,
purchasing or otherwise distributing or transferring any of the Elcom Shares.
4.5.2 Indemnification of the Company. To the extent permitted by
law, each Stockholder requesting or joining in any Registration Statement under
this Article 4 will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Act, and each
agent for the Company (within the meaning of the Act) against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, controlling person or agent may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
taken in respect thereto) arise out of or are based upon any untrue statement of
any material fact contained in such Registration Statement, including any
prospectus contained therein or any amendments or supplements thereto, or arise
out of or are based upon the omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or omission was made in such Registration Statement, any prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished by or on behalf of such Stockholder or his or her
controlling persons for use in connection with such registration; and each such
Stockholder will reimburse
6
<PAGE> 7
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling person or agent in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this Subsection 4.5.2 shall
be subject to Subsection 4.5.3 and shall not apply to amounts (including
expenses) paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of such Stockholder
(which consent shall not be unreasonably withheld).
4.5.3 Notification of and Participation in Claims. Promptly after
receipt by an indemnified party under this Section 4.5 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section, notify
the indemnifying party in writing of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with Calfee, Halter & Griswold,
if the indemnifying party is the Company or with other counsel mutually
satisfactory to the parties. The failure to notify an indemnifying party
promptly of the commencement of any such action, if prejudicial to his or her
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 4.5, but the omission so
to notify the indemnifying party will not relieve them of any liability that
they may have to any indemnified party otherwise than under this Section.
4.6 Market Stand-Off Agreement. Each Piggy-Back Holder hereby agrees,
so long as such Piggy-Back Holder beneficially owns at least one percent (1.0%)
of the Company's then outstanding securities (treating any exercisable or
convertible securities on an as-if-converted basis), in connection with a public
offering by the Company of such securities, upon the request of the Company or
the underwriters managing such offering, not to Transfer, grant any option for
the purchase of, or otherwise dispose of any Shares without the prior written
consent of the Company or the underwriters, for such period of time not to
exceed 180 days following the effective date of such Registration Statement as
the Company or the underwriters may require or specify.
4.7 Transfer of Registration Rights. Unless the Elcom Shares to be
transferred are transferable by the Stockholder in accordance with Rule 144, the
registration rights of the Stockholder under this Article 4 may be transferred
to any third party along with such Shares and such rights will inure to the
benefit of the Stockholder's respective heirs and personal representatives who
acquire the Elcom Shares without payment of value upon their death; provided in
any such case that, as a condition precedent, any such transferee shall execute
an assignment and assumption agreement with the Company with respect to such
transferred Shares, agreeing to be subject to the obligations with respect
thereto.
4.8 Underwriting Requirements. If the total amount of Shares requested
by Piggy-Back Holders to be included in any registration exceeds the 20% limit
referred to in Section 4.1 or exceeds the amount of securities which the
managing underwriter, in the case of an underwritten public offering, determines
in its discretion to be compatible with the success of
7
<PAGE> 8
the offering, then notwithstanding any other provision of this Agreement, the
Company shall be required to include in the offering only that number of Elcom
Shares which conform to the 20% limit or such lesser amount as the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata between Piggy-Back Holders according to the
total amount of securities requested to be included therein owned by each
Piggy-Back Holder desiring to sell securities or in such other proportions as
shall mutually be agreed to by the Piggy-Back Holders).
ARTICLE 5 TERM OF AGREEMENT
5.1 Termination of this Agreement. This Agreement shall remain in
effect until terminated by (a) written agreement of the Company's Board of
Directors and the Stockholders, (b) cessation of the Company's business and
winding up of its affairs, (c) any merger or consolidation of the Company in
which the Company is not the surviving corporation, unless such merger or
consolidation is with another entity that is controlled by, under the control of
or in common control with, the Company, or (d) seven (7) years from the date of
this Agreement.
5.2 Removal of Restrictive Legends. Upon termination of this Agreement,
each Stockholder shall surrender to the Company any certificates representing
Elcom Shares bearing the restrictive legend referenced in Section 2.3, and the
Company shall issue a new certificate in lieu thereof for an equal number of
Elcom Shares without such restrictive legend.
5.3 Rule 144. Following a Public Offering, the Company agrees to take
all reasonable actions within its control to file all of the reports that it is
required to file pursuant to Rule 144(c) of the Act.
ARTICLE 6 MISCELLANEOUS
6.1 Notices. Without prejudice to any other method available for the
giving of notice or to any acknowledgment by any party that it has received the
same, any notice or other communication desired to be given or made hereunder
may be given or made by personally delivering the same or by sending the same by
first class prepaid post (airmail if sent to or from abroad) or telex or
facsimile ("fax") to the respective address shown below and if sent by post as
aforesaid shall be deemed to have been received on the second business day after
the posting of the same (or on the fourth business day if sent to or from
abroad) and if personally delivered, sent by telex or fax shall be deemed to
have been received on delivery or dispatch if sent on a business day or (if not
so delivered or sent) on the first business day thereafter. For purposes hereof,
"business day" shall mean a day (other than a Saturday) on which banks generally
are open for business in London.
8
<PAGE> 9
All notices pursuant to this Agreement shall be delivered as follows:
If to the Company, to:
Elcom International, Inc.
10 Oceana Way
Norwood, Massachusetts 02062
Attention: Chairman
with a copy to:
Douglas A. Neary, Esq.
Calfee, Halter & Griswold
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114-2688
If to a Stockholder, to the address for such Stockholder listed below:
Michael Peter David Allpress Robert John Atkins
9 Summerfield Close Wayfarers Barn
Wokingham, Berkshire Steventon
Basingstoke
Hampshire RH25 3AY
Kevin John Meakings
The Flint House
Upper Wooton
Basingstoke
Hampshire RG26 5TH
with a copy to:
Cole & Cole of Buxton Court
3 West Way
Oxford, England 0X2 O5Z
6.2 Further Assurances. From time to time after the date hereof, upon
reasonable notice and without further consideration, each Stockholder shall
execute and deliver any other document or instrument and shall take any other
action as may be advisable in the reasonable discretion of the Board of
Directors of the Company to give effect to the provisions of this Agreement.
Each Stockholder agrees to approve and implement any plan which is approved by
counsel for the Company as a valid means of carrying out this Agreement.
9
<PAGE> 10
6.3 Assignment. Subject to the rights of assignment contained in
Section 4.7 hereof, no Stockholder may assign rights or delegate duties or
obligations hereunder without the prior written consent of all other parties,
and any assignment or delegation of any right, duty, or claim arising hereunder
without such consent shall be void.
6.4 Injunctive Relief. Each Stockholder acknowledges that it will be
impossible to measure in money the damage to the Company and to the other
Stockholders if there is a failure to comply with this Agreement. It is
therefore agreed that the Company or any other Stockholder, in addition to any
other rights or remedies which they may have, shall be entitled to immediate
injunctive relief and to specific performance to enforce this Agreement and that
if any action or proceeding is brought in equity to enforce it, no party will
urge, as a defense, that there is an adequate remedy at law.
ARTICLE 7 CONSTRUCTION
7.1 Entire Agreement. Other than as contained in the Purchase Agreement
and/or the Agreed Draft documents referred to therein, this Agreement
constitutes the exclusive statement of the agreement of the Company and the
Stockholders concerning the matters set forth herein and supersedes all other
agreements, oral or written, among or between any of them concerning the matters
set forth herein. Except as may be provided in the Purchase Agreement, all
negotiations among or between any of the Company and the Stockholders with
respect to the subject matter hereof are superseded by this Agreement, and there
are no representations, promises, understandings, or agreements, or written, in
relation thereto among or between any of them other than those incorporated
herein.
7.2 Modification and Waiver. No amendment, modification, or waiver of
this Agreement shall be effective unless made in a written instrument which
specifically references this Agreement and which is signed by the Company and
all of the Stockholders (except those whose rights hereunder would not be
affected by such amendment, modification, or waiver). Except as expressly
provided herein, the failure of the Company or any Stockholder to enforce at any
time, or for any period of time, any provision of this Agreement shall not be
construed as a waiver of any provision or the right of any such Person to
enforce each and every provision of this Agreement.
7.3 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Stockholders, successors-in-interest, legal representatives
and permitted assigns and shall be binding upon and inure to the benefit of the
Company, its successors and assigns.
7.4 Governing Law; Consent to Jurisdiction; Arbitration. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware without giving effect to the conflict of law provisions thereof. Each
of the parties hereto agrees that all disputes arising in connection with this
Agreement shall be governed by and finally settled under the rules of binding
arbitration of the American Arbitration Association ("AAA") by a panel of three
arbitrators familiar with Delaware corporate law (at least one of whom shall be
an attorney)
10
<PAGE> 11
appointed by the AAA. Any such claim or controversy hereunder shall first be
promptly submitted to AAA under its minitrial procedures. All arbitration
proceedings shall take place in Boston, Massachusetts.
7.5 Severability and Reformation. If any provision of this Agreement,
or the application thereof to any Person or circumstance should, for any reason
and to any extent, be invalid or unenforceable, the remainder of this Agreement
and the application of such provision to other Persons or circumstances shall
not be affected thereby, but rather shall be enforced to the greatest extent
permitted by law.
7.6 Headings. The Article and Section headings contained herein are
intended solely for convenience of reference and shall not be considered in
interpreting this Agreement.
7.7 Gender and Number. Whenever the context requires herein, the
masculine gender includes the feminine or neuter, and the singular number
includes the plural.
7.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute the same document.
7.9 Third Parties. Nothing expressed or implied in this Agreement is
intended or shall be construed to confer on any Person, other than the Company
and the Stockholders, any rights hereunder.
7.10 Exhibits. The Exhibits referenced in this Agreement constitute an
integral part of this Agreement as if fully rewritten herein.
7.11 Time Periods. Any action required hereunder to be taken within a
certain number of days shall be taken within that number of calendar days;
provided, however, that if the last day for taking such action falls on a
Saturday, Sunday, or a holiday observed by the Company, the period during which
such action may be taken shall be automatically extended to the next business
day.
11
<PAGE> 12
INTENDING TO BE LEGALLY BOUND, the parties hereto have executed this
Agreement or have caused this Agreement to be executed by their duly authorized
representatives as of the day first above written.
ELCOM INTERNATIONAL, INC.
By: /s/ L. F. Mulhern
----------------------------------
Laurence F. Mulhern
Title: Corporate Executive Vice President
and Chief Financial Officer
STOCKHOLDERS
/s/ Michael Peter David Allpress
--------------------------------------
Michael Peter David Allpress
/s/ Robert John Atkins
--------------------------------------
Robert John Atkins
/s/ Kevin John Meakings
--------------------------------------
Kevin John Meakings
12
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1
TO
THE 1995 (COMPUTERWARE) STOCK OPTION PLAN
OF ELCOM INTERNATIONAL, INC.
WHEREAS, the 1995 Computerware Stock Option Committee of Elcom
International, Inc. (the "Company") approved the following amendment to the
Company's 1995 (Computerware) Stock Option Plan, effective August 19, 1996; and
WHEREAS, the undersigned officer is authorized to integrate this
amendment into the Company's 1995 (Computerware) Stock Option Plan and any
officer is thereafter entitled to certify the same as the true and complete copy
of the amended Plan;
NOW, THEREFORE, the Company's 1995 (Computerware) Stock Option
Plan is hereby amended as follows:
A. The first paragraph of Section 6, entitled "Shares Subject to the
Plan" is hereby deleted in its entirety, and replaced with the following:
"6 Shares Subject to the Plan. Subject to the provisions of
the next succeeding provisions of this Section 6, the aggregate number of shares
of Common Stock for which options may be granted under the Plan shall be
1,000,000 shares of Common Stock. The maximum number of shares of Common Stock
for which options may be granted under the Plan to any one Key Personnel in any
one fiscal year of the Company is 210,000, subject to the other provisions of
this Section 6. Either treasury or authorized and unissued shares of Common
Stock, or both, in such amounts, within the maximum limit of the Plan, as the
Committee shall from time to time determine, may be so issued. All shares of
Common Stock which are the subject of any lapsed, expired or terminated options
may be made available for reoffering under the Plan to any Key Personnel. In
addition, any shares of Common Stock which are transferred to the Company by an
Optionee to satisfy an Optionee's withholding tax obligations or to pay all or
any portion of the option price in accordance with the terms of the Plan may be
made available for reoffering under the Plan to any Key Personnel. If shares of
Common Stock underlying an option granted under this Plan are purchased, any
shares of Common Stock which are the subject thereof shall not thereafter be
available for reoffering under the Plan."
B. Section 7(d), entitled "Conditions Governing Vesting of Option",
is hereby deleted in its entirety, and replaced with the following:
"(d) Conditions Governing Vesting of Option. Each option
shall be subject to restrictions or conditions with respect to the time and
method of vesting as shall be prescribed by the Committee. Upon satisfaction of
any such conditions, the option may become vested in whole or in part at any
time during the option period. Shares of Common Stock
<PAGE> 2
underlying an option shall be purchased by the Optionee (i) giving written
notice to the Company of the Optionee's purchase of the option accompanied by
full payment of the purchase price either in cash or in whole or in part in
shares of Common Stock by delivery to the Company of already-owned shares of
Common Stock, provided that such shares have been owned by the Optionee for at
least a six-month continuous period, having a fair market value on the date the
shares underlying the option are purchased equal to that portion of the purchase
price for which payment in cash is not made, and (ii) making appropriate
arrangements acceptable to the Company with respect to income tax withholding,
as required, which arrangements may include, at the discretion of the Committee,
in lieu of other withholding arrangements, the Optionee's delivery to the
Company of shares of Common Stock, provided that such shares have been owned by
the Optionee for at least a six-month continuous period, having a fair market
value on the date the shares underlying the option are purchased equal to that
portion of the withholding obligation for which payment in cash is not made.
Certain dissolutions or liquidations of the Company or, unless the surviving
corporation assumes said options, mergers or consolidations in which the Company
is not the surviving corporation, may cause each outstanding option to
terminate, provided that during the option period each Optionee shall have the
right during the period prescribed in the option agreement prior to such
dissolution or liquidation, or merger or consolidation in which the Company is
not the surviving corporation, to purchase the then vested portion of his or her
shares underlying the option in whole or in part without regard to any other
limitations contained in the Plan or the option agreement. Additional provision
with respect to acquisitions, mergers, liquidations or dissolutions may be made
in the option agreement."
IN WITNESS WHEREOF, Elcom International, Inc., by the undersigned
officer duly authorized, has executed this document as of the 19th day of
August, 1996.
THE COMPANY
ELCOM INTERNATIONAL, INC.
By: /s/ L. F. Mulhern
-----------------------------------
Laurence F. Mulhern
Its: Corporate Executive Vice
President, Chief Financial
Officer, Treasurer and Secretary
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<PAGE> 1
EXHIBIT 10.4
$100,000,000
BUSINESS CREDIT AND SECURITY AGREEMENT
Dated as of March 1, 1997
AMONG
CATALINK DIRECT, INC.,
CATALINK DIRECT (PENNSYLVANIA), INC.
AND
DEUTSCHE FINANCIAL SERVICES CORPORATION
<PAGE> 2
BUSINESS CREDIT AND SECURITY AGREEMENT
BETWEEN: DEUTSCHE FINANCIAL SERVICES CORPORATION, a Nevada corporation ("DFS")
AND: CATALINK DIRECT, INC., a Delaware corporation ("Catalink") and
CATALINK DIRECT (PENNSYLVANIA), INC., a Delaware corporation
("Catalink PA") (Catalink and Catalink PA sometimes hereinafter being
referred to individually and collectively as "Borrower").
EFFECTIVE DATE: March 1, 1997
1. RECITALS
Borrower has requested that DFS provide Borrower with a credit facility
for working capital and inventory acquisition purposes. Catalink PA is a
wholly-owned subsidiary of Catalink, and Catalink is a wholly-owned subsidiary
of Elcom International, Inc., a Delaware corporation ("Elcom"), all of which do
business among each other and with third parties as an integrated family of
companies, and accordingly, each Borrower desires to have the availability of
one common credit facility instead of separate credit facilities. Each Borrower
has requested that DFS extend such a common credit facility. Each Borrower and
Elcom acknowledges that DFS will be lending against, and relying on a lien upon,
substantially all of Borrower's assets even though the proceeds of any
particular Loan made hereunder may not be advanced directly to such Borrower,
and that such Borrower will nevertheless benefit by the making of all such Loans
by DFS and the availability of a single credit facility of a size greater than
each could independently warrant.
2. DEFINITIONS
Terms defined in this Agreement shall have initial capital letters.
Those terms are defined below, in this Section 2, and elsewhere in this
Agreement. All financial and accounting terms used herein and not otherwise
defined, shall be defined in accordance with GAAP.
"AAA" shall have the meaning set forth in Section 14.2.
"Account Debtor" shall mean any Person who is or who may become obligated to
Borrower under, with respect to, or on account of an Account, general intangible
or other Collateral.
"Accounts" shall have the meaning given to that term in the UCC, and, to the
extent not included therein, shall also mean all accounts, leases, contract
rights, chattel paper, general intangibles, choses in action and instruments,
including any Lien or other security interest that secures or may secure any of
the foregoing, plus all books, invoices, documents and other records in any form
evidencing or relating to any of the foregoing, now owned or hereafter acquired
by Borrower.
"Affiliates" shall mean: (i) any individual who is an officer or director of
a Person; and (ii) any Person who directly or indirectly controls, is controlled
by, or is under common control or ownership with, another Person.
<PAGE> 3
For the purposes of this definition, the term "control" shall mean the ownership
of or the ability to direct or control 10% or more of the beneficial interest in
the applicable entity.
"Agreement" shall mean this Business Credit and Security Agreement, and any
amendments hereto.
"Average Daily Balance" shall have the meaning set forth in Section 3.6.
"Borrowing Base" shall mean, as of any date of determination, an amount
equal to the sum of the Eligible Account Availability plus the Eligible
Inventory Availability, less Borrower's from time to time outstanding
Indebtedness to DFS under the Floorplan Inventory Loan Facility.
"Borrowing Base Certificate" shall have the meaning set forth in Section
3.3(a).
"Business" shall mean the marketing, sale, and distribution of computers
and related equipment.
"Business Day" shall mean any day other than Saturdays, Sundays, legal
holidays designated by Federal law, and any other day on which DFS' office is
closed.
"Capital Expenditure" shall mean any amount debited to the fixed asset
account on the consolidated balance sheet of Borrower and the Subsidiaries in
respect of (a) the acquisition (including, without limitation, acquisition by
entry into a capitalized lease), construction, improvement, replacement or
betterment of land, buildings, machinery, equipment or of any other fixed assets
or leaseholds, and (b) to the extent related to and not included in clause (a),
materials, contract labor and direct labor (excluding expenditures properly
chargeable to repairs or maintenance in accordance with GAAP).
"Collateral" shall mean all items described in Section 6.1.
"Credit Facility" shall have the meaning set forth in Section 3.1.
"Daily Charge" shall have the meaning set forth in Section 3.6.
"Daily Contract Balance" shall have the meaning set forth in Section 3.6.
"Daily Rate" shall have the meaning set forth in Section 3.6.
"Debt" shall have the meaning set forth in Section 9.3.
"Default" shall have the meaning set forth in Section 10.
"Default Interest Rate" shall have the meaning set forth in Section 3.9.
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<PAGE> 4
"DFS Companies" shall have the meaning set forth in Section 14.1.
"Disputes" shall have the meaning set forth in Section 14.1.
"Effective Date" shall mean the date set forth in the heading on page 1 of
this Agreement.
"Eligible Accounts" shall mean all Accounts that are not Ineligible
Accounts.
"Eligible Account Availability" shall have the meaning set forth in Section
3.3(a).
"Eligible Inventory" means Borrower's finished goods Inventory that is owned
by Borrower free and clear of all Liens, security interests and encumbrances of
any third parties, except for the Permitted Liens, that is not obsolete or
unmerchantable, that is in good, new and salable condition that conforms to the
representations and warranties of Section 8.26 of this Agreement, and which DFS
deems, in its reasonable credit judgment, to be acceptable for financing.
