SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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
(781) 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... No..X..
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 on The Nasdaq Stock
Market on March 3, 1998, was approximately $124,965,000. 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 27,248,327 shares of common stock, $.01 par value,
outstanding as of March 3, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1998 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 automated
procurement software applications which enable the conduct of interactive
electronic commerce and, through its PC remarketing subsidiary, uses a version
of its technology to support the sale and marketing of PC products, the source
of substantially all the Company's net sales since inception. The Company,
through its technology subsidiary, has developed the PECOS(R) technologies which
enable companies to communicate, market, sell and buy various goods and services
electronically. PECOS stands for Personal Electronic Catalog and Ordering
System, and the Company believes that its PECOS Commerce Manager was the first
transaction-based electronic commerce system to generate substantial revenues in
the emerging area of PC-based electronic commerce. The Company currently has 10
active license agreements to companies in a broad range of industries, for its
PECOS.net Family of Products and is pursuing additional license agreements.
The Company's wholly-owned technology subsidiary, Elcom Systems, Inc.
("Elcom Systems"), has introduced and continues to develop electronic commerce
applications to meet the business objectives of organizations seeking to
leverage electronic commerce to extend market reach, reduce operating expenses
and enable new service offerings. These applications direct communications
between trading partners' systems for the buying and selling of goods and
services and are built upon the Company's PECOS.net distributed processing
framework which provides secure and reliable transaction processing over
networks including intranets, extranets and the Internet. The Company's
PECOS.net Family of Products are designed in a year 2000 compliant manner and
can support large numbers of end-user customers, products and transactions. The
Company's transaction server middleware provides a fully scaleable foundation
for robust system performance and high transaction capacity.
The PECOS.net Family of Products offers electronic commerce solutions for
sellers as well as buyers. Elcom Systems' PECOS Commerce Manager ("PECOS.cm")
system provides selling organizations with the ability to support direct
electronic linkages with its customers, providing automation of sales order
processing utilizing personal computers and networking infrastructure. PECOS.cm
can support a number of deployment alternatives which include Windows, Java or
HTML operating in conjunction with standard browser applications. 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 UNIX or NT-based platforms.
Elcom Systems' buy-side solution is PECOS Procurement Manager ("PECOS.pm"),
which was announced in 1997, and provides purchasing departments with the
ability to automate internal procurement processes related to maintenance,
repair and operational products and services ("MRO items"). PECOS.pm can assist
organizations in their implementation of procurement best practices, which can
result in reduced order processing costs, consolidation of vendors, and the
implementation of new service capabilities, such as desktop ordering and
just-in-time purchasing. Additionally, PECOS.pm can be integrated with existing
enterprise management information systems. PECOS.pm is deployed as an
intranet-based technology, which integrates with a company's existing management
information system infrastructure and enables electronic commerce with key
vendors. Based upon customer-defined controls, the system supports such work
flow processes as requisition routing and approval, electronic order placement
and automated payment processing. The Company believes that the current
marketplace for a business-to-business automated procurement system is
substantial. PECOM.pm version 1.9 is currently in "beta" use at a customer site,
and the Company intends to announce the general availability of PECOS.pm version
2.1 in the summer of 1998, and continue the product's further development during
1998.
The Company uses the PECOS.cm technology through Catalink Direct, Inc.(R)
("Catalink"), the Company's other wholly-owned subsidiary, to market and sell
PC-related products to business customers. Heretofore, the Company's Catalink
subsidiary has generated substantially all of the Company's net sales.
Catalink's use of PECOS.cm represents the first utilization of this technology
and the Company believes that its PECOS.cm system
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significantly differentiates Catalink from other PC remarketers while providing
Catalink with certain marketing and cost advantages. Catalink commenced
operations in December 1993 and has experienced rapid growth. The Company
achieved its growth by offering its PECOS.cm technology to its Catalink
customers and by various marketing efforts, including the expansion of its
direct sales force nationwide and by the acquisition of six PC remarketers. The
Company's PC remarketer acquisition strategy includes utilizing an acquired
company's sales force to offer PECOS.cm to prospective customers in those new
markets and, over time, to transition the acquired company's customers to the
PECOS.cm system, thereby generating increasing revenues transacted through the
PECOS.cm 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.cm or to complement its Elcom
Systems' PECOS.net 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.cm and these
entities continue to use, in whole or in part, traditional methods of selling
and order taking.
In addition to PECOS.cm, Catalink intends to offer its customers PECOS.pm
in 1998, thereby providing its corporate customers with the ability to
reengineer their MRO items (including PCs and related products and services)
procurement practices and consolidate suppliers through the Company's
easy-to-use automated procurement system. Although there can be no assurances as
to the ultimate timing, capabilities, or successfulness of this technology,
management believes that by providing PECOS.pm to existing and prospective
customers, Catalink's sales force will be empowered with another significant
competitive differentiation in the PC remarketing marketplace, with the intent
to improve Catalink's market share as well as providing solutions to its
business partners' needs.
Catalink offers over 18,000 products manufactured by leading companies
such as Compaq, IBM, Toshiba, Hewlett-Packard and Apple at competitive prices.
Compaq, IBM, Hewlett Packard, IBM Software, Lotus, 3COM and other product
manufacturers have paid marketing fees to Catalink to advertise their products
in PECOS.cm. 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 placed through PECOS.cm 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 (See
- --"Fulfillment/Logistics/Information Systems"). PECOS.cm is distributed
primarily by Catalink's telemarketing and direct sales personnel to current and
potential customers at no charge on five diskettes or a single CD-ROM. Catalink
operates 15 Field Sales and Support Offices ("FSSO") in the United States and 7
in the United Kingdom and also maintains configuration and distribution
facilities in Canton, MA; Irvine, CA; and Langley, Berkshire, United Kingdom,
and also utilizes an outsourced facility in Hartford, CT.
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 may reinforce the PECOS.net Family of Products as significant enabling
technologies for electronic commerce while positioning Elcom Systems as a
provider of electronic commerce systems for both buying and selling
organizations.
In 1996, the Company invested a nominal amount in, and licensed its
technology to, ShopLink Incorporated ("ShopLink"). ShopLink is a provider of
personal computer-based shopping services whereby consumers are able to use the
PECOS.cm technology to conveniently purchase groceries, health and beauty care
products and other home consumable products and services and receive direct
deliveries from ShopLink's product consolidation center or product fulfillment
partners to their homes or other specified locations. As further discussed in
the Notes to Consolidated Financial Statements contained elsewhere herein, in
September 1997, the Company sold options to acquire its entire equity ownership
interest in ShopLink, which may be exercised through March 31, 1999.
The Company also is pursuing additional licensing agreements through its
Elcom Systems subsidiary for the PECOS.pm and PECOS.cm technologies. The
Company's strategy also includes augmenting its growth by acquiring companies
with complementary technologies and expertise or existing customer bases.
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Electronic Commerce Overview
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 networks such as those operated by AT&T, MCI Telecommunications,
Sprint Corp., and others, or over a public network such as the Internet. The
Company believes that interest in conducting business through Internet Commerce,
the joining of electronic commerce and Internet technologies, is maturing
rapidly as the marketplace becomes more aware of emerging technology and of the
advantages that can be offered to businesses and consumers in the form of low
cost communications, reduced transaction time, and ubiquitous access.
The Company's PECOS.net Family of Products currently operates on common
carrier networks and over the Internet. The commercial market for products and
services designed for use with internetworks (i.e. intranet, Internet, extranet)
has only recently started to develop. Because commerce and online exchange of
information over the Internet are new and evolving and concerns exist as to
security of data during transmission, it is difficult to predict with any
assurance whether the marketplace in general will accept the Internet as a
viable environment to support substantial electronic commerce applications or
systems. The Company also anticipates that the Internet commerce market will be
the focus of rapidly emerging and shifting business and technological alliances
and innovations which may affect the ability of the Company to compete
effectively.
Elcom Systems
Elcom Systems designs, develops and licenses interactive and robust
electronic commerce software systems for use over public and private networks.
In addition, Elcom Systems offers a full range of consulting services to
implement, support and deploy its electronic commerce technology, including
complete outsourcing. The Company targets businesses that wish to automate their
selling and/or procurement processes through the integration of an electronic
commerce solution with their existing enterprise systems. On a stand-alone
presentation basis for the year ended December 31, 1997, revenues generated from
Elcom Systems' licenses, including associated professional services and
maintenance fees, were approximately $4.8 million.
The Company's PECOS.net Family of Products is designed to be year 2000
compliant and create "full-circle" electronic linkages between buyers and
sellers (trading partners) which automate and support many key functions
necessary for large-scale interactive electronic commerce, including user
registration and authentication, catalog and content management, product
searching and selection, order capture and management, security, payment
processing, customer service functions, and real-time links to order entry and
warehouse management systems thereby facilitating the fulfillment of orders. The
PECOS.net Family of Products includes:
PECOS Commerce Manager - PECOS.cm is an electronic commerce system that enables
online transactions. PECOS.cm automates the complete sales order transaction
cycle - linking sellers to their customers throughout product selection,
ordering, fulfillment, delivery and financial settlement. The application helps
companies reduce manually-oriented sales operational costs, create new revenue
opportunities, and enhance buyer-seller relationships. By automating routine
tasks, PECOS.cm can enable companies to assert and/or maintain a competitive
sales advantage, compressing traditional sales cycles from days to minutes, 24
hours a day, seven days a week. PECOS.cm operates on UNIX and Windows (3.1, 95,
NT) platforms; integrates with legacy applications and databases; and
communicates on private and public IP networks (i.e. intranet, Internet,
extranet).
PECOS Procurement Manager - PECOS.pm is an intranet-deployable, automated
procurement system that enables purchasing departments to improve their
procurement processes for MRO items, which can reduce product acquisition costs,
improve service and create desktop PC purchasing relationships with key
suppliers. PECOS.pm can dramatically lower procurement costs by automating
traditionally manual or disparate processes by enabling
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automated procurement to the individual desktop PC. PECOS.pm can replace the
conventional paper-based purchasing process with an automated system that
includes multi-vendor electronic catalogs, online order entry, customer-defined
requisition and automated order routing, and back-end settlement of electronic
invoices. In addition, approval routing and order status updates occur
automatically with users receiving e-mail notification of the progress of their
orders. Other features include archiving and reporting which allow an
organization to review purchase histories and trends and monitor supplier
performance. In addition, the "recurring order" feature enables users to
establish and reuse "template orders" for frequently purchased items. PECOS.pm
operates on UNIX and Windows NT platforms and can be deployed using either a
browser or Windows-based client. PECOS.pm can be integrated with a wide range of
enterprise management information systems. The Company believes that the current
marketplace for a business to business supply-chain oriented electronic commerce
procurement solution is substantial.
In April 1997, Elcom Systems acquired certain key elements of the
electronic procurement software which is being augmented and developed into
PECOS.pm. The purchase price was approximately $1.2 million, consisting of cash
and stock. The Company intends to continue its investment in PECOS.pm in 1998,
including finalizing the development of an intranet-enabled version which was
deployed as a "beta version" at a large customer during the fourth quarter of
1997, as well as further development during 1998 to integrate other PECOS.net
functions and features.
Elcom Systems has been developing and enhancing the PECOS.net Family of
Products since 1992, and began actively marketing PECOS.cm in mid-1995. PECOS.cm
is a complete "sell-side" business solution for interactive electronic commerce,
incorporating a front-end customer interface which operates on a user's PC for
presentation and end-user functionality and a back-end Transaction Server System
("TSS") for transaction processing and electronic linkage to a licensee's
internal information system. PECOS.cm technology creates electronic marketing
capabilities, including support of "click-on" product or other marketing videos
(via CD-ROM), and 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 continues to develop its PECOS.net technologies through the
integration of a suite of technologies 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. The Company is able to offer
a complete range of electronic commerce technology deployment alternatives from
full CD-ROM client/server-based video interactivity, to a so-called "thin
client" front-end customer interface utilizing standard browser technologies.
Historically, Elcom Systems has marketed and sold its products primarily
through direct selling. Due to its focus on Catalink's implementation of
PECOS.cm, 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. At
the beginning of the third quarter of 1997, the direct sales force was
significantly reduced to a level more consistent with its current and near-term
product marketing strategy and revenue expectations. Elcom Systems is now
expanding its indirect selling methodologies, which are focused on partnering
with system integrators, suppliers and technology partners.
Elcom Systems' strategy is to enhance the PECOS.net technologies,
proliferate the technologies via licenses, and develop new versions to take
advantage of the significant emerging market for Internet commerce applications.
Although license revenues to date have not been material to the Company as a
whole, Elcom Systems has 10 (including Catalink) active license agreements in
such diverse industries as PC products distribution, stationery and office
supplies, business machine supplies, home consumable products and utilities, and
is pursuing additional licensing opportunities for its PECOS.net technologies. A
further element of Elcom Systems' strategy is to provide digital media and
content management services to licensees, including producing and maintaining
electronic catalogs.
Elcom Systems is also investigating various growth options, which may
include a strategic alliance with a technology or financial partner.
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Catalink
Catalink Direct, Inc., the Company's other wholly-owned subsidiary,
utilizes PECOS.cm technology 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 United Kingdom
remarketer of PC products known as Lantec Information Services ("Catalink U.K.")
in 1995, each of which operated as a wholly-owned subsidiary of Catalink. CDCI
(as of December 31,1995) and Computerware (as of December 31, 1997) were merged
into Catalink, and are no longer separate entities. In February 1996, the
Company completed the acquisition of AMA (U.K.) Limited ("AMA"), a United
Kingdom-based remarketer of personal computer products which was accounted for
as a pooling of interests. In December 1996, Catalink acquired Prophet Group
Limited, a United Kingdom-based PC remarketer, which was accounted for as a
purchase. On February 21, 1997, Catalink acquired Data Supplies Limited, a
United Kingdom-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.cm to prospective
customers in those new markets and to transition an acquired company's
customers, over time, to the PECOS.cm technology.
Catalink's PECOS.cm System. Catalink's PECOS.cm 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.cm technology can be implemented in customized
versions, most of its operational characteristics and basic functionality are
common to Catalink's PECOS.cm system. PECOS.cm 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.cm operates in a client/server
architecture as 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 primary DFP's inventory
system, PECOS.cm 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.cm
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 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.cm. For orders to be fulfilled through the Company or its primary
DFP, PECOS.cm concurrently communicates with the applicable computer system(s),
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.cm automatically initiates a communications link
("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 DFP. A comprehensive electronic link currently is utilized by Catalink
with its primary DFP and electronic links are being pursued with other DFPs.
During periodic Commlinks, product information on the customer's hard drive also
is updated automatically to reflect changes, such as new products and
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pricing revisions, new PECOS.cm 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.cm disks.
In addition to providing its customers PECOS.cm, during 1998 Catalink
intends to further differentiate itself by offering a Catalink version of Elcom
Systems' next PECOS.pm system release to its customers, as soon as it is made
available, as a systems tool to support the consolidation of supplier
relationships into one manageable procurement system. PECOS.pm will offer
various features to streamline and consolidate the historically inefficient
process of acquiring products through traditional means. Catalink believes that
PECOS.pm, as has been the case with PECOS.cm, can provide a significant
competitive advantage in the area of electronic commerce that will enable
Catalink to continue to differentiate itself from its competitors. Management
believes that use of PECOS.pm will empower its customers to achieve process
reengineering and best practice objectives, as well as leveraging the system to
order other desired supplier's products via a fully integrated electronic
procurement system. There can be no assurances as to when PECOS.pm will be
finalized, or made available to Catalink, and after delivery, whether PECOS.pm
will be accepted and used by customers.
Products and Pricing
Products. Catalink offers over 18,000 products from a wide variety of
manufacturers through the PECOS.cm system. In the United States, Catalink
currently purchases selected products directly from certain manufacturers,
including Compaq and Toshiba, with the balance of products being purchased from
DFPs, while in the United Kingdom, the substantial majority of products are
purchased directly from manufacturers on net terms. 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 Cisco
Intel Mitsubishi Kingston
Viewsonic 3Com Iomega
SOFTWARE
Microsoft Lotus Corel
Seagate Novell Computer Associates
Adobe Claris Symantec
In the United States, Catalink has established electronic purchasing and
supply relationships with Ingram Micro, Inc., as well as traditional
relationships with several other large, national PC product suppliers.
Catalink's purchasing relationships with DFP suppliers are pursuant to
industry-standard arrangements with negotiated pricing based on anticipated
volume levels and with payment being made through existing floor plan financing
arrangements.
In the United Kingdom, Catalink also is an authorized product fulfillment
aggregator for IBM and Compaq products, and 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.
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Pricing. Catalink believes that its product pricing is competitive with
other remarketers. Catalink offers larger corporate customers a higher discount
than other customers, reflecting the economies of a higher level of purchases by
such customers. The Company uses a specially designed, customized and automated
pricing system for its customers through PECOS.cm's back-end server system which
supports and tracks a variety of pricing methodologies, including the ability to
provide customized pricing for each customer, by product. PECOS.cm was designed
so that each time a customer Commlinks, Catalink can optionally change pricing
on selected products in real-time, as appropriate.
Professional Services
Catalink offers a wide range of professional services in both the United
States and the United Kingdom. Service offerings to customers in the United
States and United Kingdom, include advising on project and roll-out management,
providing on-site engineers for network integration and systems support,
responsive "Help" desk and break/fix services. The Company also offers national
dispatch service for warranty and repair contracts. In the United Kingdom,
Catalink provides additional service offerings, including offering customers
complete PC lifecycle management from purchase to disposal, high-end technical
consulting, as well as designing and overseeing implementations of complex
applications. The Company's service-oriented revenues increased 60% in 1997 to
approximately $32 million, from approximately $20 million in 1996, and the
Company believes there is a significant opportunity to expand its service
operations in the future. Accordingly, the Company expects to continue its focus
on growing this higher margin segment of its business.
Fulfillment/Logistics/Information Systems
Fulfillment. In the United Kingdom, Catalink sources the substantial
majority of its products directly from manufacturers, while in the United
States, Catalink has direct purchasing arrangements with Compaq, Toshiba and
certain other manufacturers. Catalink also sources its products from a number of
DFPs, including Ingram Micro, Inc., its primary DFP, from which it normally
purchases a majority of domestically purchased PC products which are not sourced
directly. Ingram Micro, Inc. is the largest PC products distributor in the
world, with annual sales in excess of $12 billion, and distributes thousands of
products from over 1,100 suppliers. Augmented by its DFPs, Catalink draws from
inventories which the Company believes are well in excess of $1.5 billion. In
the United Kingdom, in addition to its direct purchasing arrangements, Catalink
also maintains relationships with several DFPs. 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 two
configuration facilities in the United States and one in the United Kingdom and
also utilizes an additional outsourced facility in the United States. Products
that the Company purchases directly are typically shipped to these facilities.
Although the Company believes that both its DFPs and Catalink 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 believes that it can
substantially mitigate the risks associated with additional inventory positions
resulting from expanding its United States direct purchasing relationships in
1997 in the same manner that this has historically been accomplished in the
United Kingdom, which is to limit the range of models that it stocks to those in
demand and by carefully monitoring items on hand and their associated net
carrying costs, relative to demand. The Company also believes that direct
purchasing of these products can improve its delivery time to customers and
quality control of configured systems.
In the United States, the electronic links between PECOS.cm's front-end
client "interface", Catalink's back-end transaction server system, and its
primary DFP's computer system provides the customer with seamless order
processing and shipment, as if a customer's order was shipped directly from
Catalink. Using PECOS.cm, when a customer clicks and accepts an order, if
applicable, its primary DFP's 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 Catalink's
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configuration centers. PECOS.cm also can automatically select one of the
Company's configuration and distribution facilities in the United States (and
similarly in the United Kingdom) 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 DFPs, which are primarily aggregators, for
electronic inquiry of product price and availability (although there can be no
assurances that any such electronic links will be finalized and implemented or,
if so, what the timing thereof will be). Until these links are fully
established, Catalink obtains some of its product to fulfill customer orders
from these aggregators and its other suppliers, including manufacturers, 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.cm, 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 Canton, MA and Irvine, CA facilities and in an
outsourced facility in Hartford, CT. In addition, Catalink maintains a product
distribution and configuration facility in Langley, Berkshire in the United
Kingdom. Catalink's technical support staff reviews the viability of
configuration orders before the order is released for fulfillment, or on demand
via PECOS.cm's Analyze Custom Configuration function.