"Eligible Inventory Availability" shall have the meaning set forth in
Section 3.2(b).
"Environmental Laws" shall mean the Resource Conservation and Recovery Act,
as amended, the Toxic Substances Control Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the Solid
Waste Disposal Act, as amended, the Water Pollution Control Act, as amended, the
Clean Air Act, as amended, the Clean Water Act, as amended, and any successor or
comparable federal or state statutes, now existing or later enacted, or any
regulation promulgated under any of such federal or state statutes relating to
the protection of the environment.
"Environmental Lien" shall mean a Lien in favor of any governmental entity
for (a) any liability under any Environmental Law, or (b) damages arising from
or costs incurred by such governmental entity in response to a spillage,
disposal, or release into the environment of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance.
"Equipment" shall have the meaning as given to that term in the UCC, and, to
the extent not included therein, shall also mean all equipment, machinery, trade
fixtures, furnishings, furniture, supplies, materials, tools, machine tools,
office equipment, appliances, apparatus, parts and all attachments,
replacements, substitutions, accessions, additions and improvements to any of
the foregoing.
"Excess Advances" shall have the meaning given in Section 5.2.
"FAA" shall have the meaning set forth in Section 14.5.
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<PAGE> 5
"Floorplan Inventory Loan" shall have the meaning set forth in Section 3.2.
"GAAP" shall mean generally accepted accounting principles, consistently
applied.
"Guarantor" shall mean a guarantor of any of the Obligations.
"Hazardous Material" shall mean any and all hazardous or toxic substances,
materials or wastes as defined or listed under the Environmental Laws.
"Indebtedness" shall mean any sum for borrowed money owed by Borrower or any
Subsidiary to a Person and shall include any debt guaranteed by Borrower or any
Subsidiary, any debt as to which the Borrower has granted or permitted to exist
a Lien on any asset even if non-recourse, letter of credit reimbursement
obligations, and capitalized lease obligations.
"Indemnified Liabilities" shall have the meaning set forth in Section 12.1.
"Indemnitees" shall have the meaning set forth in Section 12.1.
"Ineligible Accounts" shall mean: (a) Accounts created from the sale of
goods and services on non-standard terms and/or that allow for payment to be
made more than forty-five (45) days from date of sale; (b) Accounts unpaid: (i)
more than one-hundred twenty (120) days from date of invoice if the Account
Debtor is the United States of America, any state, or any local government, or
any department, agency, instrumentality or subdivision thereof (herein, a
"Governmental Account Debtor"); provided, however, that at no time shall there
be Eligible Accounts of such Governmental Account Debtors in excess of a maximum
outstanding principal amount of $2,000,000, or (ii) more than ninety (90) days
from date of invoice if the Account Debtor is not a Governmental Account Debtor;
(c) all Accounts of any Account Debtor if fifty percent (50%) or more of the
outstanding balance of such Accounts are unpaid more than ninety (90) days from
the date of invoice; (d) Accounts for which the Account Debtor is an officer,
director, shareholder, partner, member, owner, employee, agent, parent,
Subsidiary, or Affiliate of, or is related to, Borrower or has common
shareholders, officers, directors, owners, partners or members with Borrower;
(e) consignment sales; (f) Accounts for which the payment is or may be
conditional; (g) Accounts for which the Account Debtor is not a commercial or
institutional entity or is not a resident of the United States or Canada; (h)
Accounts with respect to which any warranty or representation provided in
Section 8.19 is not true and correct; (i) Accounts which represent goods or
services purchased for a personal, family or household purpose; (j) Accounts
which represent goods used for demonstration purposes or loaned by Borrower to
another party; (k) Accounts which are progress payment, barter, or contra
accounts; and (l) any and all other Accounts which DFS deems to be ineligible in
its reasonable credit judgment.
"Intangibles" shall have the meaning set forth in Section 9.3.
"Inventory" shall have the meaning given to that term in the UCC, and, to
the extent not included therein, shall also mean all of Borrower's merchandise,
4
<PAGE> 6
materials, finished goods, work-in-process, component materials, packaging,
shipping materials, parts and other tangible personal property, now owned or
hereafter acquired and held for sale or which contribute to the finished
products or the sale, promotion, storage and shipment thereof, whether located
at facilities owned or leased by Borrower, or in the course of transport to or
from facilities owned or leased by Borrower.
"Lantec" shall mean Elcom Group Limited, a corporation organized and
existing under the laws of the United Kingdom.
"Lantec Group" shall mean Lantec, its parent corporation Elcom International
Limited, a corporation organized and existing under the laws of the United
Kingdom, and all of the subsidiaries of Lantec and Elcom International Limited.
"Lien" shall mean any security interest, mortgage, pledge, lien,
hypothecation, judgment lien or similar legal process, charge, encumbrance,
title retention agreement or analogous instrument or device (including, without
limitation, the interest of lessors under capitalized leases and the interest of
a vendor under any conditional sale or other title retention agreement),
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting any of Borrower's property.
"Loan" shall mean any advance made to or for the benefit of Borrower
pursuant to this Agreement, including but not limited to any Floorplan Inventory
Loan, any Working Capital Loan and any Overadvance Loan.
"Loan Documents" shall mean all documents executed by Borrower pursuant to
any financial accommodation between Borrower and DFS and all documents entered
into in connection with the transaction herein contemplated. The term "Loan
Documents" includes, but is not limited to, this Agreement, financing
statements, all pledges, mortgages, deeds of trust, leasehold mortgages,
security agreements, guaranties, assignments, subordination agreements, and any
future or additional documents or writings executed under the terms of this
Agreement or any amendments or modifications hereto.
"Monthly Reports" shall have the meaning given in Section 3.12(b).
"Obligations" shall mean all liabilities and Indebtedness of any kind and
nature whatsoever now or hereafter arising, owing, due or payable from Borrower
(and/or any of its Subsidiaries and Affiliates) to DFS, whether primary or
secondary, joint or several, direct, contingent, fixed or otherwise, secured or
unsecured, or whether arising under this Agreement, any other Loan Document or
any other agreement now or hereafter executed by Borrower (or any of its
Subsidiaries or Affiliates) and delivered to DFS. Obligations will include,
without limitation, any third party claims against Borrower (or any of its
Subsidiaries or Affiliates) satisfied or acquired by DFS. Obligations will also
include all obligations of Borrower to pay to DFS: (a) any and all sums
reasonably advanced by DFS to preserve or protect the Collateral or the value of
the Collateral or to preserve, protect, or perfect DFS' security interests in
the Collateral; (b) in the event of any proceeding to enforce the collection of
the Obligations after a Default, the reasonable expenses of retaking, holding,
preparing for sale, selling or otherwise disposing of or realizing on the
Collateral, or expenses of any exercise by DFS of its rights, together with
5
<PAGE> 7
reasonable attorneys' fees, expenses of collection and court costs, as provided
in the Loan Documents; and (c) any other indebtedness or liability of Borrower
to DFS, whether direct or indirect, absolute or contingent, now or hereafter
arising.
"OSHA Law" shall mean the Occupational Safety and Health Act of 1970, any
successor thereto, and any other federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to or
imposing liability or standards of conduct concerning employee health and/or
safety.
"Other Reports" shall have the meaning set forth in Section 3.12(c).
"Overadvance Facility" shall have the meaning set forth in Section 3.4.
"Overadvance Loan" shall mean a Loan made pursuant to the terms of Section
3.4.
"PAS" shall have the meaning set forth in Section 3.2(b).
"Permitted Liens" shall mean: (a) Liens for taxes, assessments or other
governmental charges or levies not yet delinquent or which are being contested
in good faith by appropriate action and as to which adequate reserves shall have
been set aside in conformity with GAAP; (b) Liens of mechanics, materialmen,
landlords, warehousemen, carriers and similar Liens arising in the future in the
ordinary course of business for sums not yet delinquent, or being contested in
good faith if a reserve or other appropriate provision in accordance with GAAP
shall have been made therefor and which are, in addition, satisfactory to DFS in
its reasonable discretion; (c) statutory Liens incurred in the ordinary course
of business in connection with workers' compensation, unemployment insurance,
social security, and similar items for sums not yet delinquent or being
contested in good faith, if a reserve or other appropriate provision in
accordance with GAAP; (d) lessor's Liens arising from operating leases entered
into in the ordinary course of business; (e) Liens arising from legal
proceedings, so long as such proceedings are being contested in good faith by
appropriate proceedings, appropriate reserves have been established therefor in
accordance with GAAP, and so long as execution is stayed and bonded on appeal on
all judgments resulting from any such proceedings; (f) Liens in favor of DFS
granted hereunder; and (g) Purchase Money Liens securing Permitted Purchase
Money Indebtedness which is not incurred in violation of Section 9.2.12.
"Permitted Purchase Money Indebtedness" shall mean Purchase Money
Indebtedness of Borrower incurred in compliance with Section 9.2.12 which is
secured by a Purchase Money Lien and which, when aggregated with the principal
amount of all other such Indebtedness and the capitalized lease obligations of
Borrower at the time outstanding, does not exceed $15,000,000. For the purposes
of this definition, the principal amount of any Purchase Money Indebtedness
consisting of capitalized leases shall be computed as a capitalized lease
obligation.
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, a limited liability company, an unincorporated
organization, and a government or any department or agency thereof.
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<PAGE> 8
"Prime Rate" shall mean a fluctuating interest rate per annum equal to the
prime rate of interest announced publicly from time to time (whether or not
charged in each instance) by The Chase Manhattan Bank (or any successor thereof)
as its prime rate. Each change in the Prime Rate shall become effective on the
day the applicable reference bank announces a change in its prime rate. If any
of the banks listed above discontinue the practice of announcing or publishing a
prime rate during the term of this Agreement, then DFS may, in its reasonable
judgment, designate a comparable bank and/or publicly announced rate to be
thereafter used as a basis for determining Prime Rate. Borrower acknowledges
that any bank listed above may extend credit at rates of interest less than its
announced prime rate.
"Purchase Money Indebtedness" shall mean and include:
(i) Indebtedness for the payment of all or any part of the purchase
price of any assets,
(ii) any Indebtedness incurred at the time of or within ten (10) days
prior to or after the acquisition of any assets for the purpose of financing all
or any part of the purchase price thereof, and
(iii) any renewals, extensions or refinancings thereof, but not any
increases beyond the original principal amounts thereof outstanding at the time.
"Purchase Money Lien" shall mean a Lien upon assets which secures Purchase
Money Indebtedness, but only if such Lien shall at all times be confined solely
to the assets the purchase price of which was financed through the incurrence of
such Purchase Money Indebtedness.
"SPP" shall have the meaning set forth in Section 3.2(b).
"Statement of Transaction" shall have the meaning set forth in Section
3.2(a).
"Subordinated Debt" shall have the meaning set forth in Section 9.3.
"Subsidiaries" shall mean any corporation in which a Borrower or a
subsidiary of a Borrower owns or controls greater than 50% of the voting
securities, or any partnership or joint venture in which a Borrower or a
subsidiary of a Borrower owns or controls greater than 50% of the aggregate
equitable interest. The term "Subsidiary" means any one of the Subsidiaries.
"Tangible Net Worth" shall have the meaning set forth in Section 9.3.
"Total Credit Limit" shall have the meaning set forth in Section 3.1.
"Total Working Capital Credit Limit" shall have the meaning set forth in
Section 3.3.
"UCC" shall mean the Uniform Commercial Code as in effect in the
Commonwealth of Massachusetts and any successor statute, together with any
regulations thereunder, in each case as in effect from time to time. References
7
<PAGE> 9
to sections of the UCC shall be construed to also refer to any successor
sections.
"Unmatured Default" shall mean any event which, but for the passage of time
or notice, or both, would be a Default.
"Value" means the cost to Borrower of Borrower's Eligible Inventory
(exclusive of discounts, rebates, credits (including, without limitation price
protection credits), incentive payments and all other general intangibles
relating to such ), as determined in accordance with GAAP.
"Weekly Report" shall have the meaning set forth in Section 3.12(a).
"Working Capital Loan" shall have the meaning set forth in Section 3.3.
3. CREDIT FACILITY
3.1 Total Credit Facility. In consideration of Borrower's payment and
performance of its Obligations and subject to the terms and conditions contained
in this Agreement, DFS agrees to provide, and Borrower agrees to accept, an
aggregate credit facility (the "Credit Facility") of up to One Hundred Million
Dollars ($100,000,000) (the "Total Credit Limit"). The Credit Facility shall be
available in the form of the following types of Loans: (a) Floorplan Inventory
Loans, (b) Working Capital Loans, and (c) Overadvance Loans. No Loans need be
made by DFS if Borrower is in Default or if there exists any Unmatured Default.
This is an agreement regarding the extension of credit, and not the provision of
goods or services.
3.2 Floorplan Inventory Loans. Subject to the terms of this Agreement,
DFS may provide to Borrower floorplan financing for the acquisition of Inventory
from vendors approved by DFS in DFS' reasonable credit judgment (each advance
being a "Floorplan Inventory Loan"), up to an aggregate unpaid principal amount
at any time not to exceed Forty Seven Million Dollars ($47,000,000)
(collectively, the "Floorplan Inventory Loan Facility"). DFS may, however, at
any time and without notice to Borrower, elect not to finance any Inventory sold
by particular vendors who are in default of their obligations to DFS. DFS may at
any time suspend or terminate the relationship or approval of any vendor. DFS
will use reasonable efforts to attempt to give Borrower prior notice of such
suspension or termination.
(a) Financing Terms and Statements of Transaction. Borrower and
DFS agree that certain financial terms of any advance made by DFS as a Floorplan
Inventory Loan under this Agreement, whether regarding finance charges, other
fees, maturities, curtailments or other financial terms, are not set forth
herein because such terms depend, in part, upon the availability of vendor
discounts, payment terms or other incentives, prevailing economic conditions,
DFS' floorplanning volume with Borrower and with Borrower's vendors, and other
economic factors which may vary over time. Borrower and DFS further agree that
it is therefore in their mutual best interest to set forth in this Agreement
only the general terms of Borrower's Floorplan Inventory Loans. Upon agreeing to
finance a particular item of Inventory for Borrower, DFS will send Borrower a
Statement of Transaction identifying such inventory and the applicable financial
terms ("Statement of Transaction"). Unless Borrower
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<PAGE> 10
notifies DFS in writing of any objection within fifteen (15) days after a
Statement of Transaction is mailed to Borrower: (a) the amount shown on such
Statement of Transaction will be an account stated; (b) Borrower will have
agreed to all rates, charges and other terms shown on such Statement of
Transaction; (c) Borrower will have agreed that the items of Inventory
referenced in such Statement of Transaction are being financed by DFS at
Borrower's request; and (d) such Statement of Transaction will be incorporated
herein by reference, will be made a part hereof as if originally set forth
herein, and will constitute an addendum hereto. If Borrower objects to the terms
of any Statement of Transaction, Borrower agrees to pay DFS for such Inventory
in accordance with the most recent terms for similar Inventory to which Borrower
has not objected (or, if there are no prior terms, at the lesser of the Prime
Rate or at the maximum lawful contract rate of interest permitted under
applicable law).
(b) Payment Terms. Borrower will immediately pay DFS the principal
indebtedness owed DFS on each item of Inventory financed by DFS (as shown on the
Statement of Transaction identifying such Inventory) on the earliest occurrence
of any of the following events: (a) when such Inventory is lost, stolen or
damaged to the extent that such loss, theft or damage is not adequately insured
under an insurance policy which names DFS as loss payee; (b) in strict
accordance with any curtailment schedule for such Inventory (as shown on the
Statement of Transaction identifying such Inventory); (c) for Inventory financed
under Scheduled Payment Program ("SPP") terms (as shown on the Statement of
Transaction identifying such Inventory), in strict accordance with the
installment payment schedule; and (d) when otherwise required under the terms of
any financing program agreed to in writing by the parties. Regardless of the SPP
terms pertaining to any Inventory financed by DFS, if DFS determines that the
current outstanding debt which Borrower owes to DFS exceeds the aggregate
wholesale invoice price of such Inventory in Borrower's possession, Borrower
will immediately upon demand pay DFS the difference between such outstanding
debt and the aggregate wholesale invoice price of such Inventory. If Borrower
from time to time is required to make immediate payment to DFS of any past due
obligation discovered during any Inventory review, or at any other time,
Borrower agrees that acceptance of such payment by DFS shall not be construed to
have waived or amended the terms of its financing program. The proceeds of any
Inventory received by Borrower will be held by Borrower in trust for DFS'
benefit, for application as provided in this Agreement. DFS may apply: (i)
payments to reduce finance charges first and then principal, regardless of
Borrower's instructions; and (ii) principal payments to the oldest (earliest)
invoice for Inventory financed by DFS, but, in any event, all principal payments
will first be applied to such Inventory which is sold, rented, leased, or
otherwise disposed of or unaccounted for, or lost, stolen or damaged to the
extent that such loss, theft or damage is not adequately insured under an
insurance policy which names DFS as a loss payee. Any third party discount,
rebate, bonus or credit granted to Borrower for any Inventory will not reduce
the debt Borrower owes DFS until DFS has received payment therefor in cash.
Borrower will: (1) pay DFS even if any Inventory is defective or fails to
conform to any warranties extended by any third party; (2) not assert against
DFS any claim or defense Borrower has against any third party; and (3) indemnify
and hold DFS harmless against all claims and defenses asserted by any buyer of
the Inventory relating to the condition of, or any representations regarding,
any of the Inventory. Borrower waives all rights of offset Borrower may have
against DFS.
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3.3 Working Capital Loans. Subject to the terms of this Agreement, DFS
agrees, for so long as no Default exists, to provide to Borrower, and Borrower
agrees to accept, working capital financing (each advance being a "Working
Capital Loan") on Eligible Accounts and Eligible Inventory in the maximum
aggregate unpaid principal amount at any time equal to the lesser of (i) the
Borrowing Base and (ii) Fifty Million Dollars ($50,000,000) ("Total Working
Capital Credit Limit"). A request for a Working Capital Loan shall be made, or
shall be deemed to be made, as provided in Section 5.1 hereof.
(a) Eligible Accounts. On receipt of each Borrowing Base Certificate in
form and substance acceptable to DFS (the "Borrowing Base Certificate"), DFS
will credit Borrower with (i) eighty-five percent (85%) of the net amount of the
Eligible Accounts which are, absent error or other discrepancy, listed in such
Borrowing Base Certificate arising from Account Debtors other than Smith Barney
and Traveler's Insurance and (ii) ninety percent (90%) of the net amount of the
Eligible Accounts which are, absent error or other discrepancy, listed in such
Borrowing Base Certificate arising from Account Debtors Smith Barney and
Traveler's Insurance up to a maximum principal amount outstanding at any time
with respect thereto of $15,000,000 ("Eligible Account Availability"). For
purposes hereof, the net amount of Eligible Accounts at any time shall be the
face amount of such Eligible Accounts less any and all returns, discounts (which
may, at DFS' option, be calculated on shortest terms), credits, rebates,
allowances, or excise taxes of any nature at any time issued, owing, claimed by
Account Debtors, granted, outstanding or payable in connection with such
Accounts at such time.
(b) Eligible Inventory. On receipt of each Borrowing Base Certificate,
DFS will credit Borrower with the lesser of (i) fifty percent (50%) of the Value
of Eligible Inventory which is, absent error or other discrepancy, listed in
such Borrowing Base Certificate, and (ii) Five Million Dollars ($5,000,000)
(such lesser amount being called the "Eligible Inventory Availability").
(c) Interest. Borrower hereby agrees to pay interest to DFS, on the
Daily Contract Balance owed under Borrower's Working Capital Loans at a rate
that is equal to the Prime Rate minus one percentage point (1.0%) per annum.