Information System. During 1997, in the United States, the Company
licensed and installed year 2000 compliant software from Oracle Corporation and
other software firms as its Management Information System ("MIS") to improve
management's ability to monitor and manage the Company and its expected growth.
The Company's installation went "live" in the United States in November of 1997.
This system provides full year 2000 compliance and incorporates modules
supporting General Ledger, Accounts Payable, Purchasing, Accounts Receivable,
Inventory and Order Entry. The MIS design is a unique implementation of the
Oracle software applications which are being and/or have been enhanced and
extended to provide functionality not found in the standard system, including
the ability to:
Accept electronically delivered sales orders such as PECOS and EDI
orders, as well as converted quotations;
Automatically source product from its own or DFP inventories based
on set parameters; and
Automatically create purchase orders, electronically transmit them,
and electronically confirm shipments by DFPs to enable invoicing or
anticipate receipt as the case may be.
During 1998, the Company intends to augment its MIS with the
implementation of a year 2000 compliant warehousing system in its United States
distribution centers. In 1998, the Company also plans to implement its
Oracle-based year 2000 compliant applications in the United Kingdom. The United
Kingdom is currently using a year 2000 compliant warehousing system; however,
the balance of MIS applications in use in the United Kingdom are generally not
year 2000 compliant. By the end of 1998 the Company expects installation of year
2000 compliant applications to be substantially complete in both the United
States and the United Kingdom. The Company has been assured by its electronic
trading partners that their information systems applications either are, or will
be, year 2000 compliant before issues may arise. The Company is dependent on its
MIS and any problems with its ongoing development and installation, or any
interruption in its functional availability may have an adverse effect on sales
to customers and/or customer satisfaction. Although the Company believes that
its technology and operating systems will be adequate for its current needs,
such systems will undoubtedly require ongoing modification and improvement as
the Company expands and evolves.
8
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Marketing and Sales
Catalink Targeted Customer Segments. Catalink uses its telemarketing and
direct sales forces in the United States and United Kingdom to sell to targeted
business and corporate accounts, its educational and government customer base
and, in the United Kingdom, to its value-added reseller customers. As of
December 31, 1997, Catalink employed approximately 325 sales representatives,
account executives, telemarketers and related support personnel to service those
customer segments.
As of December 31, 1997, Catalink sales and support personnel operated
from FSSOs in 15 metropolitan areas in the United States and 7 in the United
Kingdom. Catalink's primary locations and FSSOs are listed below:
UNITED STATES: 15
- Allentown, PA - New York City, NY
- Atlanta, GA - Norwood, MA (Boston)
- Chicago, IL - Philadelphia, PA
- Dallas, TX - Pittsburgh, PA
- Edison, NJ - San Diego, CA
- Hartford, CT - San Francisco Bay Area, CA
- Houston, TX - Stamford, CT
- Irvine, CA
UNITED KINGDOM: 7
- Basingstoke, Hampshire - London (City of)
- Birmingham - Manchester
- Glasgow (Scotland) - Slough, Berkshire
- Langley, Berkshire
The Company's strategy includes expanding existing FSSOs as appropriate
and opening additional FSSOs and/or acquiring remarketers in other metropolitan
areas as it deems necessary or desirable.
Corporate and Business Accounts. Large corporations that wish to make
their PC product procurement functions more efficient are Catalink's 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 targeted by Catalink 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 United States and United
Kingdom 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, as well as demonstrations to potential corporate customers of
PECOS.cm, and as soon as it is made available in 1998, PECOS.pm. Telemarketers
assist the sales professionals by contacting and pre-qualifying accounts for
follow-up and 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 United States, 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. In 1992, Apple Computer began its Apple Education
Sales Agent ("AESA") program for sales to grade K-12 schools. Since its
acquisition of Computerware in 1995, Catalink has operated under periodic
contracts with Apple as the exclusive AESA in Pennsylvania, West Virginia,
Delaware and New Jersey. The current contract expires in December 1998. Under
this sales agent arrangement, Catalink
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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 United Kingdom, Catalink U.K. also operates
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 United Kingdom. The Company
believes that although its product fulfillment business is to a different market
than its core remarketer business, this fulfillment business, which Catalink
U.K. has been operating for many years, provides the Company 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,
including nationwide toll-free pre-sale and post-sale telephone-based support.
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 privileges for products which have
not been used or 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.cm 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 United States, generally 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 either return products to inventory, to one of the Company's DFPs
or to a manufacturer for credit, or to liquidate non-returnable items.
Competition
Electronic Commerce Systems Marketplace. The market for interactive
electronic commerce software is new and rapidly evolving and the Company expects
competition in this market to continue to intensify in the future. The Company
competes with vendors of prepackaged electronic commerce software, vendors of
software tools for developing electronic commerce applications, and systems
integrators. The Company's competitors include IBM, Open Market, Inc., Connect,
Inc., Trade'ex Electronic Commerce Systems, Ariba Technologies, Inc., Elekom
Procurement, CommerceOne and Actra Business Systems. The Company expects
additional competition from other emerging and established companies, including
Microsoft Corp., SAP and Oracle, all of which have announced products for
Internet-based electronic commerce. The Company's potential competitors also
include systems integrators such as Electronic Data Systems (EDS) and a number
of EDI solution vendors, including Sterling Commerce, Inc.
Certain of 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
10
<PAGE>
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/or financial condition. See "--Electronic Commerce
Overview".
PC Products Marketplace. The Company has invested substantial effort and
capital to develop and implement its proprietary PECOS.cm front- and back-end
system, as well as for the associated hardware and electronic link with its
primary DFP. 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. Of the more than
10,000 total outlets, the Company believes that there are more than 1,000
significant PC product remarketers of various types in the United States and
United Kingdom. In response to competitive pressures and declining margins,
traditional computer remarketers are cutting costs and acquiring or merging with
other remarketers to increase scale and efficiency. A prospective purchaser of
personal computer products has the option to purchase directly from a
manufacturer or assembler (e.g., IBM, Dell Computer Corp., Gateway 2000 Inc.),
from a major remarketer (e.g., Entex Information Systems, Inc., Vanstar Corp.,
MicroAge, Inc., Inacom Corp., CompuCom Systems, Inc.), from a computer mail
order company (e.g., CDW Computer Centers, Inc., Micro Warehouse Inc., Creative
Computers Inc., INMAC Corp.), from a systems integrator (e.g., Andersen
Consulting, EDS), from computer superstores (e.g., CompUSA Inc., Computer City),
electronics superstores (e.g., Best Buy Company Inc., Circuit City Group), 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. Certain of
these and other potential competitors have substantially greater financial,
technical and marketing resources than the Company and greater name recognition
and more extensive customer bases.
Intellectual Property
The Company's success and ability to compete are dependent, in part, upon
its proprietary technology. While the Company relies to a certain extent 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 received a patent on certain, specific aspects of its PECOS.net
technologies, there can be no assurance 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 also is
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 the PECOS.net technologies.
The Company generally enters into confidentiality or license agreements
with its employees, consultants, licensees and certain of its vendors, and
generally attempts to control access to and distribution of its proprietary
software, documentation and other information. In connection with the
distribution of Catalink's PECOS.cm 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,
11
<PAGE>
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 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 custom
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 Company believes that the most critical and proprietary
elements of its PECOS.net 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.
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.
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, 1997, the Company had a total of 996 personnel,
including 917 salaried and 79 hourly personnel. The Company's personnel are not
represented by any labor union and the Company believes that its personnel
relations are good. 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 tradenames or trademarks.
Such tradenames or trademarks are the property of the respective companies
owning such tradenames and trademarks.
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<PAGE>
Item 2. Properties
As of December 31, 1997, the Company leased the properties set forth
below, and rented 15 other smaller field sales and support offices ("FSSOs").
The following leases vary in length remaining, from less than one year to 16
years for the Langley, Berkshire facility and, in some cases, include options to
extend the lease terms.
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
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 34,000 Catalink FSSO, Configuration and
Distribution
Bristol, Pennsylvania 35,000 Catalink Administrative and FSSO
Langley, Berkshire(U.K.) 40,000 United Kingdom Headquarters;
Catalink FSSO, Configuration
and Distribution
Slough, Berkshire (U.K.) 7,800 FSSO
Basingstoke, Hampshire (U.K.) 7,500 Catalink Administrative and FSSO
In addition to the leased properties noted above, the Company also owns,
through Prophet Group Limited, land and a building in Redditch, Hereford, United
Kingdom, comprising administrative and FSSO facilities of approximately 20,000
square feet.
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, MA facility
against damage from physical break-ins, natural disasters, operational
disruptions and other events.
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, sought 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 were 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 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
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<PAGE>
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 contended.
On March 26, 1997, the Company and certain of its subsidiaries entered
into a Final Agreement of Settlement and Mutual Release of All Claims and
Demands with the former owners of Computerware, including the dismissal of all
litigation pending against the Defendants and of their counterclaims against the
Company. The essence of the settlement, a complete copy of which was filed as an
exhibit to a Current Report on Form 8-K dated March 26, 1997, and filed on April
8, 1997, includes a confirmation of the merger transaction and confirms that the
1,326,417 shares of the Company's stock issued in 1995 is the appropriate and
final amount of stock due and payable in connection with the transaction. In
addition, the Kovalciks have agreed to certain volume and manner of sale
limitations on their ability to sell their shares of the Company's common stock.
The settlement of these disputes and related litigation did not have a
significant impact on the Company's results of operations.
The Company is a party to various claims, disputes and other proceedings
relating to matters arising in the normal course of its business. In the opinion
of management, the outcome of these matters will not have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
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 Stock Market (Symbol:
ELCO). As of December 31, 1997, there were approximately 184 stockholders of
record of the Company's Common Stock. This number does not reflect persons or
entities who hold their stock in nominee or "street name" through various
brokerage firms. The high and low closing sales prices reported by The Nasdaq
Stock Market for each of the quarters in the two year period ended December 31,
1997 are set forth in the table below. For the period from January 1, 1998 to
March 3, 1998, such high and low closing sales prices were: high: $6.69, and
low: $5.19.
Quarter Ended 1996 1997
-------------- --------------- -----------------
High Low High Low
------- ------ ------- --------
March 31, $14.50 $6.25 $9.00 $5.63
June 30, 14.63 6.88 7.31 4.56
September 30, 12.63 5.38 7.00 5.81
December 31, 10.38 7.25 8.00 5.63
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
The following table sets forth selected consolidated financial data for
the Company for the years ended December 31, 1993 through December 31, 1997. 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
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are included elsewhere in this Annual Report. The data for the periods presented
are not necessarily comparable because of acquisitions consummated at various
times during the periods presented.
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
-------- ------- -------- -------- --------
INCOME STATEMENT DATA (1):
Net sales $22,387 $57,712 $311,423 $620,115 $760,136
Gross profit 3,749 8,778 39,382 70,039 90,394
Selling, general and
administrative expenses 4,996 10,364 36,016 57,551 70,200
Research and development
expenses 644 1,166 1,122 1,200 1,275
-------- -------- --------- --------- ---------
Operating profit (loss) (1,891) (2,752) 2,244 11,288 18,919
Interest and other income
(expense), net (116) (146) (1,909) (2,303) (4,142)
-------- -------- --------- --------- ---------
Income (loss) before income
taxes (2,007) (2,898) 335 8,985 14,777
Provision for income taxes 266 564 1,239 3,410 4,489
-------- -------- --------- --------- ---------
Net income (loss) $(2,273) $(3,462) $ (904) $5,575 $10,288
======== ======== ========= ======== =========
Basic net income (loss) per share $ (0.37) $(0.05) $0.21 $ 0.38
======== ======= ======= ======
Basic weighted average shares
outstanding 9,247 18,195 26,363 26,937
======== ======= ======= ======
Diluted net income (loss)per share $ (0.37) $(0.05) $0.19 $ 0.35
======== ======= ======= ======
Diluted weighted average
shares outstanding 9,247 18,195 29,739 29,461
======== ======= ======= ======
DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ----- ---- ----
CONSOLIDATED BALANCE
SHEET DATA (1):
Total current assets $5,098 $20,313 $136,781 $210,185 $277,806
Total assets 7,010 22,356 174,231 260,769 332,068
Total current liabilities 5,169 13,997 89,290 161,158 218,300
Long-term liabilities, net of
current portion 401 236 91 1,008 3,465
Total stockholders' equity 1,440 8,123 84,850 98,603 110,303
- ----------
(1)The information presented for all periods 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
inception in September 1992 to include the results of operations of CDCI and
AMA.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
To date, substantially all of the Company's net sales have been derived
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 technology subsidiary, Elcom Systems, generates revenues from
licensing its PECOS.net technologies and providing related services to other
companies. On a stand-alone presentation basis for the year ended December 31,
1997, revenues generated from Elcom Systems' licenses, including associated
professional services and maintenance fees, were approximately $4.8 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.cm technology to its Catalink customers and by
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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 Computerware,
a Bristol, Pennsylvania-based PC products remarketer (which was merged into
Catalink in December 1997). In June 1995, the Company acquired all of the equity
of Catalink U.K. a PC products remarketer in the United Kingdom operating as
Lantec Information Services. The Computerware and Catalink U.K. 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 United Kingdom, which has been accounted for on
a pooling-of-interests basis. Accordingly, AMA's results have been included with
the Company's results since the date of the Company's organization. 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 United Kingdom. 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.net technologies. The Company intends to seek
acquisitions of additional companies either to expand its customer base and the
use of the PECOS.net technologies or to complement its Elcom Systems' PECOS.net
technologies, although there can be no assurances as to the success or timing of
any such acquisitions.
On April 29, 1997, the Board of Directors adopted, and on February 17,
1998 the Board amended The 1997 Stock Option Plan of Elcom International, Inc.,
reserving up to an aggregate of 2,000,000 shares of the Company's Common Stock
for possible issuances pursuant to stock options granted thereunder. On April
30, 1997, the Company's wholly-owned subsidiary Elcom Systems, Inc. canceled its
stock option plan under which no stock options were then issued or outstanding.
On July 23, 1997, the Company announced that its Board of Directors
authorized the engagement of the investment banking firm of Salomon Smith Barney
to assist the Company by coordinating and evaluating options which would enable
the strategic potential of the Company to be realized. These actions, intended
to maximize stockholder value, include evaluating the possible sale or merger of
the Company, strategic financing options, and potential strategic partners. This
process also includes investigation of various potential options for Elcom
Systems as a separate company, including possible strategic alliances with a
technology or financial partner. The rapid growth of the Company, and the Board
of Directors' belief that the Company's stock is undervalued in the marketplace,
prompted the Company to take this step. There can be no assurance that the
Company will be successful in consummating a transaction or realizing additional
stockholder value as a result of this process, which is currently ongoing.
On September 4, 1997, the Company's Board of Directors approved and
adopted the Executive Profit Performance Bonus Plan for Executive Officers (the
"Executive Performance Plan") and the Key Personnel Profit Performance Bonus
Plan (the "Key Personnel Plan" and, together with the Executive Plan, the
"Plans"). The Plans will only be effective if the Executive Performance Plan is
approved by the stockholders of the Company, and provide that the designated
Executive Officers and Key Personnel collectively will be entitled to a bonus
based on a designated portion of the year-to-year increase in the Company's
Operating Profit (as defined in the Plans and which could include a reduction in
operating losses). The aggregate total of the designated percentages for bonuses
under both Plans cannot exceed 20% of the increase in the Company's Operating
Profit (the "Bonus Pool") and an individual's annual participation in the Bonus
Pool is limited to two times the individual's base salary. The Company will seek
approval and ratification of the Executive Performance Plan by its stockholders
at the Company's 1998 Annual Meeting. The Plans cover fiscal years commencing in
1998; however, if the Executive Performance Plan is not approved by Stockholders
at the Company's 1998 Annual Meeting, the Plans will automatically terminate and
no payments will accrue or be paid thereunder.
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During the fourth quarter of 1997, the Company completed initial
implementation in the United States of its year 2000 compliant, Oracle-based
enterprise Management Information System ("MIS"). During 1998, the Company
intends to augment the MIS with the implementation of a year 2000 compliant
warehousing system in its United States distribution centers. In 1998, the
Company also plans to implement these year 2000 compliant applications in its
United Kingdom operations. The United Kingdom operations are currently using a
year 2000 compliant warehousing system, however the balance of MIS applications
in use in the United Kingdom are generally not year 2000 compliant. By the end
of 1998, the Company expects the installation of its year 2000 compliant MIS
applications to be substantially complete in both its United States and United
Kingdom operations. The Company has been assured by its key electronic trading
partners that their information system applications either are, or will be, year
2000 compliant before issues may arise. The Company's PECOS.net family of
electronic commerce technology applications have been developed in a year 2000
compliant fashion.
RESULTS OF OPERATIONS
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, 1997:
Year Ended December 31,
1995 1996 1997
---- ---- ----
Net sales 100% 100% 100%
Gross profit 13 11 12
Selling, general and
administrative expense 12 9 9
Research and development
expenses..... -- -- --
Operating profit(loss) 1 2 3
Interest expense 1 1 1
Interest income and other, net -- 1 --
Provision for income taxes -- 1 1
Net income(loss) (--) 1 1
Year Ended December 31, 1997 compared to the year ended December 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 increased to
$760.1 million from $620.1 million in the year ended December 31, 1996, an
increase of $140 million or 22.6%. Net sales in the United States increased to
$473.8 million in 1997 from $435.1 million in 1996, an 8.9% increase, which
reflects management's decision to defer significant expansion of its domestic
sales force and focus its efforts on consolidation of certain general and
administrative functions of acquisitions and implementation of its new
management information system. Such implementation adversely impacted net sales
in the United States in the forth quarter of 1997. During 1998, management
intends to focus its energies on rebuilding sales momentum and expansion of its
United States sales force. The Company believes that its 1997 efforts provide a
solid foundation to support the anticipated growth in revenues. Net sales of the
Company's United Kingdom based operations increased to $286.3 million in 1997
from $185.0 million in 1996, an increase of 54.8%. Net sales for the year ended
December 31, 1997 in the United Kingdom include an aggregate of $51.1 million
generated by Prophet Group Limited (acquired in December, 1996) and Data
Supplies Limited (acquired in February, 1997). During 1997, management also
completed the consolidation of certain general and administrative functions of
United Kingdom acquisitions, and intends to install its new management
information system in the United Kingdom during 1998.
Gross Profit. Gross profit for the year ended December 31, 1997 increased
to $90.4 million from $70.0 million in the year ended December 31, 1996, an
increase of $20.4 million, or 29.1%. The increase in gross profit dollars
resulted primarily from the substantial growth in net sales, including sales
generated by recent acquisitions. Gross profit, including the contribution from
acquisitions, as a percent of net sales increased from 11.3% in 1996 to 11.9% in
1997. The gross profit percentage was higher in 1997 principally due to new
direct purchasing programs implemented with several major manufacturers in the
United States, coupled with an increase in the portion of revenues generated by
the Company's United Kingdom operations, and from an increase in higher margin
17
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professional services revenues in both countries. The Company anticipates that
ongoing increases in direct purchasing volume, and continued growth in
higher-margin professional services revenues should mitigate a portion of the
product gross margin decline expected to be associated with targeted expansion
of sales to high volume corporate accounts during 1998, which typically generate
lower gross margin percentages than other customers.
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses for the year ended December 31, 1997 increased
to $70.2 million from $57.6 million in the year ended December 31, 1996, an
increase of $12.6 million or 22%. This increase is attributable primarily to the
cost of the Company's larger work force and other expenses of the acquired
companies. Other S,G&A expenses also increased as the Company continued to
invest in administrative infrastructure to support its current and future
growth, including the development and implementation of its Oracle-based, year
2000 compliant management information system. Until such system is fully
operational worldwide, which the Company expects to substantially complete
during 1998, the Company will continue to maintain additional personnel and
manual support processes (and incur additional S,G&A expenses) to facilitate its
actual and anticipated growth in volume. The new management information system
is being implemented to allow the Company to operate more efficiently by
providing an information systems backbone for the Company and to provide an
efficient means to accomplish the consolidation of the information and other
internal systems of potential acquisitions.