3.4 Overadvance Facility. Subject to the terms of this Agreement, DFS
agrees, for so long as no Default exists, to provide Borrower, and Borrower
agrees to accept, overadvance financing for the purposes described herein (each
advance being an "Overadvance Loan"), up to an aggregate unpaid principal amount
not to exceed at any time Three Million Dollars ($3,000,000), on and subject to
the following terms and conditions (the "Overadvance Facility"):
(a) An Overadvance Loan may be made to satisfy Borrower's working
capital needs to the extent they exceed the formula-determined Borrowing Base;
(b) An Overadvance Loan may also be made to satisfy Borrower's
Obligations to the extent that as of the date of any Monthly Report, (i) the
principal amount of Loans hereunder (exclusive of the principal amount of any
outstanding Overadvance Loans), exceeds (ii) the Borrowing Base plus one hundred
percent (100%) of the total aggregate wholesale invoice price of all of
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Borrower's Inventory financed by DFS with Floorplan Inventory Loans that is
unsold and in Borrower's possession and control as of the date of such Monthly
Report;
(c) Each Overadvance Loan shall be due and payable ninety (90) days
after the date thereof;
(d) the Guaranty shall not be in default and shall be in full force
and effect at the time any Overadvance Loan is made;
(e) Borrower will pay DFS finance charges on the principal amount of
any Overadvance Loan outstanding at the end of each day at a rate that is one
percentage point (1.00%) per annum above the Prime Rate; and
(f) except as provided to the contrary in clauses (a) through (e)
above, Overadvance Loans pursuant to this Section 3.4 shall be subject to all
other terms and conditions of this Agreement.
Notwithstanding anything else herein, the total outstanding principal amount
of all Loans under this Agreement shall not at any time exceed $100,000,000.
Borrower shall have signed and sent to DFS, if DFS so requests, a request,
setting forth in writing the amount of the proposed Overadvance Loan; provided,
however, that the foregoing condition shall not prevent DFS, if it so elects in
its sole discretion, from making an Overadvance Loan pursuant to Borrower's
non-written request therefor.
3.5 Mandatory Prepayment. If at any time and for any reason the
aggregate amount of outstanding Loans (excluding therefrom any outstanding
Overadvance Loans) exceeds the Borrowing Base, Borrower will, immediately upon
demand, repay an amount of such Loans made to it by DFS hereunder equal to such
excess. In addition, Borrower shall immediately pay DFS whatever sums may be
necessary from time to time to remain in compliance with the Total Credit Limit
and the Total Working Capital Credit Limit, as such limits may change from time
to time, including, without limitation, as a result of any Collateral no longer
being deemed an Eligible Account or Eligible Inventory, or as a result of any
change in the Value of any Eligible Inventory, or in the amount of any Eligible
Account.
3.6 Calculation of Charges.
(a) Floorplan Inventory Loans. Borrower will pay DFS finance charges on
the outstanding principal debt Borrower owes DFS for each item of Inventory
financed by DFS under a Floorplan Inventory Loan at the rate(s) shown on the
Statement of Transaction identifying such Inventory, unless Borrower objects
thereto as provided in Section 3.2(a). The finance charges attributable to such
rates will: (i) be computed based on a 360 day year; (ii) be calculated by
multiplying the Daily Charge (as defined below) by the actual number of days in
the applicable billing period; and (iii) accrue from the invoice date of the
Inventory identified on such Statement of Transaction, until DFS receives full
payment of the principal debt Borrower owes DFS in good funds in accordance with
DFS' payment recognition policy and DFS applies such payment to Borrower's
principal debt in accordance with the terms of this Agreement. The annual
percentage rate of the finance charges will be calculated from the invoice date
of any item of Inventory financed by DFS, regardless of any period
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during which any finance charge subsidy shall be paid or payable by any third
party.
(b) Working Capital Loans. Borrower will pay DFS finance charges on the
Daily Contract Balance (as defined below) at the rate shown in Section 3.3(c).
The finance charges attributable to such rate will: (i) be computed based on a
360 day year; (ii) be calculated with respect to each day by multiplying the
Daily Rate (as defined below) by the Daily Contract Balance; and (iii) accrue
from the date of a Working Capital Loan advanced to or for the benefit of
Borrower, until DFS receives full payment of the principal debt Borrower owes
DFS in good funds in accordance with DFS' payment recognition policy and DFS
applies such payment to Borrower's principal debt in accordance with the terms
of this Agreement.
(c) Definitions. The "Daily Charge" is the product of the Daily Rate
multiplied by the Average Daily Balance. The "Daily Rate" is the quotient of the
applicable annual rate provided herein or in any Statement of Transaction
divided by 360. The "Daily Contract Balance" is the amount of outstanding
principal debt which Borrower owes DFS on the Working Capital Loans at the end
of each day after DFS has credited payments which it has received on the Working
Capital Loans. The "Average Daily Balance" is the quotient of: (i) the sum of
the outstanding principal debt owed DFS on each day of a billing period for each
item of Inventory identified on the Statement of Transaction, divided by (ii)
the actual number of days in such billing period.
3.7 Billing Statement. DFS will send Borrower a monthly billing
statement identifying all charges due on Borrower's account with DFS. The
charges specified on each billing statement will be: (a) due and payable in full
immediately on receipt; and (b) an account stated, absent manifest error. DFS
may adjust the billing statement at any time to conform to applicable law and
this Agreement.
3.8 Loan Proceeds. The parties intend that all indebtedness incurred
hereunder shall be governed exclusively by the terms of this Agreement and the
other Loan Documents, and shall not, unless requested by DFS, be evidenced by
notes or other evidences of indebtedness. Upon any such request, Borrower will
immediately execute and deliver any such note or other evidence reasonably
requested by DFS. Any fees, charges or expenses charged to DFS by any bank for
payments made by DFS at Borrower's request shall be immediately payable by
Borrower. All advances and other obligations of Borrower made hereunder will
constitute a single obligation.
3.9 Default Interest Rate. If a Default occurs, and unless and until
cured, DFS may without prior demand, raise the rate of interest accruing on the
disbursed unpaid principal balance of any Loan by three percentage points (3%)
above the rate of interest, if any, otherwise applicable (the "Default Interest
Rate"), whether or not DFS elects to accelerate the unpaid principal balances as
a result of a Default. DFS will use reasonable efforts to attempt to notify
Borrower before imposing the Default Interest Rate permitted by this Section.
3.10 Interest Rate After Certain Events. If a judgment is entered
against Borrower for sums due under any of the Obligations, as applicable, the
amount of the judgment entered (which may include principal,
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interest, reasonable attorneys' fees and costs) shall bear interest at the
judgment rate as permitted under applicable law as of the date of entry of the
judgment. All Obligations of Borrower described in clauses (a) and (b) of the
definition thereof shall bear interest at the Default Interest Rate.
3.11 Verification Rights of DFS. DFS may, without notice to Borrower
and at any time or times hereafter verify the validity, amount or any other
matter relating to any Account by mail, telephone or other means, in the name of
Borrower or DFS.
3.12 Reports.
(a) Weekly Reports. Borrower agrees to provide DFS with a report
each week, or more frequently if requested by DFS, in such form as is
satisfactory to DFS, including supporting information regarding, but not limited
to, a Borrowing Base Certificate (the "Weekly Report"). The Weekly Report will
be received by DFS each Thursday after the date of the Agreement by noon (in the
event that DFS is not open for business on a Thursday then the Weekly Report
will be due by noon of the next business day that DFS is open for business), or
more frequently if so requested by DFS.
(b) Monthly Reports. Borrower agrees to provide to DFS by the 15th
day of each month, or more frequently if requested by DFS, in each case as of
the last day of the immediately prior month, or other date, as applicable, each
of the following: (i) Inventory report including the current Inventory status,
showing the lower of cost (determined on a "first-in, first-out" basis) or
market value thereof; (ii) aging of Accounts sorted by Account Debtor, and aged
by invoice date with detail concerning each such invoice to include the invoice
number, date, dollar amount and credit detail, if any; and (iii) if Borrower's
system is able to produce such reports, an aging of Borrower's accounts payable
sorted by payee, and aged by purchase date with detail concerning each such
purchase to include the purchase date, dollar amount and credit detail, if any
(the "Monthly Reports").
(c) Other Reports. Borrower agrees to provide DFS within five (5)
Business Days after each request by DFS any other report or information
reasonably requested by DFS (the "Other Reports").
(d) Accuracy of Reports. The Weekly Report, Monthly Reports and
the Other Reports will be true and correct in all respects. Borrower
acknowledges DFS' reliance on the truthfulness and accuracy of each Weekly
Report, Monthly Report and the Other Reports.
3.13 Establishment of Reserves. Notwithstanding the foregoing
provisions of Section 3.3, DFS shall have the right to establish reserves in
such amounts, and with respect to such matters, as DFS shall deem necessary or
appropriate, against the amount of Working Capital Loans which Borrower may
otherwise request under Section 3.3, including, without limitation, with respect
to (a) price adjustments, damages, unearned discounts, returned products or
other matters for which credit memoranda are issued in the ordinary course of
Borrower's business; (b) shrinkage, spoilage and obsolescence of Inventory; (c)
slow moving Inventory; (d) other sums chargeable against Borrower as Working
Capital Loans under any section of this Agreement; and (e) such other matters,
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events, conditions or contingencies as to which DFS, in its reasonable credit
judgment determines reserves should be established from time to time hereunder.
3.14 Capital Adequacy.
(a) In the event that DFS shall have determined that the adoption
of any law, rule or regulation regarding capital adequacy, or any change therein
or in the interpretation or application thereof or compliance by DFS with any
request or directive regarding capital adequacy (whether or not having the force
of law) from any central bank or governmental authority, does or shall have the
effect of reducing the rate of return on DFS' capital as a consequence of its
obligations hereunder to a level below that which DFS could have achieved but
for such adoption, change or compliance (taking into consideration DFS' policies
with respect to capital adequacy), then from time to time, after submission by
DFS to Borrower of a written demand therefor and a calculation of such
reduction, Borrower shall pay to DFS such additional amount or amounts as will
compensate DFS for such reduction.
(b) A certificate of DFS claiming entitlement to payment as set
forth in Section 3.14(a) above shall be conclusive in the absence of manifest
error. Such certificate shall set forth the nature of the occurrence giving rise
to such payment, the additional amount or amounts to be paid to DFS, and the
method by which such amounts were determined. In determining such amount, DFS
may use any reasonable averaging and attribution method.
3.15 Collections. Borrower will direct all Account Debtors to make all
remittances to, and Borrower will deposit all collections on Accounts received
directly by Borrower into, an account or accounts of Borrower designated by and
blocked in favor of DFS. All funds in such accounts immediately shall become the
property of DFS and Borrower shall obtain the agreement of such banks to waive
any offset rights against the funds so deposited. Until delivery to such
account(s), Borrower will keep such remittances separate and apart from
Borrower's own funds so that they are capable of identification as the property
of DFS and will be held in trust for DFS. DFS may, upon the occurrence and
during the continuance of a Default, notify any Account Debtor of the assignment
of Accounts and collect the same. Upon the occurrence and during the continuance
of a Default, all proceeds received or collected by DFS with respect to
Accounts, and reserves and other property of Borrower in possession of DFS, may
be held by DFS without interest to Borrower until all Obligations are paid in
full or applied by DFS on account of the Obligations. DFS may release to
Borrower such portions of such reserves and proceeds as DFS may reasonably
determine.
3.16 Advancements. If Borrower fails to (a) perform any of the
affirmative covenants contained herein, (b) protect or preserve the Collateral
or (c) protect or preserve the status and priority of the Liens and security
interest of DFS in the Collateral, DFS may make advances to perform those
obligations. DFS will use reasonable efforts to attempt to give Borrower notice
prior to making such an advancement. All sums so advanced will be due and
payable upon demand and will immediately upon advancement become secured by the
security interests created by this Agreement and will be subject to the terms
and provisions of this Agreement and all of the Loan Documents. DFS may add all
sums so advanced, plus any expenses or costs incurred by DFS, including
reasonable attorney's fees, as outstanding Loans as DFS may designate in its
sole discretion. The provisions of this Section will not be construed to prevent
the institution of rights and remedies of DFS upon the occurrence of a
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Default. Any provisions in this Agreement to the contrary notwithstanding, the
authorizations contained in this Section will impose no duty or obligation on
DFS to perform any action or make any advancement on behalf of Borrower and are
for the sole benefit and protection of DFS.
3.17 Continuing Requirements - Accounts. Borrower will: (a) if from
time to time required by DFS, promptly after their creation, deliver to DFS
copies of all invoices, delivery evidences and other such documents relating to
each Account; (b) other than in the ordinary course of the Business, not permit
or agree to any extension, compromise or settlement or make any change to any
Account; (c) affix appropriate endorsements or assignments upon all such items
of payment and proceeds so that the same may be properly deposited by DFS to
DFS' account; (d) immediately notify DFS in writing which Accounts may be deemed
Ineligible Accounts; and (e) mark all chattel paper and instruments now owned or
hereafter acquired by it to show that the same are subject to DFS' security
interest and immediately thereafter deliver such chattel paper and instruments
to DFS with appropriate endorsements and assignments to DFS.
3.18 Floorplan Paydown. In the event:
(i) Borrower's outstanding Obligations to DFS under Borrower's
Floorplan Inventory Loan Facility exceeds, at any time;
(ii)(a) the Borrowing Base, minus
(b) Borrower's outstanding Working Capital Loans;
(the amount of such excess being the "Excess Floorplan Outstandings");
then Borrower will immediately pay to DFS, as a reduction of Borrower's
total current outstanding Indebtedness to DFS under the Floorplan Inventory Loan
Facility, the amount of any such Excess Floorplan Outstandings.
4. TERM OF AGREEMENT.
4.1 Termination. This Agreement will continue in full force and effect
and be non-cancellable for two (2) years from the Effective Date (except that it
may be terminated by DFS in the exercise of its rights and remedies upon Default
by Borrower) and shall be subject to automatic one-year renewal periods
thereafter unless at least 180 days prior to the expiration of such initial
period or any renewal period, either party shall have addressed the other of its
intention not to renew this Agreement; provided however, that Borrower may
terminate this Agreement prior to such date upon: (a) at least 90 days prior
written notice to DFS; (b) payment to DFS of all Obligations; and (c) payment to
DFS of the fee described in Section 4.3 below:
Termination on any date other than the anniversary date will not entitle
Borrower to a refund of any fee. DFS shall be entitled to payment of all fees
upon Default by Borrower which would have been payable during the original term
of this Agreement, or any extension thereof, but for such early termination. Any
accelerated fees represent liquidated damages and not a penalty. Any such
written notice of termination delivered by Borrower to DFS shall be irrevocable.
It is understood that Borrower may elect to terminate this Agreement in its
entirety only, no section or lending facility may be terminated singly.
4.2 Effect of Termination. Borrower will not be relieved from any
Obligations to DFS arising out of DFS' advances or commitments made before
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the effective termination date of this Agreement. DFS will retain all of its
rights, interests and remedies hereunder until Borrower has paid all of
Borrower's Obligations to DFS. All waivers set forth within this Agreement will
survive any termination of this Agreement.
4.3 Right of First Refusal. Despite anything to the contrary provided
in Sections 4.1 and 4.2, upon Borrower's notice to DFS of its intention to
terminate this Agreement, DFS will have the right to extend the term of this
Agreement to the end of the original term or the next succeeding renewal term,
whichever period is longer, by notifying Borrower, within thirty (30) days of
its receipt of such notice of termination, of DFS' willingness to substantially
meet the following quantifiable provisions of any alternative financing which
has been offered to Borrower (such information to be provided to DFS with
Borrower's notice of its intention to terminate): (i) interest, (ii) charges,
(iii) advance rates, and (iv) eligibility of Collateral. Upon receipt of DFS'
notification of its willingness to substantially meet the above terms of any
alternative financing, this Agreement and the other Loan Documents will continue
in full force and effect except as to any of the above terms which will be
amended as required pursuant to this Subsection.
If, however, Borrower elects not to accept such alternative financing from
DFS, Borrower must pay to DFS a fee equal to one quarter of one percent (0.25%)
of the Total Credit Limit.
Subject to the terms of the sentence immediately following, if DFS chooses
not to exercise its rights hereunder with respect to any alternative financing
which has been offered to Borrower during the first year of this Agreement, the
Agreement and the other Loan Documents shall terminate in accordance with the
terms hereof and upon Borrower's payment to DFS of a fee equal to one half of
one percent (0.5%) of the Total Credit Limit. The foregoing notwithstanding, if
as the result of a transaction which, upon closure, would result in the merger
of Borrower with and into a third party, with Borrower not being the survivor,
Borrower delivers notice of its intention to terminate this Agreement within the
first year hereof, Borrower shall not be obligated to pay DFS the fee set forth
in the sentence immediately preceding. If DFS chooses not to exercise its rights
hereunder with respect to any alternative financing which has been offered to
Borrower after the first year of this Agreement, the Agreement and the other
Loan Documents shall terminate in accordance with the terms hereof without any
obligation of Borrower to pay any fees described in this Section 4.3.
5. BORROWING AND REPAYMENT PROCEDURES
5.1. Borrowing Procedures.
(a) Generally. A request for a Working Capital Loan shall be made, or
shall be deemed to be made, in the following manner: (i) Borrower may give DFS
written notice of its intention to borrow, in which notice Borrower shall
specify the amount of the proposed borrowing and the proposed borrowing date;
(ii) the becoming due of any amount required to be paid under this Agreement as
interest not otherwise paid by Borrower shall be deemed irrevocably to be a
request for a Working Capital Loan on the due date in the amount required to pay
such interest; and (iii) the becoming due of any other Obligations not otherwise
paid by Borrower shall be deemed irrevocably to be a request for a Working
Capital Loan on the due date in the amount then so due.
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For purposes of subpart (i) above, Borrower agrees that DFS may rely and act
upon any request for a Working Capital Loan from any individual who DFS, absent
gross negligence or willful misconduct, believes to be a representative of
Borrower who is serving as one of the following officers of Borrower:
President; Vice President and Controller; Secretary; Chief Financial Officer;
Treasurer; Assistant Controller and Agent.
(b) Conditions Precedent to Each Working Capital Loan. Without limiting
the applicability of the conditions precedent set forth in Section 7 below to
DFS' obligation to make any Working Capital Loan, the obligation of DFS to make
any Working Capital Loan shall be subject to the further conditions precedent
that, on the date of each such Working Capital Loan:
(i) The following statements shall be true: (A) the representations and
warranties contained in Section 8 hereof are correct in all material respects on
and as of the date of such Working Capital Loan as though made on and as of such
date, and (B) there exists no Default or Unmatured Default, nor would any
Default or Unmatured Default result from the making of the Working Capital Loan
requested by Borrower;
(ii) Borrower shall have signed and sent to DFS, if DFS so requests, a
request for advance, setting forth in writing the amount of the Working Capital
Loan requested; provided, however, that the foregoing condition precedent shall
not prevent DFS, if it so elects in its sole discretion, from making a Working
Capital Loan pursuant to Borrower's non-written request therefor;
(iii) DFS shall have received a current Borrowing Base Certificate,
signed by the Borrower, in accordance with the provisions of Section 3.12(a)
hereof; and
(iv) DFS shall have received such other approvals, opinions or
documents as it may reasonably request.
Borrower agrees that the making of a request by Borrower for a Working Capital
Loan, shall constitute a certification by Borrower and the Person(s) executing
or giving the same that all representations and warranties of Borrower herein
are true in all material respects as of the date thereof and that all required
conditions to the making of the Working Capital Loan have been met.
5.2 Excess Advances. DFS, in its sole and absolute discretion, may
elect to permit the total unpaid balance of Loans to exceed the Total Credit
Limit (the "Excess Advances"), and no such event or occurrence shall cause or
constitute a waiver by DFS of its right to demand payment of all or any part of
the Loans at any time within the terms of this Agreement or to refuse, in its
sole and absolute discretion, to make such further Loans. Any such Excess
Advances shall be payable immediately upon demand therefor, unless otherwise
specifically agreed to by DFS, and shall bear interest at the Prime Rate plus
one percent (1%) per annum.
5.3 All Loans One Obligation. All Obligations of Borrower to DFS under
this Agreement and all other agreements between Borrower and DFS shall
constitute one obligation to DFS secured by the security interest granted in
this Agreement, and by all other Liens heretofore, now, or at any time or
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times hereafter granted by Borrower. All of the rights of DFS set forth in this
Agreement shall apply to any modification of or supplement to this Agreement, or
Exhibits hereto, unless otherwise agreed in writing.