Overall, S,G&A expenses decreased as a percentage of net sales for the
year ended December 31, 1997 to 9.2% from 9.3% in 1996, reflecting the impact of
slower overall expense growth relative to the increase in net sales, as the
Company maintains its focus on controlling expenses, and is also reflective of
the increase in manufacturer funding/reimbursement of certain S,G&A expenses,
resulting from the Company's increased volume of direct purchasing in 1997.
Research and Development Expense. Research and development expense
increased slightly from $1.2 million in 1996 to $1.3 million in 1997. The
Company's research and development expenses are focused on developing
incremental functionality and features for its PECOS.net technologies, including
the aspects of the PECOS.pm technology acquired in 1997, as well as
modifications to allow its PECOS.net technologies to communicate using the
Internet and the continued development of a browser compliant and Java-enabled
version of its PECOS.net technologies 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, 1997
increased to $5.2 million from $3.8 million in 1996. Interest expense in both
years primarily results from borrowings in support of the Company's accounts
receivable and inventory and is reflective of the substantial increases in such
assets, net of reductions in the applicable interest rate on the principal
United States credit facility from prime plus 1% in the first six months of
1996, to the prime rate as of July 1, 1996, and a further reduction to prime
minus 1% as of March 1, 1997.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 1997 decreased to $1.1 million from $1.5 million in 1996
and reflects a reduction in average on hand balances of cash and cash
equivalents available for investment. Interest income and other, net in 1997
includes a gain of $389,000 resulting from the sale of the Bristol, PA rental
division in March 1997, net of certain redundant operating and severance
expenses of certain Computerware operations, which have been phased-out and
consolidated into the Company's headquarters and new East Coast configuration
and distribution facility which was opened in Canton, MA late in the first
quarter of 1997.
Income Tax Provision. The income tax provisions in 1997 and 1996 primarily
relate to the income taxes of the Company's United Kingdom-based operations, as
well as certain current federal and state income taxes provided by the Company.
During 1997, the Company utilized substantially all of its remaining net
operating loss ("NOL") carryforwards which were eligible to reduce its tax
provision. Hence, such NOLs will no longer be available to reduce the Company's
effective tax rate for income reported in United States, if any, in 1998 and
future years, although the Company does have approximately $3.3 million of NOLs
available to reduce its United States taxable income in 1998 and future years.
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Net Income. The Company reported net income of $10.3 million for the year
ended December 31, 1997, versus net income of $5.6 million in 1996, as a result
of the factors described herein.
Year ended December 31, 1996 compared to the 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 United States 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 United
Kingdom-based operations (Catalink U.K. 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 versus only a portion of 1995, as
well as organic growth of the United Kingdom 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 primarily 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.
Selling, General and Administrative Expenses. 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. The Company also maintained 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. 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
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.net technologies, including modifications to allow
communication using the Internet, the continued development of a browser
compliant version of its PECOS.net technologies, and the development of a Java
enabled version for license to other companies.
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 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 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 United States state income tax provisions.
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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.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended December 31, 1997
was $44.2 million, which is primarily due to an increase in accounts receivable
of $30.2 million, resulting primarily from the Company's increase in net sales
during 1997, and a $26.1 million increase in inventory which is related to the
Company's direct purchasing arrangements with manufacturers which were
instituted in the United States in 1997. Net cash used for investing activities
was $11.3 million, consisting primarily of $7.7 million in additions to
property, equipment and software and $3.3 million related to acquisitions. Net
cash provided by financing activities was $65.6 million, including a $64.6
million net increase in borrowings under floor plan lines of credit and $1.8
million in proceeds from the exercise of stock options and related tax benefit.
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 $8.1 million
related to 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
Catalink U.K. 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 Catalink U.K. and $5.9 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 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.
At December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $33.2 million and floor plan lines of
credit from Deutsche Financial Services Corporation ("DFSC"). The United States
DFSC facility provides for aggregate borrowings of up to $120 million, and as of
March 1, 1997, the interest rate was reduced to the prime rate minus 1%.
Availability of United States borrowings is based on DFSC's determination as to
eligible accounts receivable and inventory. As of December 31, 1997, the
Company's borrowings from DFSC on its United States floor plan line of credit
were $113.0 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, although approximately one-half of the Company's initial
United States borrowings do not bear interest until after interest-free periods
of 30 to 90 days have lapsed. As of March 1, 1997, the interest rate was reduced
to prime (8.5% at December 31, 1997) minus 1%. The United States DFSC line of
credit is secured primarily by the Company's United States inventory and
accounts receivable, although substantially all of the Company's other United
States assets also are pledged as collateral on the facility. In December 1997,
the Company also established a United Kingdom DFSC credit facility which
provides for aggregate borrowings of up to (pound)30 million, or approximately
$49.5 million, as of December 31, 1997. Availability of United Kingdom
borrowings is based upon DFSC's determination of eligible accounts receivable
and amounts outstanding bear interest at the Base Rate of National Westminster
Bank plc (7.25% at December 31, 1997) plus 1.25%. The United Kingdom DFSC
facility replaced four separate facilities previously maintained in the United
Kingdom. As of December 31, 1997, the Company's borrowings under its United
Kingdom DFSC facility were (pound)24 million or $39.7 million which approximated
the Company's availability thereunder.
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The Company is dependent upon the DFSC lines of credit to finance
increases in its eligible accounts receivable arising from sales of PC products
as well as its United States inventory purchases and hence, the Company expects
that its borrowings under such facilities 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 lines of credit will continue to be
available, or be increased to support the Company's requirements. The DFSC lines
of credit limit borrowings to defined percentages of eligible inventory (in the
United States) 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 IBMCC
borrowing facility is secured by the IBM products purchased under the
arrangement and relates to domestic operations only. At December 31, 1997, the
Company's borrowings from IBMCC on its floor plan line of credit were $1.2
million.
As of December 31, 1997, the Company had borrowings aggregating
approximately $153.9 million outstanding under these borrowing facilities, which
approximated its availability thereunder. The Company also included a note
payable of approximately $0.8 million, related to its acquisition of Data
Supplies Limited, in lines of credit.
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 contract awarded in 1996, the Company started purchasing
selected products directly from manufacturers in late 1996. Although the
Company's inventory investment imposes certain costs and risks and has increased
substantially since December 31, 1996, the Company believes that this investment
will improve its delivery time to customers and the quality control of
configured systems and, over time, may increase the profitability of the
Company. These direct purchasing arrangements have favorably impacted gross
profit, particularly in the third and fourth quarters of 1997, as the volume of
direct purchases increased significantly over prior quarters and the Company
earned substantial direct purchasing rebates and incremental discounts. There
can be no assurances that these manufacturer rebates and discounts will be
available in the future, or if available, that the Company will be in a position
to purchase the necessary levels of products necessary to receive comparable or
increased levels of such rebates and incremental discounts. The Company also
believes that it can substantially mitigate the risks associated with its
additional inventory positions by limiting the range of models it stocks to
those in demand and by carefully monitoring items on hand and their associated
net carrying costs, relative to demand. The Company also intends to continue to
maintain logistical and traditional relationships with selected distributors
and/or aggregators.
As of September 30, 1997, the Company sold options to acquire its entire
equity ownership interest in ShopLink Incorporated. The Company received
$418,000 in payment for the options, which may be exercised through March 31,
1999. If exercised, the Company could receive payments of up to an additional
$4.2 million. The Company has included the $418,000 received in payment for the
options in other deferred liabilities.
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. In addition, future
growth of the Company will require ongoing investment in property, equipment and
software.
The Company believes that its cash and cash equivalents, together with its
existing sources of liquidity and cash generated from operations, will be
sufficient to meet its working capital and capital expenditure requirements for
the next year, so long as its financing sources continue to make lines of credit
available. However, as the Company's business strategy includes growth through
acquisitions, additional sources of financing may be required to accomplish the
Company's growth plans.
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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, in the United States, are stronger in
the fourth calendar quarter and somewhat weaker in the first calendar quarter,
while sales are generally strong in the first calendar quarter in the United
Kingdom. 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, since the latter half of 1996, the Company has been increasingly
impacted by the low unemployment rate in certain of its markets, particularly in
the Northeast United States and the United Kingdom, 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.
Catalink's revenues are effected by general price reductions by PC
manufacturers, which has been substantial, particularly in the first quarters of
1997 and 1998. Such price cutting requires that Catalink increase its base unit
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
net sales. 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.
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, or will be, correct. These forward-looking
statements involve a number of risks and uncertainties which could cause the
Company's future results to differ materially from those anticipated, including:
the industry's acceptance and usage of electronic commerce software systems, the
impact of competitive technologies, products and pricing, control of expenses,
levels of gross margins, revenue growth, overall business conditions, price
decreases of PC products, corporate demand for PC products, the success and
timing of implementing the Company's new management information system,
availability of appropriate financing, risks associated with acquisitions of
companies, the consequent results of operations given the aforementioned
factors, and 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. Regarding the Company's
evaluation of possible strategic partners and financing alternatives, including
for Elcom Systems, there can be no assurance that any strategic alternatives,
including any possible arrangements with a strategic partner or the possible
sale, merger or financing of the Company, can be successfully identified or
solicited, negotiated, or consummated to the betterment of the Company or the
Company's stock price, or what the timing, terms, or ultimate impact of any such
arrangement might be.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None Required.
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Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements beginning on page F-1.
Supplemental earnings per share and quarterly financial information for the
Company are included in Notes 10 and 11, respectively, of the Notes to
Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the fourth quarter of 1997, the Audit Committee of the Company's
Board of Directors decided to engage Arthur Andersen LLP to audit the Company's
1997 financial statements in both the United States and the United Kingdom.
Previously, the financial statements of the Company's United Kingdom operations
were audited by the London office of Deloitte & Touche. The decision to change
was made to increase the efficiency and coordination of the annual audit
process, and the Company has continued its relationship with Deloitte & Touche
for tax services in the United Kingdom.
Deloitte & Touche's opinions with respect to the Company's United Kingdom
subsidiaries' operations in 1995 and 1996 were unqualified and there were no
disagreements between the Company and Deloitte & Touche concerning accounting or
financial disclosure matters. In conjunction with the change, Deloitte & Touche
was requested to cooperate fully with Arthur Andersen LLP to ensure an effective
transition of the audit engagement.
The Company reported this change on a Form 8-K filed on March 11, 1998,
which was not timely filed.
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 1998 Annual Meeting of
Stockholders to be held April 28, 1998, 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.
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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, 1997:
Report of Independent Public Accountants 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, 10.38, 10.39 and 10.40.
(b) Reports on Form 8-K:
None.
(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. Such request can be made to:
Chief Financial Officer, Elcom International, Inc., 10 Oceana Way, Norwood, MA
02062.
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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 13, 1998 By: /s/ Robert J. Crowell
-------------------------
Robert J. Crowell
Chairman and
Chief Executive Officer
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.
Signatures Title Date
/s/ Robert J. Crowell Chairman of the March 13, 1998
Robert J. Crowell Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Laurence F. Mulhern Corporate Executive March 13, 1998
Laurence F. Mulhern Vice President,
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
/s/ William W. Smith Vice Chairman and Director March 13, 1998
William W. Smith
/s/ James Rousou Corporate Executive March 13, 1998
James Rousou Vice President and Director
/s/ J. Richard Cordsen Director March 13, 1998
J. Richard Cordsen
/s/ Richard J. Harries, Jr. Director March 13, 1998
Richard J. Harries, Jr.
/s/ John W. Ortiz Director March 13, 1998
John W. Ortiz
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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)
2.5 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)
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 (1), with attached
First Amended List of Holders of Warrants to Purchase Common Shares of the
Registrant. (10)
4.17 AMA Securities Agreement, dated February 29, 1996, by and among the
Registrant and the former stockholders of AMA (UK) Limited. (9)
4.18 Final Agreement of Settlement and Mutual Release of All Claims and
Demands, dated March 26, 1997, by and among the Registrant and certain of
its subsidiaries, and the Former Shareholders of Computerware Business
Trust. (13)
E-1
<PAGE>
Exhibit No. Description
10.1 Form of Indemnity Agreement for Executive Officers and/or Directors of the
Registrant (1), with attached list of Director and/or Executive Officer
Indemnitees. (12) (*)
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. (9)
(*)
10.4 $120,000,000 Business Credit and Security Agreement Dated as of March
1, 1997 among Catalink Direct, Inc., Catalink Direct (Pennsylvania),
Inc. and Deutsche Financial Services Corporation (9), and Amendment to
Business Credit and Security Agreement. (12)
10.5 Lease Agreement for the Registrant's Headquarters, dated July 5, 1993, by
and among Oceana Way Associates and the Registrant (1), and Agreement of
Amendment thereto, dated October 20, 1997. (x)
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 Financial Services
Corporation (UK) LTD., dated December 1, 1997, guarantying Elcom Group
Limited's indebtedness to Deutsche. (x)
10.19 Amended Employment Agreement by and between the Registrant and Robert J.
Crowell dated June 1, 1997 (11), and Form of Consulting Agreement appended
thereto as Exhibit A. (12) (*)
10.20 Employee Benefits Agreement by and between Elcom Systems, Inc. and
Peter F. McAree dated August 1, 1997. (x) (*)
10.22 Employment Agreement by and between the Registrant and James Rousou, dated
April 1, 1996 (7), and First Amendment to Employment Agreement, dated
November 5, 1997. (x) (*)
10.23 Employee Benefits Agreement by and between the Registrant and Andres
Escallon dated August 1, 1997. (12) (*)
10.24 Standard Conditions for the Sale and Purchase of Debts, dated December 3,
1997, between Elcom Group Limited and Deutsche Financial Services (UK)
LTD. (x)
10.25 Agreement for the Sale and Purchase of Debts dated December 3, 1997,
between Elcom Group Limited and Deutsche Financial Services (UK) LTD. (x)
10.29 1995 Non-Employee Director Stock Option Plan of the Registrant, dated
October 9, 1995 (1), and Amendment No. 1 thereto. (11) (*)
10.33 Guaranty by the Registrant in favor of Deutsche Financial Services
Corporation, dated November 6, 1995, guarantying Catalink Direct, Inc.'s
indebtedness to Deutsche (1), as ratified by a Reaffirmation of Guaranty
dated September 2, 1997. (x)
E-2
<PAGE>
Exhibit No. Description
10.36 The 1996 Stock Option Plan of Elcom International, Inc. (8) (*)
10.37 Amended Employment Agreement by and between the Registrant and Laurence F.
Mulhern dated June 1, 1997 (11), and Form of Consulting Agreement appended
thereto as Exhibit A. (12) (*)
10.38 The 1997 Stock Option Plan of Elcom International, Inc. (11), and
Amendment One thereto. (x) (*)
10.39 Elcom International, Inc. Executive Profit Performance Bonus Plan for
Executive Officers dated September 4, 1997. (12) (*)
10.40 Elcom International, Inc. Key Personnel Profit Performance Bonus Plan
dated September 4, 1997. (12) (*)
10.41 Engagement letter between the Registrant and Smith Barney Inc. dated
July 21, 1997. (12)
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.
(9) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, and incorporated herein by
reference.
(11) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference.
E-3
<PAGE>
(12) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, and incorporated herein by
reference.
(13) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated March 26, 1997 and incorporated herein by reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
E-4
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Elcom
International, Inc. are included in response to Item 8:
Page
Report of Independent Public Accountants F-2
Reports of Other Auditors F-3 to F-4
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-5
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-8
Notes to Consolidated Financial Statements F-9 to F-22
F-1
<PAGE>
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,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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
1995 and 1996 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 $98,879,000 of the related 1996
consolidated financial statement totals, and which statements reflect net income
of $1,224,000 and $4,301,000 of the 1995 and 1996 consolidated financial
statement totals, respectively. Those statements were audited by other auditors
whose reports have 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, 1996 and 1997 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 17, 1998
F-2
<PAGE>
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 1996 and 1995 and of its profit for
the years then ended.
/s/ DELOITTE & TOUCHE
Chartered Accountants
London
21 March 1997
F-3
<PAGE>
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 1996 and 1995 and of its profit for
each of the three years in the period ended 31 December 1996.
/s/ DELOITTE & TOUCHE
Chartered Accountants
London
21 March 1997
F-4
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------
1996 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 23,259 $ 33,165
Accounts receivable:
Trade ............................................ 134,617 154,223
Other ............................................ 21,039 32,200
-------- --------
155,656 186,423
Less--Allowance for doubtful accounts ............ 4,312 5,474
-------- --------
Accounts receivable, net ..................... 151,344 180,949
Inventory ........................................... 34,718 60,437
Prepaids and other current assets ................... 864 3,255
-------- --------
Total current assets .......................... 210,185 277,806
-------- --------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software ....................... 17,577 22,118
Land, buildings and leasehold improvements ........... 3,415 3,402
Furniture, fixtures and equipment .................... 6,202 8,579
-------- --------
27,194 34,099
Less -- Accumulated depreciation and amortization .... 13,308 17,649
-------- --------
13,886 16,450
-------- --------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION 36,698 37,812
========= =========
$ 260,769 $ 332,068
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ...................................... $ 89,469 $ 154,714
Accounts payable ..................................... 36,987 43,271
Accrued expenses and other current liabilities ....... 34,405 19,557
Current portion of capital lease obligations ......... 252 680
Current portion of long-term debt .................... 45 78
--------- ---------
Total current liabilities ..................... 161,158 218,300
--------- ---------
OTHER DEFERRED LIABILITIES ............................. 32 2,213
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ...... 556 920
LONG-TERM DEBT, NET OF CURRENT PORTION ................. 420 332
--------- ---------
1,008 3,465
--------- ---------
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--26,663,512 and 27,218,239 shares.. 267 272
Additional paid-in capital ........................... 98,483 100,726
Retained earnings (accumulated deficit) .............. (919) 9,369
Treasury stock, at cost -- 37,546 and 56,319 shares . (366) (549)
Cumulative translation adjustment .................... 1,138 485
--------- ---------
Total stockholders' equity .................... 98,603 110,303
========= =========
$ 260,769 $ 332,068
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31,
1995 1996 1997
--------- --------- ---------
Net sales .................................... $ 311,423 $ 620,115 $ 760,136
Cost of sales ................................ 272,041 550,076 669,742
--------- --------- ---------
Gross profit ................................. 39,382 70,039 90,394
Expenses:
Selling, general and administrative......... 36,016 57,551 70,200
Research and development ................... 1,122 1,200 1,275
--------- --------- ---------
Total expenses ............................... 37,138 58,751 71,475
--------- --------- ---------
Operating profit ............................. 2,244 11,288 18,919
Interest expense.............................. (2,164) (3,837) (5,203)
Interest income and other, net ............... 255 1,534 1,061
--------- --------- ---------
Net income before income taxes ............... 335 8,985 14,777
Provision for income taxes.................... 1,239 3,410 4,489
--------- --------- ---------
Net income (loss)............................. $ (904) $ 5,575 $10,288
========= ========= =========
Basic net income (loss) per share............. $(0.05) $ 0.21 $ 0.38
========= ========= =========
Basic weighted average shares outstanding..... 18,195 26,363 26,937
========= ========= =========
Diluted net income (loss) per share........... $ (0.05) $ 0.19 $ 0.35
========= ========= =========
Diluted weighted average shares outstanding... 18,195 29,739 29,461
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
<CAPTION>
Convertible
Preferred Stock Common Stock Retained Total
---------------- ---------------- Additional Earnings Treasury Cumulative Stock-
Number $.01 Par Number $.01 Par Paid-in (Accumulated Stock, Translation holders'
of Shares Value of Shares Value Capital Deficit) at cost Adjustment Equity
--------- -------- --------- -------- -------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 .............. 3,452,175 $ 34 9,116,716 $ 91 $ 13,527 $ (5,590) $ -- $ 61 $8,123
Sale of Series B convertible