5.4 Payments of Principal and Interest. All payments and amounts due
hereunder by Borrower shall be made and be payable without set-off and shall be
made to DFS on the date due at its office(s) responsible for Borrower's account,
or at such other place which DFS may designate to Borrower in writing. Any
payments received after such time shall be deemed received on the next Business
Day. Whenever any payment to be made hereunder shall be stated to be due on a
date other than a Business Day, such payment may be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
payment of interest or any fees.
5.5 Collection Days. All payments and all amounts received hereunder
will be credited by DFS to Borrower's account on the day that good funds have
been deposited into DFS' blocked collection account and swept by DFS into DFS'
general operating account.
6. SECURITY FOR THE OBLIGATIONS
6.1 Grant of Security Interest. To secure payment of all of Borrower's
current and future Obligations and to secure Borrower's performance of all of
the provisions under this Agreement and the Other Agreements, Borrower grants
DFS a security interest in all of Borrower's inventory, equipment, fixtures,
accounts, contract rights, chattel paper, security agreements, instruments,
deposit accounts, reserves, documents and general intangibles; and all
judgments, claims, insurance policies, and payments owed or made to Borrower
thereon; all whether now owned or hereafter acquired, all attachments,
accessories, accessions, returns, repossessions, exchanges, substitutions and
replacements thereto, and all proceeds thereof. All such assets are collectively
referred to herein as the "Collateral." All such terms for which meanings are
provided in the Uniform Commercial Code are used herein with such meanings. All
Collateral financed by DFS, and all proceeds thereof, will be held in trust by
Borrower for DFS, with such proceeds being payable in accordance with this
Agreement. Borrower covenants with DFS that DFS may realize upon all or part of
any Collateral in any order it desires and any realization by any means upon any
Collateral will not bar realization upon any other Collateral. Borrower's
liability under this Agreement is direct and unconditional and will not be
affected by the release or nonperfection of any security interest granted
hereunder.
6.2 Future Advances. DFS' security interests shall secure all
current and all future advances to Borrower made by DFS under the Loan
Documents.
6.3 Financing Statements. Borrower shall execute and deliver to DFS for
the benefit of DFS such financing statements, certificates of title and original
documents as may be required by DFS with respect to DFS' security interests.
6.4 Guaranties. Borrower shall cause Elcom to execute and deliver a
collateralized guaranty of the Obligations secured by a first priority,
perfected security interest in the assets described therein.
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6.5 Further Assurances. Borrower will execute and deliver to DFS, at
such time or times as DFS may request, all financing statements, security
agreements, assignments, certificates, affidavits, reports, schedules, and other
documents and instruments that DFS may reasonably deem necessary to perfect and
maintain perfected DFS' security interests in the Collateral and to fully
consummate the transactions contemplated under all Loan Documents. All filing,
recording or registration fees shall be payable by Borrower.
6.6 Intellectual Property. Borrower shall execute and deliver a
collateral assignment of patents, copyrights and trademarks in form and
substance reasonably acceptable to DFS granting DFS a first priority security
interest in and to the items listed in Exhibit 8.21 in form acceptable for
recordation.
7. CONDITIONS PRECEDENT
All duties and obligations of DFS under the Loan Documents on the Effective
Date, and at all times during the term of this Agreement, are specifically
subject to the full and continued satisfaction by Borrower of the conditions
precedent set forth below.
7.1 Conditions Precedent. The following conditions must be satisfied
as of the Effective Date:
(a) DFS' Counsel. DFS' counsel must approve of all matters pertaining to (i)
title to the Collateral; (ii) the form, substance and due execution of all
Loan Documents; (iii) Borrower's organizational documents; and (iv) all
other legal matters, including the application of any laws relating to
usury.
(b) Material Change. There must not have been any material adverse change,
between September 30, 1996 and the Effective Date, in the condition of
Borrower, the condition of the Business, the value and condition of the
Collateral, the structure of Borrower other than as contemplated herein, or
in the financial information, audits and the like obtained by DFS.
(c) Perfected Liens. DFS shall have a perfected first priority Lien and
security interest in the Collateral, subject only to the Permitted Liens.
(d) Insurance. Borrower shall provide DFS with certificates of insurance
evidencing that Borrower has obtained the insurance as required in Section
9.1.2.
(e) Laws. Borrower and its Subsidiaries shall be in compliance with all
applicable laws and governmental regulations, including, but not limited to,
all Environmental Laws, the failure to comply with which would have a
material adverse effect on Borrower or its Subsidiaries, on a consolidated
basis, or the Business.
(f) Certificates of Good Standing. A certificate of good standing for
Borrower (or other similar certificate) must be delivered to DFS, from the
appropriate governmental authority of Borrower's state of incorporation and
other jurisdictions in which any material Collateral is located, dated not
earlier than 30 days prior to the Effective Date.
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(g) Opinion of Borrower's Counsel. DFS must receive a written opinion from
counsel for Borrower, dated the Effective Date, and addressed to and for the
benefit of DFS, in form and substance satisfactory to DFS.
(h) UCC Searches. DFS must receive a certificate from a provider of
financing statement searches acceptable to DFS which identifies all
financing statements of public record not more than 5 days before the
Effective Date, that pertain to the Collateral.
(i) Other Documents. DFS must receive such other documents, certificates,
submissions, insurance policies and other matters as reasonably requested by
DFS relating to the transaction herein contemplated.
(j) CFO's Certificate. DFS must receive a certificate in the form attached
hereto as Exhibit 7.1(j) with respect to Borrower's compliance with all of
the terms and conditions in the Loan Documents.
(k) Articles of Incorporation. A certified copy of the Articles of
Incorporation, By-Laws and the resolutions of the directors of Borrower
authorizing the transactions contemplated by this Agreement.
(l) Secretary's Certificate of Resolution and Incumbency. DFS must
receive a certificate in the form attached hereto as Exhibit 7.1(l).
(m) Pre-closing Expenses. Borrower shall pay to DFS all fees and expenses
required under this Agreement that are due on or before the Effective Date.
(n) Pre-closing Reviews. DFS must complete reviews with satisfactory
results of Borrower's Inventory and Accounts. All costs and expenses for
such pre-closing reviews will be included within the pre-closing expenses.
(o) Payoff Letter. A lien release and payoff letter executed by any and
all lienholders on any of the Collateral, other than with respect to the
Permitted Liens.
8. REPRESENTATIONS AND WARRANTIES
To induce DFS to enter into this Agreement, Borrower makes the
representations and warranties set forth below, all of which will remain true in
all material respects during the term of this Agreement. Borrower acknowledges
DFS' justifiable right to rely upon the representations and warranties set forth
below.
8.1 Financial Statements. Elcom's audited consolidated financial
statements as of December 31, 1995 and Elcom's unaudited consolidated financial
statements as of September 30, 1996, copies of which have been previously
submitted to DFS, have been prepared in conformity with GAAP and present fairly
the financial condition of Elcom and its consolidated Subsidiaries as at such
dates and the results of their operations for the periods then ended. Borrower
warrants and represents to DFS that all financial statements and information
relating to Borrower or any Guarantor which have been or may hereafter be
delivered by Borrower or any Guarantor, excluding any forecasts or projections,
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are true and correct and have been and will be prepared in accordance GAAP
excluding footnotes and, with respect to such previously delivered statements or
information, there has been no material adverse change in the financial or
business condition of Borrower or any Guarantor since the submission to DFS,
either as of the date of delivery, or, if different, the date specified therein,
and Borrower acknowledges DFS' reliance thereon.
8.2 Non-Existence of Defaults. Neither Borrower nor any of its
Subsidiaries is in default with respect to any material amount of its existing
Indebtedness. The making and performance of this Agreement and all other Loan
Documents, will not immediately, or with the passage of time, the giving of
notice, or both: (a) violate the provisions of the bylaws or any other corporate
document of Borrower; (b) violate any laws to the best of Borrower's knowledge
after diligent inquiry; (c) result in a material default under any contract,
agreement, or instrument to which Borrower is a party or by which Borrower or
its properties are bound; or (d) result in the creation or imposition of any
security interest in, or Lien or encumbrance upon, any of the Collateral except
the Permitted Liens.
8.3 Litigation. Set forth on Exhibit 8.3 is a list of all actions,
suits, investigations or proceedings pending or, in the knowledge of Borrower,
threatened against Borrower or any of its Subsidiaries, as of the date hereof in
which there is a reasonable probability of an adverse decision which would
materially and adversely affect Borrower, the Business, or the Collateral.
8.4 Material Adverse Changes. Borrower does not know of or reasonably
expect any material adverse change in the Business, or in Borrower's or any of
its Subsidiaries' assets, liabilities, properties, or condition, financial or
otherwise, including changes in Borrower's financial condition from September
30, 1996 through the Effective Date.
8.5 Title to Collateral. Except as set forth on Exhibit 8.5, Borrower
has good and marketable title to all of the Collateral, free and clear of any
and all Liens, claims and encumbrances, other than the Permitted Liens.
8.6 Corporate Status. Borrower and each of the Subsidiaries is a
corporation duly organized and validly existing, in good standing, with
perpetual corporate existence, under the laws of their respective jurisdictions
of formation. Borrower and its Subsidiaries have the corporate power and
authority to own their properties and to transact the Business in which they are
engaged and presently propose to engage. Borrower and each Subsidiary is duly
qualified as a foreign corporation and in good standing in all states where the
nature of their Business or the ownership or use of their property requires such
qualification, and where failure to so qualify would have a material adverse
effect on its Business, operations or financial condition.
8.7 Subsidiaries. Exhibit 8.7 hereto lists the Subsidiaries as of
the Effective Date, excluding, however, the Lantec Group.
8.8 Power and Authority. Borrower has the corporate power to borrow and
to execute, deliver and carry out the terms and provisions of the Loan
Documents. Borrower has taken or caused to be taken all necessary corporate
action to authorize the execution, delivery and performance of this Agreement
and all other Loan Documents and the borrowing thereunder.
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8.9 Place of Business. Catalink's chief executive office and principal
place of business is located at 10 Oceana Way, Norwood, MA 02062. Catalink PA's
chief executive office and principal place of business is located at 111
Sinclair Street, Bristol, PA 19007. Borrower's records concerning the Collateral
are kept at such chief executive offices, or will be kept at such other place
that Borrower informs DFS of not less than 30 days in advance of relocation.
8.10 Enforceability of the Loan Documents. The Loan Documents executed
by Borrower are the valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their terms, except as limited
by bankruptcy, insolvency, or other laws of general application relating to
equitable principles and the enforcement of creditors' rights.
8.11 Taxes. Catalink's federal tax identification number is 04-3292174.
Catalink PA's federal tax identification number is 04-3254723. Borrower has: (a)
filed all federal, state and local tax returns and other reports that it is
required by law to file, (b) paid or caused to be paid all taxes, assessments
and other governmental charges that are due and payable, the failure of which to
pay would have a material adverse effect on the Business, except those contested
in good faith and in accordance with accepted procedures, and for which adequate
reserves have been established in accordance with GAAP, and (c) made adequate
provision for the payment of such taxes, assessments or other charges accruing
but not yet payable. Borrower has no knowledge of any deficiency or additional
assessment in a material amount in connection with any taxes, assessments or
charges.
8.12 Compliance with Laws. Borrower, to the best of its knowledge after
diligent inquiry, has complied, and shall cause each Subsidiary to comply, in
all material respects with all applicable laws, including any Environmental Laws
and any zoning laws, the failure to comply with which would have a material
adverse effect on Borrower and its Subsidiaries on a consolidated basis.
8.13 Consents. Borrower and the Subsidiaries have obtained all material
consents, permits, licenses, approvals or authorization of, or effected the
filing, registration or qualification with, any governmental entity which is
required to be obtained or effected by Borrower and the Subsidiaries in
connection with the Business or the execution and delivery of this Agreement and
the other Loan Documents the failure of which to obtain or effect would have a
material adverse effect on Borrower and its Subsidiaries on a consolidated
basis.
8.14 Purpose. Borrower will use the advances which DFS makes under the
Credit Facility solely for lawful purposes and as described in Section 3 hereof.
8.15 Condition of the Business. All material assets used in the conduct
of the Business are in good operating condition and repair and are fully usable
in the ordinary course thereof, reasonable wear and tear excepted.
8.16 Capital. All issued shares and all outstanding shares in the
Subsidiaries are validly issued pursuant to proper authorization of the board of
directors of such Subsidiary, and are fully paid, and non-assessable. Except as
described on Exhibit 8.16, there are no outstanding subscriptions, warrants,
options, calls or commitments, obligations or securities convertible or
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exchangeable for shares of any stock of Elcom or the Subsidiaries. Elcom and the
Subsidiaries shall give DFS thirty days (30) prior written notice before
entering any agreement to register any new issues of equity or debt securities
under the Securities Act of 1933, as amended, or any state securities law, which
are not so registered on the Effective Date. All of Elcom's and the Subsidiary's
issued shares and outstanding capital stock are fully paid and non-assessable,
and each such Person's capital structure is as set forth on Exhibit 8.16,
excluding, however, the Lantec Group.
8.17 Location of Collateral. Exhibit 8.17 describes the locations where
any material amount of the Collateral is located or stored as of the date
hereof, excepting therefrom any location where a non-material amount of
Collateral utilized in the ordinary course of Business as equipment, fixtures or
sales or demonstration items.
8.18 Real Property. Neither Borrower nor any Subsidiary (excluding the
Lantec Group) owns or leases any real property where any material amount of the
Collateral is located or stored, except as set forth on Exhibit 8.18 attached
hereto.
8.19 Warranties and Representations-Accounts. For each Account listed
by Borrower on any Borrowing Base Certificate, Borrower warrants and represents
to DFS that at all times: (a) such Account is genuine; (b) such Account is not
evidenced by a judgment or promissory note or similar instrument or agreement;
(c) it represents an undisputed bona fide transaction completed in accordance
with the terms of the invoices and purchase orders relating thereto; (d) the
goods sold or services rendered which resulted in the creation of such Account
have been delivered or rendered to and are expected to be accepted by the
Account Debtor; (e) the amounts shown on the Borrowing Base Certificate,
Borrower's books and records and all invoices and statements delivered to DFS
with respect thereto are owing to Borrower and are not contingent; (f) no
payments have been or will be made thereon except payments turned over to DFS;
(g) there are no offsets, counterclaims or disputes existing or asserted with
respect thereto and Borrower has not made any agreement with the Account Debtor
for any deduction or discount of the sum payable thereunder except regular
discounts allowed by Borrower in the ordinary course of its business for prompt
payment; (h) there are no facts or events which in any way impair the validity
or enforceability thereof or reduce the amount payable thereunder from the
amount shown on the Borrowing Base Certificate, Borrower's books and records and
the invoices and statements delivered to DFS with respect thereto; (i) to the
best of Borrower's knowledge, all persons acting on behalf of the Account Debtor
thereon have the authority to bind the Account Debtor; (j) the goods sold or
transferred giving rise thereto are not subject to any Lien, claim, encumbrance
or security interest which is superior to that of DFS; (k) such Account is
subject to DFS' perfected, first priority security interest and no other Lien
other than a Permitted Lien; and (l) there are no proceedings or actions known
to Borrower which are threatened or pending against the Account Debtor thereon
which might reasonably be expected to result in any material adverse change in
such Account Debtor's financial condition.
Notwithstanding the foregoing provisions of Section 8.19(g) above, only that
portion of such Account equal to the offset, counterclaim or dispute shall not
be considered an Eligible Account.
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8.20 Environmental, Health and Safety Matters. Except as disclosed on
Exhibit 8.20: To the best of Borrower's knowledge: (a) the operations of
Borrower and each of the Subsidiaries complies in all material respects with (i)
all applicable Environmental Laws, and (ii) all applicable OSHA Laws; (b) none
of the operations of Borrower or any Subsidiary are subject to any judicial or
administrative proceeding alleging the Violation of any Environmental Law or
OSHA Law; (c) to the best of Borrower's knowledge, none of the operations of
Borrower or any Subsidiary is the subject of federal or state investigation
evaluating whether any remedial action is needed to respond to (i) a spillage,
disposal or release into the environment of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance, or (ii) any unsafe or unhealthful condition at any premises of
Borrower or any Subsidiary; (d) neither Borrower nor any Subsidiary has filed
any notice under any Environmental Law or OSHA Law indicating or reporting (i)
any past or present spillage, disposal or release into the environment of, or
treatment, storage or disposal of, any Hazardous Material or other hazardous,
toxic or dangerous waste, substance or constituent, or other substance or (ii)
any unsafe or unhealthful condition at any premises of Borrower or any
Subsidiary; and (e) neither Borrower nor any Subsidiary has any known contingent
liability in connection with (i) any spillage, disposal or release into the
environment of, or otherwise with respect to, any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance or (ii) any unsafe or unhealthful condition at any premises of
Borrower or any Subsidiary.
8.21 Patents, Copyrights, Trademarks, Etc. The Borrower and each of the
Subsidiaries possesses or has the right to use all of the patents, trademarks,
trade names, service marks and copyrights, and applications therefor, and all
technology, know-how, processes, methods and designs used in or necessary for
the conduct of its business, without known material conflict with the rights of
others. All such licenses, patents, trademarks, trade names, service marks and
copyrights, and applications therefor existing on the date hereof are listed on
Exhibit 8.21.
8.22 Solvency. The Borrower and each of the Subsidiaries now has
capital sufficient to carry on its respective business and transactions and all
business and transactions in which it is about to engage and is now solvent and
able to pay its respective debts as they mature.
8.23 Leases. Exhibit 8.23(a) attached hereto is a complete listing of
all material capitalized leases of Borrower and Exhibit 8.23(b) attached hereto
is a complete listing of all material operating leases of Borrower.
8.24 Labor Relations. Except as described on Exhibit 8.24 attached
hereto and made a part hereof, neither Borrower nor any of its Subsidiaries is a
party to any collective bargaining agreement, and there are no material
grievances, disputes or controversies with any union or any other organization
of Borrower's employees, or threats of strikes, work stoppages or any asserted
pending demands for collective bargaining by any union or organization.
8.25 Business Locations; Agent for Process. Except as described on
Exhibit 8.25 attached hereto and made a part hereof, during the preceding seven
(7) year period, Borrower has had no office, place of business
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or agent for service of process located in any state or county other than as
shown Exhibit 8.17, provided, however, that with respect to the predecessor
corporation to Catalink PA, Borrower makes the foregoing representation only to
the best of Borrower's knowledge.
8.26 Warranties and Representations-Inventory. For each item of
Inventory listed by Borrower on any Borrowing Base Certificate, Borrower
covenants, warrants and represents to DFS that at all times: (a) except for
Inventory in transit, Inventory will be kept only at the locations indicated on
Exhibit 8.17; (b) no Inventory is or will be produced in violation of the
Federal Fair Labor Standards Act; (c) Borrower now keeps and will keep
materially correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and the listed
selling price thereof, the daily withdrawals therefrom and the additions
thereto; (d) Inventory is not and will not be stored with a bailee, repairman,
warehouseman or similar party without DFS' prior written consent, and Borrower
will, concurrently with delivery to such party, cause any such party to issue
and deliver to DFS, in form acceptable to DFS, warehouse receipts, in DFS' name
evidencing the storage of such Inventory, and waivers of warehouseman's liens in
favor of DFS; (e) Borrower will pay all taxes, rents, business taxes, and the
like on the premises where the Inventory is located; and (f) Borrower will not
rent, lease, lend, demonstrate, pledge, consign, transfer or secrete any of the
Inventory or use any of the Inventory for any purpose other than exhibition and
sale to buyers in the ordinary course of business, without DFS' prior written
consent.
8.27 Reaffirmation. Each request for a Loan made by Borrower pursuant
to this Agreement or any of the other Loan Documents shall constitute (a) an
automatic representation and warranty by Borrower to DFS that there does not
then exist any Default or Unmatured Default, and (b) a reaffirmation as of the
date of said request of all of the representations and warranties of Borrower
that are not being made as of a specific date contained in this Agreement and
the other Loan Documents.