preferred stock, net of offering
costs of approximately $159.......... 1,482,736 15 -- -- 5,200 -- -- -- 5,215
Sale of Series C convertible
preferred stock, net of offering
costs of approximately $651.......... 3,052,385 31 -- -- 13,817 -- -- -- 13,848
Purchase of Computerware .............. -- -- 1,326,417 13 4,795 -- -- -- 4,808
Purchase of Lantec .................... -- -- 2,899,820 29 13,745 -- -- -- 13,774
Exercise of common stock options ...... -- -- 9,963 -- 12 -- -- -- 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 -- -- -- 39,442
Exercise of warrants .................. -- -- 170,085 2 615 -- -- -- 617
Net loss .............................. -- -- -- -- -- (904) -- -- (904)
Cumulative translation adjustment ..... -- -- -- -- -- -- -- (85) (85)
------ ------ ---------- ---- ------ ------- ------ ------ -------
BALANCE, DECEMBER 31, 1995 .............. -- -- 25,510,297 255 91,113 (6,494) -- (24) 84,850
Proceeds from sale of common stock,
net of offering costs
of approximately $200 .............. -- -- 629,489 6 6,234 -- -- -- 6,240
Exercise of common stock options ...... -- -- 523,726 6 920 -- (366) -- 560
Tax effect of AMA (U.K.) Limited
pooling ............................. -- -- -- -- 216 -- -- -- 216
Net income ............................ -- -- -- -- -- 5,575 -- -- 5,575
Cumulative translation adjustment ..... -- -- -- -- -- -- -- 1,162 1,162
------ ------ ---------- ---- ------ ------ ------ ----- -------
BALANCE, DECEMBER 31, 1996 .............. -- -- 26,663,512 267 98,483 (919) (366) 1,138 98,603
Exercise of common stock options,
including related tax benefit of
approximately $450.................. -- -- 505,447 5 1,954 -- (183) -- 1,776
Purchase of procurement technology .... -- -- 49,280 -- 289 -- -- -- 289
Net income ............................ -- -- -- -- -- 10,288 -- -- 10,288
Cumulative translation adjustment ..... -- -- -- -- -- -- -- (653) (653)
------ ------ ---------- ------ -------- ------ ------ ------ ---------
BALANCE, DECEMBER 31, 1997 .............. -- $ -- 27,218,239 $ 272 $100,726 $9,369 $(549) $ 485 $110,303
====== ====== ========== ====== ======== ====== ====== ====== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
---------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ------- ------- -------
Net income (loss)................................ $ (904) $ 5,575 $ 10,288
Adjustments to reconcile net income (loss)
to net cash used in operating activities -
Depreciation and amortization............... 3,101 6,704 8,795
Provision for doubtful accounts............. 472 2,586 3,058
Changes in current assets and liabilities, net
of purchase acquisitions --
Accounts receivable.......................(34,596) (71,095) (30,168)
Inventory................................. 4,357 (13,955) (26,088)
Prepaids and other current assets......... (1,011) 1,064 (1,995)
Accounts payable.......................... (1,181) (6,858) 5,088
Accrued expenses and other
current liabilities..................... (9,675) 19,695 (15,356)
Increase (decrease) in other deferred
liabilities.................................. -- (11) 2,183
------- ------- -------
Net cash used in operating activities..(39,437) (56,295) (44,195)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...... (5,880) (6,506) (7,723)
Increase in other assets and deferred costs ....... (105) (795) (321)
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) (625)
Purchase of Data Supplies, net of cash acquired.... -- -- (2,660)
------- ------- -------
Net cash used in investing activities........(12,284) (15,416) (11,329)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit ............ 37,457 43,009 64,570
Sale of common stock, net of offering costs...... 39,442 6,240 --
Sale of preferred stock.......................... 19,063 -- --
Repayment of capital lease obligations
and long-term debt............................. (153) (215) (731)
Exercise of common stock options including
related tax benefit ........................... 12 560 1,776
Exercise of common stock warrants ............... 617 -- --
Repayment of Computerware stockholders' loans.... (5,000) -- --
------- ------- -------
Net cash provided by financing activities.... 91,438 49,594 65,615
------- ------- -------
FOREIGN EXCHANGE EFFECT ON CASH ................... (60) 399 (185)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 39,657 (21,718) 9,906
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ............................. 5,320 44,977 23,259
-------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $44,977 $23,259 $33,165
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .................................. $ 1,964 $ 3,711 $5,141
======= ======= =======
Income taxes paid .............................. $ 526 $ 523 $1,620
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations........... $ -- $ 787 $ 1,488
======= ======= =======
Purchase of procurement technology ............. $ -- $ -- $ 289
======= ======= =======
Acquisition of businesses (Note 2):
Fair value of assets acquired ............... $59,611 $16,931 $ 6,332
Less cash paid .............................. 6,400 8,600 1,600
------- ------- -------
Liabilities assumed ...................... $53,211 $8,331 $ 4,732
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Elcom International, Inc. (the "Company") develops and licenses automated
procurement software applications which enable the conduct of interactive
electronic commerce and, through its PC remarketing subsidiary, uses a version
of the technology (primarily the Personal Electronic Catalog and Ordering
System, hereinafter referred to as "PECOS") to support the sale and marketing of
PC products, the source of substantially all the Company's net sales since
inception. 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. The accounting and reporting policies of the
Company conform with generally accepted accounting principles. All material
intercompany transactions and balances have been eliminated in consolidation.
(b) 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.
(c) Cash and Cash Equivalents
Cash equivalents at December 31, 1996 and 1997 generally 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. 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
cash equivalents is included in interest income and other, net in the
Consolidated Statements of Operations.
(d) 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.
(e) 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 $521,000 and $114,000 at December 31,
1996 and 1997, respectively. For each year in the three-year period ended
December 31, 1997, the Company charged approximately $767,000, $839,000 and
$590,000, respectively, of these costs to operations, none of which represented
write-downs to net realizable value of the capitalized costs.
F-9
<PAGE>
(f) 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 shorter of the estimated life of the related assets or related lease
instrument.
(g) 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 $3,021,000 and $5,715,000) was
$34,649,000 and $35,526,000 at December 31, 1996 and 1997, respectively. Other
intangible assets (net of accumulated amortization of $724,000 and $1,231,000)
associated with acquisitions amounted to $ 1,517,000 and $1,321,000 at December
31, 1996 and 1997, respectively, and have been assigned a five year life.
Amortization of goodwill and such other intangibles amounted to $1,461,000,
$2,210,000 and $3,252,000 for the years ended December 31, 1995, 1996 and 1997,
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, 1997.
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
as is the cost to acquire complementary technology. Capitalized software
development costs are amortized over an estimated useful life of 24 to 30
months. Net capitalized costs amounted to $461,000 and $1,853,000 (including
approximately $1.2 million related to the purchase of a procurement technology)
as of December 31, 1996 and 1997, respectively. Amortization expense amounted to
$62,000, $195,000 and $325,000 for each of the three years in the period ended
December 31, 1997, respectively.
The Company has capitalized certain costs that are associated with the
organization of the corporation totaling $152,000. Such costs have been
amortized over an estimated useful life of five years and are fully amortized as
of December 31, 1997. Amortization expense for each of the three years in the
period ended December 31, 1997 amounted to approximately $29,000, $35,000 and
$29,000, respectively.
(h) 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
F-10
<PAGE>
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. In October 1997, the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, Software Revenue Recognition. The Company intends to adopt this
pronouncement in fiscal 1998, as required by the SOP. The Company believes that
its revenue recognition practices are consistent with those required by SOP
97-2.
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.
(i) 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. The
plans contain provisions allowing for discretionary Company contributions.
Discretionary Company contributions to the UK defined contribution plan for the
years ended December 31, 1995, 1996 and 1997 were $306,000, $266,000 and
$263,000 respectively.
(j) 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 indirect 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.
(k) Income Taxes
The Company provides for income taxes in accordance with 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 in effect when these differences are expected
to reverse. (See Note 8.)
(l) 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 currently
effective. 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.)
(m) 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 period presented,
calculated in accordance with SFAS No. 128, Earnings Per Share. This statement
establishes revised standards for computing earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. SFAS No. 128 also requires presentation of diluted EPS on the
face of the statement of operations. Diluted EPS gives effect to all potential
common shares outstanding during the period. As a result, all previously
reported earnings per share have been restated. (See Note 10.)
F-11
<PAGE>
(n) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, lines of credit, accounts payable and
long-term debt. The carrying amounts of the Company's cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. Lines of credit and long-term debt bear interest at
variable market rates therefore, the carrying amounts approximate fair value.
(o) Other Accounting Pronouncements
The Financial Accounting Standards Board issued two new statements in June
1997. SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for the way that public business enterprises report
information and operating segments in annual financial statements and requires
reporting of selected information in interim financial reports. Both statements
are effective for fiscal years beginning after December 15, 1997. The required
disclosures for SFAS No. 130 will be included in the Company's quarterly report
on Form 10-Q for the first quarter of 1998. The required disclosures for SFAS
No. 131 will be included in the Company's 1998 annual report on Form 10-K.
(2) ACQUISITIONS
The Company has consummated the following acquisitions:
Method
of
Entity Date Consideration Accounting
----------------- --------- --------------------- ----------
Computer October 510,345 shares of Pooling
Specialties, Inc. 1994 common stock of
Interests
Computerware, February 1,326,417 shares of Purchase
Inc. 1995 common stock
Lantec June 1995 2,899,820 shares of Purchase
common stock and
$6.4 million of cash
AMA (UK) Limited February 3,247,371 shares of Pooling
1996 common stock of
Interests
Prophet Group December $8.9 million of cash Purchase
Limited 1996
Data Supplies February $1.6 million of cash Purchase
Limited 1997 and an interest bearing
note of $752,000
For the acquisitions accounted for as poolings 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(g)). Results of operations of those companies are included from
their respective dates of acquisition. Unaudited proforma financial information
for Data Supplies Limited is not presented as the amounts involved are not
material to the financial statements.