8.28 Survival of Representations and Warranties. Borrower covenants,
warrants and represents to DFS that all representations and warranties of
Borrower contained in this Agreement or any of the other Loan Documents shall be
true at the time of Borrower's execution of this Agreement and the other Loan
Documents, and shall survive the execution, delivery and acceptance thereof by
DFS and the parties thereto and the closing of the transactions described
therein or related thereto.
9. BORROWER'S COVENANTS
9.1 Affirmative Covenants. During the term of this Agreement and
thereafter for so long as any Obligations are outstanding and unpaid, Borrower
covenants that unless otherwise consented to by DFS in writing, it shall perform
all the acts and promises required by this Agreement and all the acts and
promises set forth below.
9.1.1 Payment and Performance. Borrower will pay and perform
all Obligations in full when and as due hereunder.
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9.1.2 Insurance.
(a) Type of Insurance. Borrower will at all times cause the
Business and the Collateral to be insured by insurers of
reasonable financial soundness and having an A. M. Best
rating of A or better, with such policies, against such
risks and in such amounts as are appropriate for reasonably
prudent businesses in Borrower's industry and of Borrower's
size and financial strength.
(b) Requirements as to Insurance Policies. The policies of
insurance which Borrower is required to carry shall comply
with the requirements listed below:
(i) Each such policy shall provide that it may not be
canceled or allowed to lapse at the end of a policy period
without at least 30 days' prior written notice to DFS;
(ii) Each liability and hazard insurance policy shall
name DFS as an additional insured; and
(iii) Each property insurance policy required hereunder
shall contain a standard lender's loss payable clause in
favor of DFS. Such insurance policies shall also contain
lender's loss payable endorsements satisfactory to DFS
providing, among other things, that any loss shall be
payable in accordance with the terms of such policy
notwithstanding any act of Borrower which might otherwise
result in forfeiture of such insurance;
(c) Collection of Claims. Borrower will promptly advise DFS
of any insured casualty and Borrower agrees that DFS may
direct all insurance proceeds therefrom to be paid directly
to DFS to the extent that such loss is not adequately
insured under an insurance policy which names DFS as a loss
payee, and hereby appoints DFS its attorney-in-fact for
such purpose.
(d) Blanket Policies. Any insurance required hereunder
may be supplied by means of a blanket or umbrella
insurance policy.
(e) Delivery of Policies or Certificates of Insurance.
Borrower shall deliver to DFS certificates of insurance
issued by insurers to evidence that the insurance
maintained by Borrower complies with the requirements
hereunder.
9.1.3 Collection of Receivables; Sale of Inventory. Borrower will
collect its Accounts and sell its Inventory only in the ordinary course of
business, unless written permission to the contrary is obtained from DFS.
9.1.4 Notice of Litigation and Proceedings. Borrower will give
prompt notice to DFS of: (a) any material litigation or proceeding
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(including fines and penalties of any public authority) in which it, or any of
the Subsidiaries is a party in which there is a reasonable probability of an
adverse decision which would require it or any of the Subsidiaries to pay money
or deliver assets, whether or not the claim is considered to be covered by
insurance; (b) any class action litigation against it, regardless of size; and
(c) the institution of any other suit or proceeding that might reasonably be
expected to materially and adversely affect its or any of its Subsidiary's
operations, financial condition, property or the Business.
9.1.5 Payment of Indebtedness to Third Persons. Borrower will, and
will cause each Subsidiary to, pay, when due, all Indebtedness and any other
liability due third persons, except when the amount thereof is being contested
in good faith by appropriate proceedings and with adequate reserves therefor in
accordance with GAAP being set aside by Borrower or such Subsidiary.
9.1.6 Notice of Change of Business Location. Borrower will notify
DFS 30 days in advance of: (a) any change in or discontinuation of the locations
listed on Exhibit 8.17, Borrower's principal place of business, or any of the
Subsidiaries' existing offices or places of business, (b) the establishment of
any new places of business relating to the Business which would be required to
be set forth on Exhibit 8.18, and (c) any change in or addition to the locations
where Borrower's Inventory or records are kept.
9.1.7 Payment of Taxes. Borrower will, and will cause each
Subsidiary to, pay or cause to be paid, prior to delinquency, all taxes,
assessments and charges or levies imposed upon it or on any of its property or
that it is required to withhold and pay over to the taxing authority or that it
must pay on its income, the failure of which to pay would have a material
adverse effect on Borrower individually, or on Borrower and the Subsidiaries on
a consolidated basis, except where contested in good faith by appropriate
proceedings with adequate reserves therefor, in accordance with GAAP, having
been set aside by Borrower or such Subsidiary. However, Borrower will and will
cause each Subsidiary to, pay or cause to be paid all such taxes, assessments,
charges or levies immediately whenever foreclosure of any Lien that attaches on
the Collateral reasonably appears to be imminent.
9.1.8 Further Assurances. Borrower agrees to, and will cause each
Subsidiary (excluding the Lantec Group) to, execute such other and further
documents, including, without limitation, deeds of trust, promissory notes,
security agreements, financing statements, continuation statements, certificates
of title, and the like as may from time to time in the reasonable opinion of DFS
be necessary to perfect, confirm, establish, re-establish, continue, or complete
the security interests, collateral assignments and Liens in the Collateral, and
the purposes and intentions of this Agreement.
9.1.9 Maintenance of Status. Borrower will take all necessary
steps to (a) preserve its, and each Subsidiary's, existence as a corporation,
(b) preserve Borrower's and the Subsidiaries' franchises and permits, and (c)
comply with all present and future material agreements to which Borrower, or any
of the Subsidiaries, is subject, and (d) maintain, and cause each Subsidiary to
maintain, its qualification and good standing in all states in which such
qualification is necessary or in which the failure to be so qualified might have
a material adverse effect on the financial condition or properties of Borrower
or the Business. Borrower will not change the nature of the Business during the
term of this Agreement.
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9.1.10 Financial Statements; Reporting Requirements;
Certification as to Events of Defaults. During the term of this Agreement,
Borrower will furnish two copies of the following to DFS:
(a) within 120 days after the end of each fiscal year, annual
financial statements for Elcom and its Subsidiaries as of the end
of such fiscal year, consisting of a consolidated balance sheet,
consolidated statement of operations, consolidated statements of
cash flows and consolidated statement of stockholder's equity, in
comparative form, together with a narrative description of the
financial condition and results of operations and the liquidity
and capital resources of Elcom and its Subsidiaries and setting
forth in comparative form the corresponding figures for the
corresponding period of the prior fiscal year discussing the
reasons for any significant variations. The statements and balance
sheet will be audited by an independent firm of certified public
accountants selected by Elcom and acceptable to DFS (DFS hereby
confirming that Arthur Andersen LLP and Touche Ross are such
acceptable accountants), and certified by that firm of certified
public accountants to have been prepared in accordance with GAAP.
The certified public accountants will render an unqualified
opinion as to such statements and balance sheets. DFS hereby
acknowledges that any such consolidating financial statements may
need subsequent adjustments. DFS will have the absolute and
irrevocable right, from time to time, to discuss the affairs of
Elcom and its Subsidiaries directly with the independent certified
public accountant after prior notice to Elcom and the reasonable
opportunity of Elcom and its Subsidiaries to be present at any
such discussions;
(b) by the 45th day of each quarter, Elcom's Quarterly Report on
Form 10-Q delivered to the Securities and Exchange Commission
("SEC");
(c) by the 45th day of each quarter, a certificate of the
President, or Chief Financial Officer, in the form of Exhibit
9.1.10(c) attached hereto, of Borrower stating that such Person
has reviewed the provisions of the Loan Documents and that a
review of the activities of Borrower during such quarter has been
made by or under such Person's supervision with a view to
determining whether Borrower has observed and performed all of
Borrower's obligations under the Loan Documents, and that, to the
best of such Person's knowledge, information and belief, on behalf
of the Borrower and in such Person's capacity as an officer of
Borrower, Borrower has observed and performed each and every
undertaking contained in the Loan Documents and is not at the time
in default in the observance or performance of any of the terms
and conditions thereof or, if Borrower will be so in default,
specifying all of such defaults and events of which such Person
may have knowledge;
(d) by the end of each fiscal year, an annual budget, balance
sheet and income statement with cash flow projections for the
following fiscal year; all such information shall be subject to
DFS' obligation of confidentiality to Borrower, but which shall
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permit DFS to share such information with any participant in the
Loans;
(e) promptly upon receipt thereof, copies of all final reports and
final management letters submitted to Elcom or any of the
Subsidiaries (excluding the Lantec Group) by independent
accountants in connection with any annual or interim audit of the
books of Elcom or such Subsidiaries made by such accountants;
(f) copies of any and all reports, filings and other documentation
delivered to the SEC by or on behalf of Elcom promptly after the
delivery thereof, including but not limited to the Annual Report
on Form 10-K; and
(g) any other statements, reports and other information as DFS may
reasonably request concerning the financial condition or
operations of Borrower, Elcom and their respective properties.
Beginning with the calendar year commencing January 1, 1998 and
thereafter, Borrower shall be obligated to deliver to DFS consolidating
financial statements in the form and at the times required for the foregoing
financial statements.
9.1.11 Notice of Existence of Default. Borrower will, and will
cause its Subsidiaries to, promptly notify DFS of: (a) the existence of any
known condition or event, which constitutes a Default or an Unmatured Default
and (b) the actual or threatened termination, suspension, lapse or
relinquishment of any material license, authorization, permit or other right
granted Borrower or for Borrower's benefit and used in the Business, or granted
to any of its Subsidiaries or for any such Subsidiaries' benefit, by any
governmental agency material to the Business.
9.1.12 Compliance with Laws. Borrower will, and will cause its
Subsidiaries to, comply in all material respects with all applicable laws,
rules, regulations and orders to the extent non-compliance therewith would have
a material adverse effect on the condition (financial or otherwise) of Borrower,
the Business or the Collateral.
9.1.13 Maintenance of Collateral. Borrower will maintain all
material Collateral and every part thereof in good condition and repair,
ordinary wear and tear excepted. Borrower will not permit the value of the
Collateral to be materially impaired. Borrower will defend the Collateral
against all claims and legal proceedings by persons other than DFS. Borrower
will not transfer the Collateral from the premises where now located (other than
Inventory sold in the ordinary course of business and other Collateral
transferred in the ordinary course of business), or permit any material
Collateral to become a fixture or accession (unless so affixed on the Effective
Date) to any goods which are not items of Collateral, without the prior written
approval of DFS. Borrower will not permit the Collateral to be used in violation
of any applicable law, regulations, or any policy of insurance the violation of
which would have a material adverse effect on the condition (financial or
otherwise) of Borrower, the Business or the Collateral. As to Collateral
consisting of instruments and chattel paper, Borrower will preserve rights in it
against prior parties.
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9.1.14 Collateral Records and Statements. Borrower will keep such
accurate and complete books and records pertaining to the Collateral in such
detail and form as DFS reasonably requires, including, but not limited to:
schedules of inventory; original orders; invoices; shipping documents; billing
settlements and receivables; sold receivables; Inventory listing containing
model, serial number (if available) and location. Other reporting will be
available upon request by DFS, including, but not be limited to, accounts
payable agings in such form as the DFS' reasonably requires, but, with respect
to any accounts payable agings, only to the extent that Borrower's information
system is capable of producing such reports. The statements will be in the form
and will contain the information as is reasonably prescribed by DFS.
9.1.15 Inspection of Collateral. DFS and any third party appraiser
selected by DFS may examine the Collateral at any time, and from time to time
during normal business hours. DFS and any third party appraiser selected by DFS
will have full access to, and the right to: (a) review, inspect and make
abstracts and copies from Borrower's books and records pertaining to the
Collateral, and (b) inspect and examine Inventory and check and test the same as
to quality, quantity, Value and condition, wherever located, at any time during
reasonable business hours, and from time to time. Borrower will assist DFS and
any third party appraiser selected by DFS in so doing. Borrower will pay a fee
to DFS in the amount of $2,250 per quarter for such Collateral reviews and any
other reviews performed under the Loan Documents as frequently as DFS shall
reasonably determine, but at least quarterly, and Borrower agrees that such fee
is not interest but rather reimburses DFS for its out-of-pocket and allocated
overhead expenses incurred in conducting such audits.
9.1.16 Landlord's Agreements. Borrower will provide or cause to be
provided, on the Effective Date, landlord waivers and agreements in a form
acceptable to DFS, as DFS shall reasonably request, with respect to leased real
property as described on Exhibit 8.17, as applicable, and with respect to any
future leases which would be required to be listed on Exhibit 8.17, prior to
entering into them.
9.1.17 Reimbursement for Bank Charges. Borrower will reimburse
DFS for all charges made by banks for collection of checks and other items of
payment and for transfer of funds to or from Borrower.
9.2 Negative Covenants. During the term of this Agreement and
thereafter, for so long as any Obligations are outstanding and unpaid, Borrower
covenants that unless otherwise consented to in writing by DFS, Borrower shall
not perform or cause or permit to be performed the following acts:
9.2.1 Change of Name, Etc. Borrower and the Subsidiaries
(excluding the Lantec Group) will not change their name, or begin to trade under
any assumed names or trade names without thirty (30) days prior written notice
to DFS. Borrower will not, and will not permit any Subsidiary (excluding the
Lantec Group) to, change its manner of organization, enter into any mergers,
consolidations, reorganizations or recapitalizations without DFS' prior written
consent other than as contemplated herein, except for any such transaction which
results in the indefeasible satisfaction in full of all Obligations to DFS and
termination of this Agreement in accordance with the terms hereof.
9.2.2 Sale or Transfer of Assets. Except in the ordinary course of
business, or except as consented to in writing by DFS, Borrower and
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the Subsidiaries will not sell, transfer, lease (including sale-leaseback) or
otherwise dispose of all or any substantial part of their assets. This provision
will not apply to any sale if the proceeds of such sale pay the Obligations in
full.
9.2.3 Encumbrance of Assets. Borrower will not, and will not
permit a Subsidiary to, mortgage, pledge, grant or permit to exist a security
interest in or Lien upon any of the Collateral, now owned or hereafter acquired
except for the Permitted Liens.
9.2.4 Acquisition of Stock or Assets; New Subsidiaries. Borrower
and the Subsidiaries (excluding the Lantec Group) will not, without DFS' prior
written consent, which consent shall not be unreasonably withheld, acquire, or
enter into any agreement, commitment letter or letter of intent to acquire, all
or substantially all the assets of, equity interest or stock in, another
business, nor will the Borrower hereafter create any new United States
Subsidiaries.
9.2.5 False Certificates or Documents. Borrower has not and will
not, and will not permit any Subsidiary to, furnish DFS with any certificate or
other document that contains any untrue statement of material fact or that omits
to state a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
9.2.6 Assignment. Borrower will not assign or attempt to assign
the Loan Documents or any of its interests under the Loan Documents, except in
favor of DFS.
9.2.7 Transactions with Affiliates. Borrower will not enter into
any contracts, leases, sales or other transactions with any Affiliate on terms
less favorable than could be obtained generally by Borrower from a
non-Affiliate.
9.2.8 [Reserved]
9.2.9 Capital Expenditures. Borrower will not make, or commit to
make, any expenditure for capital improvements (including, without limitation,
capitalized leases) or the acquisition of capital goods in excess of Seven
Million Five Hundred Thousand Dollars ($7,500,000) per year without the prior
written consent of DFS.
9.2.10 Loans by Borrower. Except for the loans described on
Exhibit 9.2.10 attached hereto, which such loans shall not be amended, modified,
refinanced or otherwise revised without the prior written consent of DFS, upon
the occurrence and during the continuance of a Default of the financial
covenants set forth in Section 9.3 hereof, Borrower will not, and will not
permit any Subsidiary (excluding the Lantec Group) to, make any loan to any
Person, except for loans in anticipation of reasonable and normally reimbursable
business expenses and trade credit extended in the ordinary course of Business.
9.2.11 Fiscal Year. Borrower will not, and will not permit any
Subsidiary (excluding the Lantec Group) to, change its fiscal year-end without
sixty (60) days prior written notice to DFS.
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9.2.12 Total Indebtedness. Borrower shall not create, incur,
assume, or suffer to exist, or permit any Subsidiary (excluding the Lantec
Group) to create, incur or suffer to exist, any Indebtedness, except:
(a) the Obligations;
(b) Subordinated Debt;
(c) Indebtedness of any Subsidiary to Borrower; and
(d) Accounts payable to trade creditors and current operating
expenses (other than for money borrowed) incurred in the ordinary
course of business which are aged not more than thirty (30) days
past due, unless actively contested in good faith and by
appropriate and lawful proceedings and for which adequate reserves
have been established in accordance with GAAP; and
(e) Permitted Purchase Money Indebtedness;
9.2.13 Adverse Transactions. Borrower will not enter into any
transaction, or permit any Subsidiary to enter into any transaction, which
materially and adversely affects or may materially and adversely affect the
Collateral or Borrower's ability to repay the Obligations or permit or agree to
any material extension, compromise or settlement or make any change or
modification of any kind or nature with respect to any Account, including any of
the terms relating thereto, other than discounts and allowances in the ordinary
course of business, all of which shall be reflected in the Borrowing Base
Certificate submitted to DFS pursuant to Section 3.3 of this Agreement.
9.2.14 Guaranties. Borrower will not guarantee, assume, endorse or
otherwise, in any way, become directly or contingently liable with respect to
the Indebtedness of any Person, except by endorsement of instruments or items of
payment for deposit or collection and except for that certain Guaranty in favor
of IBM Credit Corporation dated as of November 21, 1996 given by Catalink on
behalf of Catalink PA.
9.2.15 Bill-and-Hold Sales, Etc. Borrower will not make a sale to
any customer on a bill-and-hold, guaranteed sale, sale and return, sale on
approval or consignment basis, or any sale on a repurchase or return basis,
except, with respect to bill-and-hold sales, for such sales in the ordinary
course of Borrower's business.
9.2.16 [RESERVED]
9.2.17 Margin Securities. Borrower will not own, purchase or
acquire, or permit any Subsidiary to own, purchase or acquire, (or enter, or
permit any Subsidiary to enter, into any contract to purchase or acquire) any
"margin security" as defined by any regulation of the Federal Reserve Board as
now in effect or as the same may hereafter be in effect unless, prior to any
such purchase or acquisition or entering into any such contract, DFS shall have
received an opinion of counsel satisfactory to DFS to the effect that such
purchase or acquisition will not cause this Agreement to violate Regulations G
or U or any other regulation of the Federal Reserve Board then in effect.
9.2.18 [RESERVED]
9.2.19 Tax Consolidation. Borrower will not file or consent to
the filing of any consolidated income tax return with any Person other than a
Subsidiary or Elcom.
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9.2.20 Stock Redemption. Borrower will not redeem or purchase any
of its outstanding capital stock, warrants in favor of anyone other than DFS, or
stock options or convert or permit such stock, warrants or options to be
converted into cash, nor has or shall Borrower guaranty to any of its
shareholders any minimum stock price or valuation.
9.3 FINANCIAL COVENANTS.
9.3.1 Amounts.
(a) Borrower agrees that on a consolidated basis with Elcom, it will at
all times maintain the following:
(i) a Tangible Net Worth plus Subordinated Debt in the combined
amount of not less than Forty-Five Million Dollars ($45,000,000);
(ii) a ratio of Debt to Tangible Net Worth plus Subordinated Debt
of not more than Three and one-half to One (3.5:1.0);
(b) During any fiscal year of Elcom, not more than one fiscal quarter
thereof shall evidence a before tax loss, excluding any expense charges
relating to the Intangibles, as determined in accordance with GAAP; and
(c) For each fiscal year of Elcom, Elcom shall achieve before tax
income, excluding any expense charges relating to the Intangibles, as
determined in accordance with GAAP, of not less than one dollar
($1.00).
For purposes of this paragraph: (i) "Tangible Net Worth" means the book
value of Borrower's assets less liabilities (including as liabilities
all reserves for contingencies and other potential liabilities),
excluding from such assets all Intangibles; (ii) "Intangibles" means
and includes general intangibles (as that term is defined in the
Uniform Commercial Code); accounts receivable and advances due from
officers, directors, member, owner, employees, stockholders and
affiliates; leasehold improvements net of depreciation; licenses; good
will; prepaid expenses; escrow deposits; covenants not to compete; the
excess of cost over book value of acquired assets; franchise fees;
organizational costs; finance reserves held for recourse obligations;
capitalized research and development costs; and such other similar
items as DFS may from time to time determine in DFS' sole discretion;
(iii) "Debt" means all of Borrower's liabilities and indebtedness for
borrowed money of any kind and nature whatsoever other than
Subordinated Debt (as defined below), whether direct or indirect,
absolute or contingent, and including obligations under capitalized
leases, guaranties or with respect to which Borrower has pledged assets
to secure performance, whether or not direct recourse liability has
been assumed by Borrower; provided that Debt shall not include any
liability item on Elcom's financial statements which represents a
minority ownership interest in any Subsidiary; and (iv) "Subordinated
Debt" means all of Borrower's Debt which is subordinated to the payment
of Borrower's liabilities to DFS by an agreement in form and substance
satisfactory to DFS plus any liability item on Elcom's financial
statements which represents a
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minority ownership interest in any Subsidiary. The foregoing terms will
be determined in accordance with GAAP consistently applied, and on a
consolidated basis based upon the consolidated and consolidating
financial statements of Elcom ("Financial Covenants").
9.3.2 Covenant Compliance Certificate. The President or Chief
Financial Officer of Elcom will certify to DFS by the 10th Business day after
Elcom's filing of its 10-Q with the SEC, or more often if requested by DFS, that
Borrower is in compliance with the Financial Covenants as set forth in a form
acceptable to DFS in its sole discretion.
10. DEFAULT/REMEDIES
Borrower will be in default under this Agreement (each, a "Default")
if:
(a) Borrower breaches any terms, covenants, warranties or
representations contained herein, or in any other Loan Document;
(b) any Guarantor breaches any terms, covenants, warranties or
representations contained in any guaranty or other agreement between the
Guarantor and DFS;
(c) any representation, statement, report or certificate made or
delivered by Borrower or any Guarantor to DFS is not accurate when made;
(d) Borrower fails to pay any portion of Borrower's debts to DFS when
due and payable hereunder or under any other agreement between DFS and Borrower;
(e) Borrower abandons any Collateral;
(f) Borrower or any Guarantor is or becomes in default in the payment
of any debt owed to any third party;
(g) a money judgment issues against Borrower or any Guarantor which,
in the aggregate, at any time exceed $1,000,000;
(h) an attachment, sale or seizure issues or is executed against any
assets of Borrower or against any assets of any Guarantor;
(i) any individual Guarantor dies;
(j) Borrower ceases existence as a corporation, partnership, trust or
limited liability company;
(k) Borrower ceases or suspends business;
(l) Borrower or any Guarantor makes a general assignment for the
benefit of creditors;
(m) Borrower or any Guarantor becomes insolvent or voluntarily or
involuntarily becomes subject to the Federal Bankruptcy Code, any state
insolvency law or any similar law;
(n) any receiver is appointed for any of Borrower's or any Guarantor's
assets;
(o) any guaranty of Borrower's debts to DFS is terminated without the
prior written consent of DFS;
(p) Borrower loses any material franchise, permission, license or
right to sell or deal in any Collateral;
(q) Borrower or any Guarantor misrepresents Borrower's or such
Guarantor's financial condition or organizational structure;
(r) any of the Collateral becomes subject to any Lien, claim,
encumbrance or security interest other than a Permitted Lien;
(s) Borrower shall be enjoined, restrained or in any way prevented by
court, governmental or administrative order from conducting all or any material
part of its Business; or any material lease or agreement pursuant to which
Borrower leases, uses or occupies any property shall be canceled or terminated
prior to the expiration of its stated term, or any part of the Collateral shall
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be taken through condemnation or the value thereof shall be impaired through
condemnation;
(t) Robert J. Crowell shall cease to beneficially own or control (by
vote) at least 10% of the issued and outstanding capital stock of Elcom; or
(u) DFS determines in good faith that it is insecure with respect to
any of the Collateral or the payment of any part of Borrower's Obligations.
In the event of a Default:
(i) DFS may at any time at DFS' election, without notice or demand to
Borrower, do any one or more of the following: cease making further
Loans and declare all or any of the Obligations immediately due and
payable, together with all costs and expenses of DFS' collection
activity, including, without limitation, all reasonable attorneys'
fees; exercise any or all rights under applicable law (including,
without limitation, the right to possess, transfer and dispose of the
Collateral); and/or cease extending any additional credit to Borrower.
(ii) Borrower will segregate and keep the Collateral in trust for DFS, and
in good order and repair, and will not sell, rent, lease, consign,
otherwise dispose of or use any Collateral, nor further encumber any
Collateral.
(iii) Upon DFS' oral or written demand, Borrower will immediately deliver
the Collateral to DFS, in good order and repair, at a place specified
by DFS, together with all related documents; or DFS may, in DFS' sole
discretion and without notice or demand to Borrower, take immediate
possession of the Collateral together with all related documents.
(iv) DFS may, without notice, apply the Default Interest Rate.
(v) DFS may, without notice to Borrower and at any time or times
hereafter enforce payment and collect, by legal proceedings or
otherwise, Accounts in the name of Borrower or DFS; and take control
of any cash or non-cash items of payment or proceeds of Accounts and
of any rejected, returned, repossessed or stopped in transit goods
relating to Accounts. DFS may at its sole election and without demand
enter, with or without process of law, any premises where Collateral
might be and, without charge or liability to DFS therefor do one or
more of the following: (i) take possession of the Collateral and use
or store it in said premises or remove it to such other place or
places as DFS may deem convenient; (ii) take possession of all or part
of such premises and the Collateral and place a custodian in the
exclusive control thereof until completion of enforcement of DFS'
security interest in the Collateral or until DFS' removal of the
Collateral and, (iii) remain on such premises and use the same,
together with Borrower's materials, supplies, books and records, for
the purpose of liquidating or collecting such Collateral and
conducting and preparing for disposition of such Collateral.
(vi) Upon the occurrence of a Default under Sections 10. (l), (m), or (n),
all Obligations shall automatically be accelerated and due and payable
and the Default Interest Rate shall automatically apply as of the date
of the first occurrence of such Default, without any prior notice,
demand or action of any type on the part of DFS.
All of DFS' rights and remedies are cumulative. DFS' failure to exercise any
of DFS' rights or remedies hereunder will not waive any of DFS' rights or
remedies as to any past, current or future Default.
11. SALE OF COLLATERAL
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Borrower agrees that if DFS conducts a private sale of any Collateral
by requesting bids from 10 or more dealers or distributors in that type of
Collateral, any sale by DFS of such Collateral in bulk or in parcels within 120
days of: (a) DFS' taking possession and control of such Collateral; or (b) when
DFS is otherwise authorized to sell such Collateral; whichever occurs last, to
the bidder submitting the highest cash bid therefor, is a commercially
reasonable sale of such Collateral under the Uniform Commercial Code. Borrower
agrees that the purchase of any Collateral by a vendor, as provided in any
agreement between DFS and the vendor, if any, is a commercially reasonable
disposition and private sale of such Collateral under the Uniform Commercial
Code, and no request for bids shall be required. Borrower further agrees that 7
or more days prior written notice will be commercially reasonable notice of any
public or private sale (including any sale to a vendor). Borrower irrevocably
waives any requirement that DFS retain possession and not dispose of any
Collateral until after an arbitration hearing, arbitration award, confirmation,
trial or final judgment. If DFS disposes of any such Collateral other than as
herein contemplated, the commercial reasonableness of such disposition will be
determined in accordance with the laws of the state governing this Agreement.
12. INDEMNIFICATIONS
12.1 General Indemnity. In addition to the payment of reasonable
expenses and attorneys' fees, if applicable, whether or not the transactions
contemplated hereby shall be consummated, Borrower agrees to indemnify, pay and
hold DFS and the officers, directors, employees, agents, and affiliates of DFS
and such holders (collectively called the "Indemnitees") harmless from and
against, any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel for any of such Indemnitees in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not any of such Indemnitees shall be designated a party thereto),
that may be imposed on, incurred by, or asserted against the Indemnitees, in any
manner relating to or arising out of the Loan Documents, the statements
contained in any commitment letters delivered by DFS, DFS' agreement to make the
Loans or any other payment hereunder, or the use or intended use of the proceeds
of any of the Loans hereunder (the "Indemnified Liabilities"); provided,
however, that Borrower shall have no obligation to an Indemnitee hereunder with
respect to Indemnified Liabilities in any manner relating to or arising from the
gross negligence or willful misconduct of an Indemnitee. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in the preceding
sentence may be unenforceable because it is violative of any law or public
policy, Borrower shall contribute the maximum portion that it is permitted to
pay and satisfy under applicable law, to the payment and satisfaction of all
Indemnified Liabilities incurred by the Indemnitees or any of them. The
provisions of the undertakings and indemnification set out in this Section 12.1
shall survive satisfaction and payment of the Obligations and termination of
this Agreement.
12.2 Environmental and Safety and Health Indemnity. Borrower hereby
indemnifies the Indemnitees and agrees to hold the Indemnitees harmless from and
against any and all losses, liabilities, damages, injuries, costs, expenses and
claims of any and every kind whatsoever (including, without
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limitation, court costs and reasonable attorneys' fees) which at any time or
from time to time may be paid, incurred or suffered by, or asserted against, an
Indemnitee for, with respect to, or as a direct or indirect result of the
violation by Borrower or any Subsidiary, of any Environmental Law or OSHA Law;
or with respect to, or as a direct or indirect result of (a) the presence on or
under, or the escape, seepage, leakage, spillage, disposal, discharge, emission
or release from, properties utilized by Borrower and/or any Subsidiary in the
conduct of its business into or upon any land, the atmosphere, or any
watercourse, body of water or wetland, of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance (including, without limitation, any losses, liabilities, damages,
injuries, costs, expenses or claims asserted or arising under the Environmental
Laws) or (b) the existence of any unsafe or unhealthful condition on or at any
premises utilized by Borrower and/or any Subsidiary in the conduct of its
business. The provision of and undertakings and indemnification set out in this
Section 12.2 shall survive satisfaction and payment of the Obligations and
termination of this Agreement.
13. OTHER TERMS
13.1 Amendment, Changes and Modification. The Loan Documents may be
amended, changed or modified only as may be agreed upon in writing by Borrower
and DFS from time to time.
13.2 Binding Effect. The Loan Documents will be binding upon the
parties, their successors and assigns, provided, however, that Borrower shall
not assign or attempt to assign this Agreement, any other Loan Document or any
of its interests under the Loan Documents, without the prior written consent of
DFS.
13.3 Broker Fee. Neither party is obligated to pay any premium or
other charge, brokerage fee or commission in connection with the agreements set
forth herein. Each party will indemnify the other and hold it harmless from any
such claim arising out of such party's acts or those of its representatives.
13.4 Entire Agreement. The Loan Documents embody the entire agreement
of the parties relating to the Credit Facility. There are no promises, terms,
conditions, obligations or warranties other than those contained in the Loan
Documents. The Loan Documents supersede all prior communications,
representations or agreements, verbal or written, between the parties relating
to the Credit Facility.
13.5 Headings. The headings to the sections of this Agreement are
included only for the convenience of the parties and will not have the effect of
defining, diminishing or enlarging the rights of the parties or affecting the
construction or interpretation of any portion of this Agreement.
13.6 Incorporation by Reference. All other Loan Documents are
incorporated herein by this reference and are made a part of this Agreement as
if fully set forth herein. This Agreement, prior to such incorporation, controls
in the event of any conflict with the terms of any other Loan Documents.
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13.7 Interpretation. For the purpose of construing this Agreement,
unless the context otherwise requires, words in the singular will be deemed to
include words in the plural, and vice versa.
13.8 Notices. Any notice under the Loan Documents, will be in writing.
Any notice to be given or document to be delivered under the Loan Documents will
be deemed to have been duly given upon delivery, if delivered in person or by
any expedited delivery service which provides proof of delivery, upon tested
telex or facsimile transmission, or on the fifth Business Day after mailing, if
mailed by certified mail, return receipt requested, postage prepaid mail,
addressed to DFS or Borrower at the appropriate addresses. DFS will use
reasonable efforts to deliver any notice DFS is required to give to Borrower;
provided, however, that failure by DFS to actually give any such notice will not
be deemed to be a waiver of any rights or remedies of DFS. The addresses for
notices are those set forth below or such other addresses as may be hereafter
specified by written notice by the parties:
to DFS: Deutsche Financial Services Corporation
100 River Ridge Drive, Suite 202
Norwood, MA 02062
Attention: Regional Vice President
Facsimile No.: (617) 255-9063
with a copy to: Deutsche Financial Services Corporation
655 Maryville Centre Drive
St. Louis, MO 63141-5832
Attention: General Counsel
Facsimile No.:(314) 523-3228
to Borrower: Catalink Direct, Inc.
10 Oceana Way
Norwood, MA 02062
Attention: Chief Financial Officer
Facsimile No.: (617) 762-1540
with a copy to: Calfee, Halter & Griswold
800 Superior Avenue, Suite 1400
Cleveland, Ohio 44114-2688
Attention: Douglas A. Neary, Esq.
Facsimile No.: (216) 241-0816
13.9 No Third Party Beneficiary Rights and Reliance. No Person not a
party to this Agreement will have any benefit under this Agreement nor have
third-party beneficiary rights as a result of any of the Loan Documents, nor
will any party be entitled to rely on any actions or inactions of DFS or its
agents, all of which are done for the sole benefit and protection of DFS.
13.10 Protection or Preservation of Collateral. DFS will not have any
contractual duty to protect, insure, collect or realize upon the Collateral or
preserve rights in it against prior parties. DFS will not be responsible or
liable for any shortage, discrepancy, damage, loss or destruction of any part of
the Collateral regardless of the cause, other than any such shortage,
discrepancy, damage, loss, or destruction to the Collateral in any manner
relating to or arising from the gross negligence or willful misconduct of DFS.
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13.11 Relationship of the Parties. Neither DFS on the one hand nor
Borrower on the other hand will be deemed a partner, joint venturer or related
entity of the other by reason of the Loan Documents.
13.12 Reversal of Payments. To the extent that Borrower makes a
payment or payments to DFS, which payment or payments or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law, or equitable cause,
then to the extent of such payment or proceeds received, the Credit Facility
will be revived and continue in full force and effect, as if such payment or
proceeds had not been received by DFS.
13.13 Severability. If any provision of this Agreement (either
generally, or as to a specific application to a set of facts) will be held to be
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability will not affect any other provision of this Agreement (either
in its entirety, or as to or the application of such provision to any other set
of facts), but this Agreement will be construed as if such invalid, illegal or
unenforceable provision never had been included in this Agreement.
13.14 Maximum Interest. Borrower acknowledges that DFS intends to
strictly conform to the applicable usury laws governing this Agreement.
Regardless of any provision contained herein or in any other document executed
or delivered in connection herewith or therewith, DFS shall never be deemed to
have contracted for, charged or be entitled to receive, collect or apply as
interest on this Agreement (whether termed interest herein or deemed to be
interest by judicial determination or operation of law), any amount in excess of
the maximum amount allowed by applicable law, and, if DFS ever receives,
collects or applies as interest any such excess, such amount which would be
excessive interest will be applied first to the reduction of the unpaid
principal balances of advances under this Agreement, and, second, any remaining
excess will be paid to Borrower. In determining whether or not the interest paid
or payable under any specific contingency exceeds the highest lawful rate,
Borrower and DFS shall, to the maximum extent permitted under applicable law:
(a) characterize any non-principal payment (other than payments which are
expressly designated as interest payments hereunder) as an expense or fee rather
than as interest; (b) exclude voluntary pre-payments and the effect thereof; and
(c) spread the total amount of interest throughout the entire term of this
Agreement so that the interest rate is uniform throughout such term.
13.15 Waivers by DFS. DFS may at any time or from time to time waive
all or any rights under any of the Loan Documents, but any waiver or indulgence
at any time or from time to time will not constitute, unless specifically so
expressed by DFS in writing, a future waiver by DFS of performance by Borrower.
13.16 Survival. The grant of security interest herein to secure all
Obligations, and all provisions relating to the Collateral will survive
termination of this Agreement and will remain in full force and effect until all
Obligations have been paid in full and this Agreement has been terminated. The
Agreement to arbitrate all Disputes will survive termination of this Agreement.
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13.17 Participations; Assignments. DFS may, without the consent of
Borrower, grant participations in or assign, at any time and from time to time
hereafter, its interest in this Agreement or any Loan Document, or of any
portion thereof.
13.18 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
13.19 Information. DFS may provide to any third party any credit,
financial or other information on Borrower that DFS may from time to time
possess.
13.20 Release. Borrower releases DFS from all claims and causes of
action which Borrower may now or hereafter have for any loss or damage to it
claimed to be caused by or arising from: (a) any failure of DFS to protect,
enforce or collect, in whole or in part, any Account; (b) DFS' notification to
any Account Debtors thereon of DFS' security interest in any of the Accounts;
(c) DFS' directing any Account Debtor to pay any sum owing to Borrower directly
to DFS; and (d) any other act or omission to act on the part of DFS, its
officers, agents or employees, except for willful misconduct or gross
negligence. DFS will have no obligation to preserve rights to Accounts against
prior parties.
13.21 Miscellaneous. Time is of the essence regarding Borrower's
performance of its obligations to DFS notwithstanding any course of dealing or
custom on DFS' part to grant extensions of time. Borrower's liability under this
Agreement is direct and unconditional and will not be affected by the release or
nonperfection of any security interest granted hereunder. DFS will have the
right to refrain from or postpone enforcement of this Agreement or any other
Loan Documents without prejudice and the failure to strictly enforce the Loan
Documents will not be construed as having created a course of dealing between
DFS and Borrower contrary to the specific terms of the Loan Documents or as
having modified, released or waived the same. The express terms of this
Agreement and the other Loan Documents will not be modified by any course of
dealing, usage of trade, or custom of trade which may deviate from the terms
hereof. If Borrower fails to pay any taxes, fees or other obligations which may
impair DFS' interest in the Collateral, or fails to keep the Collateral insured,
DFS may, but shall not be required to, pay such taxes, fees or obligations and
pay the cost to insure the Collateral, and the amounts paid will be: (a) an
additional debt owed by Borrower to DFS, which shall be subject to finance
charges as provided herein; and (b) due and payable immediately in full.
Borrower agrees to pay all of DFS' reasonable attorneys' fees and expenses
incurred by DFS in enforcing DFS' rights hereunder.
13.22 Waivers by Borrower. Borrower irrevocably waives notice of: DFS'
acceptance of this Agreement, presentment, demand, protest, nonpayment,
nonperformance, and dishonor. Borrower and DFS irrevocably waive all rights to
claim any punitive and/or exemplary damages. Borrower waives all rights of
offset and counter claims Borrower may have against DFS. Borrower waives all
notices of default and non-payment at maturity of any or all of the Accounts.
13.23 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LEND
MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING
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PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU
(BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY
AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH
IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS
WE MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN AGREEMENTS
BETWEEN THE PARTIES.
13.24 Supplement. If Borrower and DFS have heretofore executed other
agreements in connection with all or any part of the Collateral, this Agreement
shall supplement each and every other agreement previously executed by and
between Borrower and DFS, and in that event, this Agreement shall neither be
deemed a novation nor a termination of such previously executed agreement nor
shall execution of this Agreement be deemed a satisfaction of any obligation
secured by such previously executed agreement. Notwithstanding the foregoing,
this Agreement shall be deemed a termination of (a) the Agreement For Wholesale
Financing dated April 11, 1994, between DFS and Catalink; (b) the Business
Financing Agreement dated April 11, 1994, between DFS and Catalink; (c) the
Agreement for Wholesale Financing dated May 31, 1995, between DFS and Catalink
PA; (d) the Business Financing Agreement dated May 31, 1995, between DFS and
Catalink PA; (e) the Agreement for Wholesale Financing, between DFS and Computer
Specialities, Inc. dated November 23, 1994; and (f) the Business Financing
Agreement, between DFS and Computer Specialities, Inc. dated May 31, 1995, each
as amended.
13.25 Use of Counsel and Receipt of Agreement. Borrower acknowledges
that it has received a true and complete copy of this Agreement. Borrower
acknowledges that it has (a) had representation of counsel during negotiation of
this Agreement, and (b) read and understood this Agreement.
13.26 Facsimiles, Etc. Notwithstanding anything herein to the
contrary: (a) DFS may rely on any facsimile copy, electronic data transmission
or electronic data storage of any statement, billing statement, Statement of
Transaction, financial statements or other reports, and (b) such facsimile copy,
electronic data transmission or electronic data storage will be deemed an
original, and the best evidence thereof for all purposes, including, without
limitation, under this Agreement or any other Loan Documents, and for all
evidentiary purposes before any arbitrator, court or other adjudicatory
authority.
13.27 Power of Attorney. Borrower irrevocably appoints DFS (and any
Person designated by it) as Borrower's true and lawful Attorney with full power
to at any time, in the discretion of DFS (whether or not Default has occurred)
to: (a) endorse the name of Borrower upon any of the items of payment of
proceeds of the Collateral and deposit the same in the account of DFS for
application to the Obligations; (b) sign the name of Borrower to verify the
accuracy of the Accounts; (c) sign the name of Borrower on any document or
instrument that DFS shall deem necessary or appropriate to perfect and maintain
perfected the security interests in the Collateral under this Agreement and
other Loan Documents; (d) initiate and settle any insurance claim and endorse
Borrower's name on any check, instrument or other item of payment; (e) endorse
the name of Borrower upon financing statements, instruments, Certificates of
Title and Statements of Origin pertaining to the Collateral; (f) supply omitted
information and correct errors in any documents between DFS and Borrower; and
(g) do anything reasonable to preserve and protect the Collateral and DFS'
rights and interest therein. In the event of a Default, Borrower irrevocably
appoints DFS (and any Person designated by it) as Borrower's true and lawful
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<PAGE> 43
Attorney with full power to at any time, in the discretion of DFS to: (i) demand
payment, enforce payment and otherwise exercise all of Borrower's rights, and
remedies with respect to the collection of any Accounts; (ii) settle, adjust,
compromise, extend or renew any Accounts; (iii) settle, adjust or compromise any
legal proceedings brought to collect any Accounts; (iv) sell or assign any
Accounts upon such terms, for such amounts and at such time or times as DFS may
deem advisable; (v) discharge and release any Accounts; (vi) prepare, file and
sign Borrower's name on any Proof of Claim in Bankruptcy or similar document
against any Account Debtor; (vii) endorse the name of Borrower upon any chattel
paper, document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to any Account or goods pertaining thereto; and
(viii) take control in any manner of any item of payments or proceeds and for
such purpose to notify the Postal Authorities to change the address for delivery
of mail addressed to Borrower to such address as DFS may designate. This power
of attorney is for value and coupled with an interest and is irrevocable so long
as any Obligations remain outstanding and by DFS exercising such right, DFS
shall not waive any right against Borrower until the Obligations are paid in
full.
13.28 Expenses. Borrower agrees, whether or not any Loan is made
hereunder, to pay DFS upon demand for all reasonable expenses, including
reasonable fees of attorneys for DFS (who may be employees of DFS), incurred by
(a) DFS in connection with the preparation, negotiation, and execution of this
Agreement and any other Loan Document, (b) DFS in connection with the
preparation of any and all amendments to this Agreement and any other Loan
Document, and all search, recording, filing, and registration expenses, and (c)
DFS in connection with the enforcement of the Borrower's obligations hereunder
or under any other Loan Document. Borrower also agrees to (i) indemnify and hold
DFS harmless from any loss or expense which may arise or be created by the
acceptance of telephonic or other instructions for making Loans, except for any
loss or expense arising from DFS' gross negligence or willful misconduct
(provided, however, that reliance alone upon telephonic or other instructions
shall not itself be deemed to constitute gross negligence or willful
misconduct), and (ii) to pay and save DFS harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of this Agreement or any of the other Loan Documents. Borrower's
obligations under this Section 13.28 shall survive any termination of this
Agreement.
13.29 Joint and Several Liability. Notwithstanding anything herein to
the contrary, each Borrower is primarily and jointly and severally liable for
all Obligations. If and to the extent a Borrower shall be deemed a guarantor of
the other Borrower hereunder, such Borrower's joint liability for any
Obligations of such other Borrower shall be deemed to be a guaranty of payment
and performance, and not of collection. A Default by one Borrower shall be
deemed a Default by the other Borrower.
14. BINDING ARBITRATION.
14.1 Arbitrable Claims. Except as otherwise specified below, all actions,
disputes, claims and controversies under common law, statutory law or in equity
of any type or nature whatsoever (including, without limitation, all torts,
whether regarding negligence, breach of fiduciary duty, restraint of trade,
fraud, conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, usury or any other tort, all contract
actions, whether regarding express or implied terms, such as implied covenants
42
<PAGE> 44
of good faith, fair dealing, and the commercial reasonableness of any Collateral
disposition, or any other contract claim, all claims of deceptive trade
practices or lender liability, and all claims questioning the reasonableness or
lawfulness of any act), whether arising before or after the date of this
Agreement, and whether directly or indirectly relating to: (a) this Agreement
and/or any amendments and addenda hereto, or the breach, invalidity or
termination hereof; (b) any previous or subsequent agreement between DFS and
Borrower; (c) any act committed by DFS or by any parent company, subsidiary or
affiliated company of DFS (the "DFS Companies"), or by any employee, agent,
officer or director of a DFS Company whether or not arising within the scope and
course of employment or other contractual representation of the DFS Companies
provided that such act arises under a relationship, transaction or dealing
between DFS and Borrower; and/or (d) any other relationship, transaction or
dealing between DFS and Borrower (collectively the "Disputes"), will be subject
to and resolved by binding arbitration.
14.2 Administrative Body. All arbitration hereunder will be conducted by the
American Arbitration Association ("AAA"). If the AAA is dissolved, disbanded or
becomes subject to any state or federal bankruptcy or insolvency proceeding, the
parties will remain subject to binding arbitration which will be conducted by a
mutually agreeable arbitral forum. The parties agree that all arbitrator(s)
selected will be attorneys with at least five (5) years secured transactions
experience. The arbitrator(s) will decide if any inconsistency exists between
the rules of any applicable arbitral forum and the arbitration provisions
contained herein. If such inconsistency exists, the arbitration provisions
contained herein will control and supersede such rules. The site of all
arbitration proceedings will be in Norfolk County, Massachusetts.
14.3 Discovery. Discovery permitted in any arbitration proceeding commenced
hereunder is limited as follows. No later than thirty (30) days after the filing
of a claim for arbitration, the parties will exchange detailed statements
setting forth the facts supporting the claim(s) and all defenses to be raised
during the arbitration, and a list of all exhibits and witnesses. No later than
twenty-one (21) days prior to the arbitration hearing, the parties will exchange
a final list of all exhibits and all witnesses, including any designation of any
expert witness(es) together with a summary of their testimony; a copy of all
documents and a detailed description of any property to be introduced at the
hearing. Under no circumstances will the use of interrogatories, requests for
admission, requests for the production of documents or the taking of depositions
be permitted. However, in the event of the designation of any expert
witness(es), the following will occur: (a) all information and documents relied
upon by the expert witness(es) will be delivered to the opposing party, (b) the
opposing party will be permitted to depose the expert witness(es), (c) the
opposing party will be permitted to designate rebuttal expert witness(es), and
(d) the arbitration hearing will be continued to the earliest possible date that
enables the foregoing limited discovery to be accomplished.
14.4 Exemplary or Punitive Damages. The Arbitrator(s) will not have the
authority to award exemplary or punitive damages.
14.5 Confidentiality of Awards. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential, although any award
or order rendered by the arbitrator(s) pursuant to the terms of this Agreement
may be entered as a judgment or order in any state or federal court
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<PAGE> 45
and may be confirmed within the federal judicial district which includes the
residence of the party against whom such award or order was entered. This
Agreement concerns transactions involving commerce among the several states. The
Federal Arbitration Act, Title 9 U.S.C. Sections 1 et seq., as amended ("FAA")
will govern all arbitration(s) and confirmation proceedings hereunder.
14.6 Prejudgment and Provisional Remedies. Nothing herein will be construed
to prevent DFS' or Borrower's use of bankruptcy, receivership, injunction,
repossession, replevin, claim and delivery, sequestration, seizure, attachment,
foreclosure, dation and/or any other prejudgment or provisional action or remedy
relating to any Collateral for any current or future debt owed by either party
to the other. Any such action or remedy will not waive DFS' or Borrower's right
to compel arbitration of any Dispute.
14.7 Attorneys' Fees. If either Borrower or DFS brings any other action for
judicial relief with respect to any Dispute (other than those set forth in
Section 14.6) the party bringing such action will be liable for and immediately
pay all of the other party's costs and expenses (including reasonable attorneys'
fees) incurred to stay or dismiss such action and remove or refer such Dispute
to arbitration. If either Borrower or DFS brings or appeals an action to vacate
or modify an arbitration award and such party does not prevail, such party will
pay all costs and expenses, including attorneys' fees, incurred by the other
party in defending such action. Additionally, if Borrower sues DFS or institutes
any arbitration claim or counterclaim against DFS in which DFS is the prevailing
party, Borrower will pay all costs and expenses (including reasonable attorneys'
fees) incurred by DFS in the course of defending such action or proceeding.
14.8 Limitations. Any arbitration proceeding must be instituted: (a) with
respect to any Dispute for the collection of any debt owed by either party to
the other, within two (2) years after the date the last payment was received by
the instituting party; and (b) with respect to any other Dispute, within two (2)
years after the date the incident giving rise thereto occurred, whether or not
any damage was sustained or capable of ascertainment or either party knew of
such incident. Failure to institute an arbitration proceeding within such period
will constitute an absolute bar and waiver to the institution of any proceeding,
whether arbitration or a court proceeding, with respect to such Dispute.
14.9 Survival After Termination. The agreement to arbitrate will survive
the termination of this Agreement.
15. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS
FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT TO ANY
DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A
JURY. BORROWER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING.
16. GOVERNING LAW. Borrower acknowledges and agrees that this and all other
agreements between Borrower and DFS have been substantially negotiated, and will
be substantially performed, in the Commonwealth of Massachusetts. Accordingly,
Borrower agrees that all Disputes will be governed by, and construed in
accordance with, the laws of such state, except to the extent inconsistent with
the provisions of the FAA which shall control and govern all arbitration
proceedings hereunder.
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IN WITNESS WHEREOF, the parties have, by their duly authorized
officers, executed this Agreement as of the Effective Date.
THIS AGREEMENT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGES
WAIVER PROVISIONS
ATTEST: CATALINK DIRECT, INC.
By: /s/ Alfred J. Gauvin By: /s/ L. F. Mulhern
-------------------- --------------------------------
Assistant Secretary Print Name: L.F. Mulhern
Title: Chief Financial Officer
ATTEST: CATALINK DIRECT (PENNSYLVANIA), INC.
By: /s/ Alfred J. Gauvin By: /s/ L. F. Mulhern
-------------------- --------------------------------
Assistant Secretary Print Name: L.F. Mulhern
Title: Chief Financial Officer
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: /s/ A. D. Hartford
-------------------------------
Print Name: A. D. Hartford
Title: Regional Branch Manager
45
<PAGE> 1
[LOGO]
EXHIBIT 10.15
February 12, 1997
Elcom International, Inc.
10 Oceana Way
Norwood, MA 02062
Re: Reaffirmation of Guaranty
Dear Mr. Mulhern:
You executed a Guaranty on November 6 , 1995 ("Guaranty") in favor of
Deutsche Financial Services Corporation ("DFS"), guaranteeing the payment and
performance of all current and future liabilities and obligations owed by
Catalink Direct (Pennsylvania), Inc., a Delaware corporation formerly known as
Computerware, Inc. ("Dealer") to DFS. The financing program between Dealer and
DFS has changed, which may affect your liabilities and obligations under the
Guaranty.
Please reaffirm your continuing guarantee of the payment and performance of
all current and future liabilities and obligations owed by Dealer to DFS
pursuant to the terms of the Guaranty by dating, signing and returning the
original of this letter to DFS at the address specified above. Thank you for
your prompt attention to this matter.
Sincerely,
/s/ A. D. Hartford
- --------------------------
By: A.D. Hartford
Title: Regional Vice President
Acknowledgement, Consent and Reaffirmation of Guaranty
The undersigned acknowledges and consents to all changes in the financing
program between Dealer and DFS, and agrees that all such changes are in the best
interests of Dealer and the undersigned. In consideration of financial
accommodations granted and which may hereafter be granted to Dealer by DFS, in
consideration of DFS' reliance on the Guaranty and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
undersigned reaffirms its continuing guarantee of the payment and performance of
all current and future liabilities and obligations owed by Dealer to DFS
pursuant to the terms of the Guaranty, and the undersigned further agrees that
the validity and enforceability of the Guaranty shall not be affected in any way
or manner by any changes in the financing program between Dealer and DFS.
DATED: March 1, 1997
CORPORATE, PARTNERSHIP OR LIMITED LIABILITY COMPANY GUARANTOR:
Elcom International, Inc., a Delaware corporation formerly known as Catalink
Direct, Inc.
(Name of Corporate, Partnership or Limited Liability Company Guarantor)
By: /s/ L. F. Mulhern
-------------------------
[Print Name: L. F. Mulhern ]
Title: Chief Financial Officer
<PAGE> 1
[LOGO]
EXHIBIT 10.33
February 12, 1997
Elcom International, Inc.
10 Oceana Way
Norwood, MA 02062
Re: Reaffirmation of Guaranty
Dear Mr. Mulhern:
You executed a Guaranty on November 6 , 1995 ("Guaranty") in favor of
Deutsche Financial Services Corporation ("DFS"), guaranteeing the payment and
performance of all current and future liabilities and obligations owed by
Catalink Direct, Inc., a Delaware corporation formerly known as CDI Shell Co.
("Dealer") to DFS. The financing program between Dealer and DFS has changed,
which may affect your liabilities and obligations under the Guaranty.
Please reaffirm your continuing guarantee of the payment and performance of
all current and future liabilities and obligations owed by Dealer to DFS
pursuant to the terms of the Guaranty by dating, signing and returning the
original of this letter to DFS at the address specified above. Thank you for
your prompt attention to this matter.
Sincerely,
/s/ A. D. Hartford
- ------------------------------
By: A.D. Hartford
Title: Regional Vice President
Acknowledgement, Consent and Reaffirmation of Guaranty
The undersigned acknowledges and consents to all changes in the financing
program between Dealer and DFS, and agrees that all such changes are in the best
interests of Dealer and the undersigned. In consideration of financial
accommodations granted and which may hereafter be granted to Dealer by DFS, in
consideration of DFS' reliance on the Guaranty and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
undersigned reaffirms its continuing guarantee of the payment and performance of
all current and future liabilities and obligations owed by Dealer to DFS
pursuant to the terms of the Guaranty, and the undersigned further agrees that
the validity and enforceability of the Guaranty shall not be affected in any way
or manner by any changes in the financing program between Dealer and DFS.
DATED: March 1, 1997
CORPORATE, PARTNERSHIP OR LIMITED LIABILITY COMPANY GUARANTOR:
Elcom International, Inc., a Delaware corporation formerly known as Catalink
Direct, Inc.
(Name of Corporate, Partnership or Limited Liability Company Guarantor)
By: /s/ L. F. Mulhern
--------------------------
[Print Name: L. F. Mulhern ]
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.38
THE 1996 STOCK OPTION PLAN
OF ELCOM SYSTEMS, INC.
January 1, 1996
Elcom Systems, Inc. (the "Company") hereby adopts a stock option plan
for the benefit of certain persons and subject to the terms and provisions set
forth below.
1. Definitions. The following terms shall have the meanings set forth
below whenever used in this instrument:
(a) The word "Affiliate" shall mean any corporation which, on the
effective date of the Plan or at any time thereafter, is,
within the meaning of Section 1563(a) of the Code, a member
of a controlled group of corporations which includes the
Company.
(b) The word "Board" shall mean the Board of Directors of the
Company.
(c) The word "Code" shall mean the United States Internal Revenue
Code (Title 26 of the United States Code) as the same may be
amended from time to time.
(d) The word "Committee" shall mean the Compensation Committee
appointed by the Board or, until such committee shall have
been appointed, the Board itself.
(e) The words "Common Stock" shall mean the common stock, par
value $.01 per share, of the Company.
(f) The word "Company" shall mean Elcom Systems, Inc., a Delaware
corporation and its Subsidiaries, if any, and any successor
thereto which shall assume this Plan.
(g) The words "Incentive Stock Option" shall mean any option
which qualifies as an incentive stock option under the terms
of Section 422A of the Code.
<PAGE> 2
(h) The words "Key Personnel" shall mean any person whose
performance as an employee (whether or not as Director) or as
an independent contractor or outside Director of the Company
or an Affiliate of the Company is, in the judgment of the
Committee, important to the successful operation of the
Company or a Subsidiary.
(i) The word "Optionee" shall mean any Key Personnel, or the
nominee designated by such Key Personnel and acceptable to
the Committee, to whom a stock option has been granted
pursuant to this Plan.
(j) The word "Plan" shall mean The 1996 Stock Option Plan of
Elcom Systems, Inc., as it is originally adopted in the form
of this document, and as it may be amended hereafter.
(k) The word "Subsidiary" shall mean any entity at least 50% of
the voting equity interest (in connection with the election
of Directors or the applicable governing body) of which is
owned directly or indirectly by the Company.
(l) The words "Substantial Stockholder" shall mean any Key
Personnel who owns more than 10% of the total combined voting
power of all classes of stock of the Company. Ownership shall
be determined in accordance with Section 424(d) of the Code
and lawful applicable regulations.
2. Purpose of the Plan. The purpose of the Plan is to provide Key
Personnel with greater incentive to serve and promote the interests of the
Company and its stockholders. The premise of the Plan is that, if such Key
Personnel acquire a proprietary interest in the business of the Company or
increase such proprietary interest as they may already hold, then the incentive
of such Key Personnel to work toward the Company's continued success will be
commensurately increased. Accordingly, the Company will, from time to time
during the effective period of the
2
<PAGE> 3
Plan, grant to such Key Personnel as may be selected to participate in the Plan,
options to purchase Common Stock on the terms and subject to the conditions set
forth in the Plan.
3. Effective Date of the Plan. The Plan shall become effective on
January 1, 1996, subject to approval by holders of a majority of the outstanding
shares of voting capital stock of the Company. In the event the Plan is not so
approved by January 1, 1997, the Plan and any options granted hereunder shall be
null and void. If, however, the Plan is so approved, subject to the provisions
of Section 8, no further stockholder approval shall be required with respect to
the granting of any options pursuant to the Plan. In the event that the Company
has not either (i) filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission which is declared effective on or before
December 31, 1999 in connection with an initial public offering of the Company's
Common Stock, or (ii) been a party to a merger, consolidation, reorganization or
other business combination with a party that is not an Affiliate and in which
the Company is not the surviving corporation, or (iii) sold, leased, exchanged,
or otherwise disposed of all or substantially all of the Company's assets to a
party that is not an Affiliate in any transaction requiring the approval of the
Company's Stockholders, or (iv) dissolved or liquidated the Company other than
with an Affiliate of the Company as the principal distributee thereof, then the
Board may consider whether, and shall be entitled upon a majority vote, to
terminate the Plan and declare the Plan and any options granted hereunder null
and void.
4. Administration of the Plan. The Plan shall be administered by the
Committee. A majority of the Committee shall constitute a quorum, and the acts
of a majority of
3
<PAGE> 4
the members present at any meeting at which a quorum is present, or acts
approved in writing by all of the members, shall be acts of the Committee.
Subject to the terms and conditions of the Plan, and in addition to the other
authorizations granted to the Committee under the Plan, the Committee shall have
full and final authority in its absolute discretion:
(a) to select the Optionees to whom options will be granted;
(b) to determine the number of shares of Common Stock subject to
any option;
(c) to determine the time when options will be granted;
(d) to determine the option price of Common Stock subject to an
option;
(e) to determine the time when each option may be exercised;
(f) to determine whether and to what extent an option is an
Incentive Stock Option; provided, however, that Incentive
Stock Options may only be granted to employees of the
Company;
(g) to prescribe the form of the option agreements governing the
options which are granted under the Plan and to set the
provisions of such option agreements as the Committee may
deem necessary or desirable provided such provisions are not
contrary to the terms and conditions of either the Plan or,
where the option is an Incentive Stock Option, Section 422A
of the Code;
(h) to adopt, amend and rescind such rules and regulations as, in
the Committee's opinion, may be advisable in the
administration of the Plan; and
(i) to construe and interpret the Plan, the rules and regulations
and the instruments evidencing options granted under the Plan
and to make all other determinations deemed necessary or
advisable for the administration of the Plan.
4
<PAGE> 5
Any decision made or action taken by the Committee in connection with the
administration, interpretation, and implementation of the Plan and of its rules
and regulations, shall, to the extent permitted by law, be conclusive and
binding upon all Optionees under the Plan and upon any person claiming under or
through such an Optionee. Neither the Committee nor any of its members shall be
liable for any act taken by the Committee pursuant to the Plan. No member of the
Committee shall be liable for the act of any other member.
5. Persons Eligible for Options. Subject to the restrictions herein
contained, options may be granted from time to time in the discretion of the
Committee only to such Key Personnel as designated by the Committee (or their
designees acceptable to the Committee, in its sole discretion), whose initiative
and efforts contribute or may be expected to contribute to the continued growth
and future success of the Company and/or its Subsidiaries. Notwithstanding the
preceding sentence, any Key Personnel who renounces in writing any right he or
she may have to receive stock options under the Plan shall not be eligible to
receive any stock options under the Plan. The Committee may grant more than one
option to the same Key Personnel.
6. Shares Subject to the Plan. Subject to the provisions of the next
succeeding provisions of this Section 6, the aggregate number of shares of
Common Stock for which options may be granted under the Plan shall be 187,500
shares of Common Stock. The maximum number of shares of Common Stock for which
options may be granted under the Plan to any one Key Personnel in any one fiscal
year of the Company is 50,000, subject to the other provisions of this Section
6. Either treasury or authorized and unissued shares of Common Stock, or both,
in such
5
<PAGE> 6
amounts, within the maximum limit of the Plan, as the Committee shall from time
to time determine, may be so issued. All shares of Common Stock which are the
subject of any lapsed, expired or terminated options may be made available for
reoffering under the Plan to any Key Personnel. In addition, any shares of
Common Stock which are retained to satisfy an Optionee's withholding tax
obligations or which are transferred to the Company by an Optionee to satisfy
such obligations or to pay all or any portion of the option price in accordance
with the terms of the Plan, may be made available for reoffering under the Plan
to any Key Personnel. If an option granted under this Plan is exercised, any
shares of Common Stock which are the subject thereof shall not thereafter be
available for reoffering under the Plan.
In the event that subsequent to the date of adoption of the Plan by the
Board, the outstanding shares of Common Stock are, as a result of a stock split,
stock dividend, combination or exchange of shares, exchange for other
securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization or other such change, including without
limitation any transaction described in Section 424(a) of the Code, increased or
decreased or changed into or exchanged for a different number or kind of shares
of stock or other securities of the Company, then (i) there shall automatically
be substituted for each share of Common Stock subject to an unexercised option
granted under the Plan and each share of Common Stock available for additional
grants of options under the Plan the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock shall be exchanged,
(ii) the option price per share of Common Stock or unit of securities shall be
increased or decreased
6
<PAGE> 7
proportionately so that the aggregate purchase price for the securities subject
to the option shall remain the same as immediately prior to such event, and
(iii) the Committee shall make such other adjustments to the securities subject
to options, the provisions of the Plan, and option agreements as may be
appropriate, equitable and in compliance with the provisions of Section 424(a)
of the Code to the extent applicable and any such adjustment shall be final,
binding and conclusive as to each Optionee. Any such adjustment shall provide
for the elimination of fractional shares.
7. Option Provisions.
(a) Option Price. The option price per share of Common Stock which
is the subject of an Incentive Stock Option shall be determined by the Committee
at the time of grant but shall not be less than one hundred percent (100%) of
the fair market value of a share of Common Stock on the date the option is
granted; provided, however, that if any Key Personnel to whom an Incentive Stock
Option is granted is, at the time of the grant, a Substantial Stockholder, the
option price per share of Common Stock shall be determined by the Committee but
shall not be less than one hundred ten percent (110%) of the fair market value
of a share of Common Stock on the date the option is granted. The option price
per share of Common Stock under each option granted pursuant to the Plan which
is not an Incentive Stock Option shall be determined by the Committee at the
time of grant. Such fair market value shall be determined in accordance with
procedures to be established by the Committee. The day on which the Committee
approves the granting of an option shall be deemed for all purposes hereunder
the date on which the option is granted, unless the Committee declares a
different date in connection with its approval of the grant.
7
<PAGE> 8
(b) Period of Option. The Committee shall determine when each
option is to expire but no option shall be exercisable after ten (10) years have
elapsed from the date upon which the option is granted; provided, however, that
no Incentive Stock Option granted to a person who is a Substantial Stockholder
at the time of the grant of such option shall be exercisable after five (5)
years have elapsed from the date upon which the option is granted.
(c) Limitation on Exercise and Transfer of Option. Except as
otherwise provided in the event of an Optionee's death, only the Optionee may
exercise an option; provided, that a guardian or other legal representative who
has been duly appointed for such Optionee may exercise an option on behalf of
the Optionee. No option granted hereunder shall be transferable otherwise than
(i) by the Last Will and Testament of the Optionee or, if the Optionee dies
intestate, by the applicable laws of descent and distribution, or (ii) to the
extent approved by the Committee, pursuant to a qualified domestic relations
order as defined by the Code, or the rules thereunder. No option granted
hereunder may be pledged or hypothecated, nor shall any such option be subject
to execution, attachment or similar process.
(d) Conditions Governing Exercise of Option. The Committee may, in
its absolute discretion, either require that, prior to the exercise of any
option granted hereunder, the Optionee shall have been an employee or
independent contractor for a specified period of time after the date such option
was granted, or make any option granted hereunder immediately exercisable. Each
option shall be subject to such additional or different restrictions or
conditions with respect to the time and method of exercise as shall be
prescribed by the Committee. Upon satisfaction of any
8
<PAGE> 9
such conditions, the option may be exercised in whole or in part at any time
during the option period. Options shall be exercised by the Optionee (i) giving
written notice to the Company of the Optionee's exercise of the option
accompanied by full payment of the purchase price either in cash or, with the
consent of the Committee, in whole or in part in shares of Common Stock (either
by delivery to the Company of already-owned shares or having the Company
withhold shares to be issued) having a fair market value on the date the option
is exercised equal to that portion of the purchase price for which payment in
cash is not made, and (ii) making appropriate arrangements acceptable to the
Company with respect to income tax withholding, as required, which arrangements
may include, at the discretion of the Committee, in lieu of other withholding
arrangements, (a) the Company withholding from issuance to the Optionee such
number of shares of Common Stock otherwise issuable upon exercise of the option
as the Company and the Optionee may agree; provided that, with respect to any
Optionee subject to Section 16 of the Securities Exchange Act of 1934 or the
regulations promulgated thereunder (or any successor laws or regulations), such
Optionee has had on file with the Committee, for at least six (6) months prior
thereto, an effective standing election to satisfy said Optionee's tax
withholding obligations in such a fashion, which election form by its terms
shall not be revocable or amendable for at least six (6) months, or (b) the
Optionee's delivery to the Company of shares of Common Stock having a fair
market value on the date the option is exercised equal to that portion of the
withholding obligation for which payment in cash is not made. The Company shall
be authorized, in the discretion of its officers, to participate in a broker's
"cashless exercise" program to receive the Optionee's cash
9
<PAGE> 10
payment of the exercise price and/or withholding taxes. Certain dissolutions or
liquidations of the Company (in which the principal distributee thereof is not
an Affiliate) or, unless the surviving corporation assumes said options, mergers
or consolidations with parties that are not, prior thereto, Affiliates of the
Company, in which the Company is not the surviving corporation, may cause each
outstanding option to terminate, provided that during the option period each
Optionee shall have the right during the period prescribed in the option
agreement (if any) prior to such dissolution or liquidation, or merger or
consolidation in which the Company is not the surviving corporation, to exercise
the then exercisable portion of his or her option in whole or in part without
regard to any limitations contained in the Plan or the option agreement.
Additional provision with respect to acquisitions, mergers, liquidations or
dissolutions may be made in the option agreement.
(e) Termination of Employment, Etc. If an Optionee ceases to be
either an employee, outside Director or independent contractor, of the Company
and all Subsidiaries (the "Cessation Date"), then the Committee shall have
absolute discretion to establish, in the option agreement or otherwise, the
restrictions on the exercisability of options granted hereunder. An Optionee's
employment shall not be deemed to have terminated while he is on a military,
sick or other bona fide approved leave of absence from the Company or a
Subsidiary as such a leave of absence is described in Section 1.421-7(h) of the
Federal Income Tax Regulations or any lawful successor regulations thereto. If
the stock option is an Incentive Stock Option, no option agreement shall:
(i) permit any Optionee to exercise any Incentive Stock Option
more than three (3) months after the date the Optionee ceased
to be employed by the Company or any Subsidiary if the reason
for the
10
<PAGE> 11
Optionee's cessation of employment was other than his death
or his disability (as such term is defined by Section
105(d)(4) of the Code); or
(ii) permit any Optionee to exercise any Incentive Stock Option
more than one (1) year after the date the Optionee ceased to
be employed by the Company or any Subsidiary if the reason
for the Optionee's cessation of employment was the Optionee's
disability (as such term is defined by Section 105(d)(4) of
the Code); or
(iii) permit any person to exercise any Incentive Stock Option
more than one (1) year after the date the Optionee ceased to
be employed by the Company or any Subsidiary if either (A)
the reason for the Optionee's cessation of employment was his
death or (B) the Optionee died within three (3) months after
ceasing to be employed by the Company or any Subsidiary.
If any option is by terms of the option agreement exercisable following the
Optionee's death, then such option shall be exercisable by the Optionee's
estate, or the person designated in the Optionee's Last Will and Testament, or
the person to whom the option was transferred by the applicable laws of descent
and distribution.
(f) Limitations on Grant of Incentive Stock Options. In no event
may Incentive Stock Options be granted hereunder to any person other than an
employee of the Company. During the calendar year in which any Incentive Stock
Option first becomes exercisable, the aggregate fair market value of the shares
of Common Stock which are subject to such Incentive Stock Option (determined as
of the date the Incentive Stock Option was granted) shall not exceed the sum of
One Hundred Thousand Dollars ($100,000). Options which are not designated as
Incentive Stock Options shall not be subject to the limitations described in the
preceding sentence and shall not be counted when applying such limitation.
11
<PAGE> 12
(g) Prohibition of Alternative Options. It is intended that Key
Personnel who are employees may be granted, simultaneously or from time to time,
Incentive Stock Options or other stock options, but no eligible Key Personnel
shall be granted alternative rights in Incentive Stock Options and other stock
options so as to prevent options granted as Incentive Stock Options from
qualifying as such within the meaning of Section 422A of the Code.
8. Amendments to the Plan. The Committee is authorized to interpret
the Plan and from time to time adopt any rules and regulations for carrying out
the Plan that it may deem advisable. Subject to the approval of the Board, the
Committee may at any time amend, modify, suspend or terminate the Plan. In no
event, however, without the approval of the Company's stockholders, shall any
action of the Committee or the Board result in:
(a) amending, modifying or altering the eligibility requirements
provided in Section 5 hereof; or
(b) increasing or decreasing, except as provided in Section 6
hereof, the maximum number of shares for which options may be
granted; or
(c) decreasing the minimum option price per share at which
options may be granted under the Plan, as provided in Section
7(a) hereof; or
(d) extending either the maximum period during which an option is
exercisable as provided in Section 7(b) hereof or the date on
which the Plan shall terminate as provided in Section 12
hereof; or
(e) changing the requirements relating to the Committee,
except as necessary to conform the Plan and/or the option agreements to changes
in the Code or other governing law. No option may be granted during any
suspension of this Plan or after this Plan has terminated and no amendment,
suspension or termination shall, without the Optionee's
12
<PAGE> 13
consent, alter or impair any of the rights or obligations under an option
theretofore granted to such Optionee under this Plan, except to the extent as
may be contemplated in the option agreement or Section 3 hereof.
9. Investment Representation, Approvals and Listing. The Committee may
condition its grant of any option hereunder upon receipt of an investment
representation from the Optionee which shall be substantially similar to the
following:
"Optionee agrees that any shares of Common Stock of Elcom Systems, Inc.
which he may acquire by virtue of the exercise of this option shall be
acquired for investment purposes only and not with a view to
distribution or resale; provided, however, that this restriction shall
become inoperative in the event the shares of Common Stock of Elcom
Systems, Inc. which are subject to this option shall be registered
under the Securities Act of 1933, as amended, or in the event there is
presented to Elcom Systems, Inc. evidence satisfactory to Elcom
Systems, Inc. to the effect that the offer or sale of the shares of
Common Stock of Elcom Systems, Inc. which are subject to this option
may lawfully be made without registration under the Securities Act of
1933, as amended".
The Company shall not be required to issue any certificates for shares of Common
Stock upon the exercise of an option granted under the Plan prior to (i)
obtaining any approval from any governmental agency which the Committee shall,
in its sole discretion, determine to be necessary or advisable, (ii) the
admission of such shares to listing on any national securities exchange on which
the shares of Common Stock may be listed, (iii) completion of any registration
or other qualification of the shares of Common Stock under any state or federal
law or ruling or regulations of any governmental body which the Committee shall,
in its sole discretion, determine to be
13
<PAGE> 14
necessary or advisable, or the determination by the Committee, in its sole
discretion, that any registration or other qualification of the shares of Common
Stock is not necessary or advisable, and (iv) obtaining an investment
representation from the Optionee in the form set forth above or in such other
form as the Committee, in its sole discretion, shall determine to be adequate.
10. General Purposes.
(a) Option Agreements Need Not Be Identical. The form and
substance of option agreements, whether granted at the same or different times,
need not be identical.
(b) No Right To Be Employed, Etc. Nothing in the Plan or in any
option agreement shall confer upon any Optionee any right to continue in the
employ of the Company or a Subsidiary, or to serve as a member of the Board or
as an independent contractor, or to be entitled to receive any remuneration or
benefits not set forth in the Plan or such option agreement, or to interfere
with or limit either the right of the Company or a Subsidiary to terminate the
employment of, or independent contractor relationship with, such Optionee at any
time or the right of the stockholders of the Company to remove him as a member
of the Board with or without cause.
(c) Optionee Does Not Have Rights Of Stockholder. Nothing
contained in the Plan or in any option agreement shall be construed as entitling
any Optionee to any rights of a stockholder as a result of the grant of an
option until such time as shares of Common Stock are actually issued to such
Optionee pursuant to the exercise of an option.
14
<PAGE> 15
(d) Successors In Interest. The Plan shall be binding upon the
successors and assigns of the Company.
(e) No Liability Upon Distribution of Shares. The liability of the
Company under the Plan and any distribution of shares of Common Stock made
hereunder is limited to the obligations set forth herein with respect to such
distribution and no term or provision of the Plan shall be construed to impose
any liability on the Company or the Committee in favor of any person with
respect to any loss, cost or expense which the person may incur in connection
with or arising out of any transaction in connection with the Plan.
(f) Use of Proceeds. The cash proceeds received by the Company
from the issuance of shares of Common Stock pursuant to the Plan will be used
for general corporate purposes.
(g) Expenses. The expenses of administering the Plan shall be
borne by the Company.
(h) Captions. The captions and section numbers appearing in the
Plan are inserted only as a matter of convenience. They do not define, limit,
construe or describe the scope or intent of the provisions of the Plan.
(i) Number. The use of the singular or plural herein shall not be
restrictive as to number and shall be interpreted in all cases as the context
may require.
(j) Gender. The use of the feminine, masculine or neuter pronoun
shall not be restrictive as to gender and shall be interpreted in all cases as
the context may require.
15
<PAGE> 16
11. Termination of the Plan. The Plan shall terminate on January 1,
2006, and thereafter no options shall be granted under the Plan. All options
outstanding at the time of termination of the Plan shall continue in full force
and effect according to the terms of the option agreements governing such
options and the terms and conditions of the Plan.
IN WITNESS WHEREOF, Elcom Systems, Inc., by its appropriate officer
duly authorized, has executed this document as of the 1st day of January, 1996.
ELCOM SYSTEMS, INC.
By: /s/Robert J. Crowell
-----------------------------------
Robert J. Crowell, Chairman
and Chief Executive Officer
16
<PAGE> 1
EXHIBIT 11.1
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $ (3,462) $ (904) $ 5,575
======== ======== =======
Weighted average Common Stock and Common
Equivalent Shares Outstanding During the Period 9,247 18,195 26,363
Conversion of Series B and C Preferred Stock 1,696 -- --
Dilutive Effect of Common Equivalent Shares (1) 1,806 1,806 3,376
-------- -------- -------
12,749 20,001 29,739
======== ======== =======
Net Income (Loss) Per Share $ (0.27) $ (0.05) $ 0.19
======== ======== =======
</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 the Company's initial public offering have been included as
outstanding for all periods presented. The dilutive effect of the
common and common equivalent shares was computed in accordance with the
treasury stock method.
<PAGE> 1
EXHIBIT 21.1
ELCOM INTERNATIONAL, INC., AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT AND STATE OF INCORPORATION
AS OF MARCH 21, 1997
PLACE OF
NAME INCORPORATION
Elcom International, Inc. Delaware
Elcom Systems, Inc. Delaware
Catalink Direct, Inc. Delaware
Catalink Direct (Pennsylvania), Inc. Delaware
Elcom International Limited United Kingdom
Elcom Systems Limited United Kingdom
Elcom Group Limited United Kingdom
AMA (UK) Limited United Kingdom
Elcom Holdings Limited United Kingdom
Rapid Recall Limited United Kingdom
Elcom Information Services Limited United Kingdom
Catalink Direct Limited United Kingdom
Prophet Group Limited United Kingdom
Portable Computers Limited United Kingdom
Able Computer Distribution Limited United Kingdom
Data Supplies Limited United Kingdom
Datacare Limited United Kingdom
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To Elcom International, Inc.:
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-00362.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 21, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-00362 of Elcom International, Inc. on Form S-8 of our reports each dated 21
March, 1997 (relating to the financial statements of Elcom International Limited
and AMA (UK) Limited), appearing in this Annual Report on Form 10-K of Elcom
International, Inc. for the year ended December 31, 1996.
Deloitte & Touche
Chartered Accountants
London, England
21 March 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ELCOM INTERNATIONAL, INC'S 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS SET FORTH
ON PAGES F-1 THROUGH F-21.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 23,259
<SECURITIES> 0
<RECEIVABLES> 155,656
<ALLOWANCES> 4,312
<INVENTORY> 34,718
<CURRENT-ASSETS> 210,185
<PP&E> 27,194
<DEPRECIATION> 13,308
<TOTAL-ASSETS> 260,769
<CURRENT-LIABILITIES> 161,158
<BONDS> 0
0
0
<COMMON> 267
<OTHER-SE> 98,336
<TOTAL-LIABILITY-AND-EQUITY> 260,729
<SALES> 620,115
<TOTAL-REVENUES> 620,115
<CGS> 550,076
<TOTAL-COSTS> 58,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,837
<INCOME-PRETAX> 8,985
<INCOME-TAX> 3,410
<INCOME-CONTINUING> 5,575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,575
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