F-12
<PAGE>
(3) LINES OF CREDIT
At December 31, 1997, the Company had a $120 million U.S. floor plan and
accounts receivable line of credit available from Deutsche Financial Services
Corporation ("DFSC"). The U.S. DFSC line of credit expires in March, 1999 and
provides for direct payment by the lender to certain Company vendors. In the
case of certain U.S. 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 U.S. DFSC line of credit limits the borrowings to
defined percentages of eligible inventories and accounts receivable. The U.S.
DFSC line of credit agreement also contains certain covenants relating to net
income and debt-to-equity ratios. The U.S. DFSC line of credit is secured
primarily by the Company's U.S. inventory and accounts receivable, although
substantially all of the Company's other U.S. assets also are pledged as
collateral on the facility. As of December 31, 1997, the Company was in
compliance with all such covenants. Interest is payable monthly at the prime
rate (8.5% at December 31, 1997) less 1%. As of December 31, 1997, the Company
had $110.0 million outstanding under this line of credit, which approximated the
Company's availability as of that date. As of December 31, 1997, the Company
also had a $3,000,000 unsecured demand note outstanding under its facility with
DFSC on which interest is payable monthly, at a rate of prime plus 1%. In
January 1998, the unsecured demand note was paid off.
The Company also has a $9.5 million floor plan financing agreement with
IBM Credit Corporation to support purchases of IBM products. The Company's
purchases under this arrangement bear interest at the prime rate (8.5% at
December 31, 1997) 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, 1997, there was
approximately $1.2 million outstanding under this line of credit.
At December 31, 1997, Elcom Group Ltd. had a financing arrangement with
Deutsche Financial Services (UK) Ltd. which provides for borrowings of up to
(pound)30 million (approximately $49.5 million based on December 31, 1997
exchange rates) based upon DFSC U.K.'s determination of eligible accounts
receivable. The financing arrangement expires in December, 1998. Borrowings bear
interest at a rate of 1.25% above the National Westminster Bank base rate (7.25%
at December 31, 1997), and are limited to defined percentages of and are secured
primarily by U.K. accounts receivable. The DFSC U.K. facility incorporates the
reporting and compliance covenants of the U.S. DFSC facility. As of December 31,
1997, there was approximately $39.7 million ((pound)24 million) outstanding
under this financing arrangement, which approximated the Company's availability
as of that date.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1996 1997
------- -------
Mortgage payable to a bank, interest at the
greater of the bank's base rate (7.25% at
December 31, 1997) plus 3% or 10.25%, due in
monthly installments of principal plus interest
through June 2005, secured by certain land and buildings $465,000 $410,000
Less current portion 45,000 78,000
======== ========
$420,000 $332,000
======== ========
F-13
<PAGE>
(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 was
converted into common stock prior to or upon completion of the Company's initial
public offering in December, 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.
All holders of preferred stock prior to conversion to common stock entered
into stock purchase agreements with the Company. Pursuant to the terms of such
preferred stock purchase agreements, holders of common stock resulting from
conversion of preferred stock maintain limited registration rights.
(c) Stock Options
The Company's Board of Directors has adopted five stock option plans and
stockholders have approved the adoption of four of such stock option plans, as
amended, with the fifth to be voted upon at the Company's 1998 Annual Meeting
(the "Option Plans"). The Option Plans provide that up to an aggregate of
10,650,000 incentive stock options (ISOs) and nonqualified options may be
granted to key personnel, directors and consultants 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.
One of the Option Plans, the 1995 Nonemployee Director Stock Option 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. 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. The 1995 Nonemployee Director Plan provides
that options are granted at fair market value on date of grant, vest over three
years and have terms not to exceed 10 years.
On April 29, 1997, the Board of Directors adopted and on February 17, 1998
it amended, The 1997 Stock Option Plan of Elcom International, Inc. (the "1997
Plan"). The 1997 Plan provides that an aggregate of up to 2,000,000 ISO's and
nonqualified options to acquire the Company's common stock may be granted to key
personnel, directors and consultants of the Company as determined by the
Compensation Committee. Under the terms of the 1997 Plan, ISO's are granted at
not less than the fair market value of the Company's common stock on the date of
grant. The 1997 Plan also provides that the options are exercisable at varying
dates, as determined by the Compensation Committee, and have terms not to exceed
ten years. To the extent the 1997 Plan is not ratified by the Company's
stockholders at its 1998 Annual Meeting, all ISO's granted theretofore will be
deemed to be non-qualified options, and only nonqualified options may be granted
under the 1997 Plan thereafter.
On April 3, 1997, the Board of Directors voted to reprice all outstanding
options (excluding those issued to Executive Officers of the Company) with an
exercise price in excess of $6.57 per share to an exercise price of $6.57 per
share. The repricing covered a total of 1,292,000 shares with a weighted average
exercise price of $7.95 per share. Such repricing is reflected in the December
31, 1997 options outstanding in the table below.
F-14
<PAGE>
Information relating to the Company's stock option plans during each of
the three years in the period ended December 31, 1997 is as follows:
Option Weighted
Number Price Average
of Shares per Share Exercise Price
---------- ------------- --------------
Outanding, 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
Granted.......................... 2,073,275 5.03 - 8.80 5.84
Terminated....................... (266,517) 4.00 - 14.25 7.19
Exercised........................ (505,447) .11 - 6.57 2.98
----------- ------------- ----------
Outstanding, December 31, 1997.... 7,730,425 $.11 - 8.80 $4.73
=========== ============= ==========
Exercisable, December 31, 1995..... 1,321,739 $.11 - 3.63 $0.92
============ ============= ==========
Exercisable, December 31, 1996..... 2,032,325 $.11 - 10.28 $2.72
============ ============= ==========
Exercisable, December 31, 1997..... 3,665,547 $.11 - 8.80 $3.86
============ ============= ==========
The following table summarizes information about stock options outstanding
as of December 31, 1997:
Options
Options Outstanding Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ ----------- ----------- ------- ----------- --------
$0.11 - 0.39 926,335 5.15 years $ 0.13 926,335 $0.13
1.22 - 3.63 423,108 5.33 years 2.64 421,158 2.63
4.00 1,099,389 7.13 years 4.00 897,362 4.00
4.75 203,800 7.47 years 4.75 106,275 4.75
5.03 1,547,300 9.33 years 5.03 - -
5.06 - 5.75 666,000 8.56 years 5.37 363,011 5.25
5.81 1,099,130 8.67 years 5.81 306,171 5.81
5.88 - 6.53 164,538 8.91 years 6.14 17,987 5.99
6.57 1,064,575 8.29 years 6.57 411,748 6.57
6.75 - 8.80 536,250 8.58 years 7.75 215,500 7.60
========== ========== ======
7,730,425 3,665,547 $3.86
========== ========== ======
As of December 31, 1997, 8,610,864 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.
F-15
<PAGE>
As described in Note 1, the Company adopted the disclosure only
alternative under SFAS No. 123. Had compensation costs for awards in 1995, 1996
and 1997 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:
1995 1996 1997
------ ------- -------
(in thousands, except per share data)
Net income (loss):
As reported $ (904) $5,575 $10,288
Pro forma $(1,581) $3,330 $ 5,981
Net income (loss) per share:
As reported - basic $ (0.05) $ 0.21 $ 0.38
Pro forma - basic $ (0.08) $ 0.13 $ 0.22
As reported - diluted $ (0.05) $ 0.19 $ 0.35
Pro forma - diluted $ (0.08) $ 0.11 $ 0.20
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:
1995 1996 1997
------- ------ -------
Volatility 53.52% 53.52% 60.25%
Risk-free interest rate 6.25% 6.2% 5.94%
Expected life of options 5 years 5 years 5 years
Expected dividend yield 0% 0% 0%
The weighted average fair value per share of options granted during 1995,
1996 and 1997 were $2.57, $3.48 and $3.28 respectively.
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 maintained a stock option plan pursuant to which 187,500 shares of its
common stock were reserved for issuance. On April 30, 1997, the Company canceled
the Elcom Systems, Inc. Stock Option Plan under which no stock options were then
issued or outstanding.
(d) Warrants
In conjunction with the conversion of Series A preferred stock 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 such 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, 1997, all of these warrants are
outstanding and exercisable.
F-16
<PAGE>
(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,
1997, 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 $1,369,000 and $2,200,000 and related accumulated amortization of
$617,300 and $881,885 as of December 31, 1996 and 1997, respectively.
Amortization of leased assets is included in depreciation expense.
The Company has entered into operating leases for office and warehouse
space, software, computers, autos and other equipment. The period covered by the
leases ranges from one to twenty-five years. Certain leases for office and
warehouse space require payment by the Company of all related operating expenses
of the building, including real estate taxes and utilities.
Future minimum rental payments as of December 31, 1997, are as follows:
Capital Operating
Leases Leases
Year Ending December 31, -------- ----------
1998.................................. $774,000 $3,954,000
1999.................................. 776,000 3,537,000
2000.................................. 198,000 3,237,000
2001.................................. -- 1,920,000
2002.................................. -- 861,000
Thereafter............................ -- 7,532,000
---------- -----------
Total minimum lease payments $1,748,000 $21,041,000
===========
Less - Amounts representing interest 148,000
----------
Present value of net minimum lease
payments $1,600,000
Current portion 680,000
===========
Long term portion $ 920,000
===========
Rent expense for operating leases for each of the three years ended
December 31, 1995, 1996 and 1997 amounted to approximately $1,654,000,
$2,808,000 and $4,042,000, respectively.
F-17
<PAGE>
(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, sought 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 were 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 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 contended.
On March 26, 1997, the Company and certain of its subsidiaries entered
into a Final Agreement of Settlement and Mutual Release of All Claims and
Demands with the former owners of Computerware, including the dismissal of all
litigation pending against the Defendants and of their related counterclaims
against the Company. The essence of the settlement includes, a confirmation of
the merger transaction and confirms that the 1,326,417 shares of the Company's
common stock issued in 1995 is the appropriate and final amount of the stock due
and payable in connection with the transaction. In addition, the Kovalciks have
agreed to certain volume and manner of sale limitations on their ability to sell
their shares of the Company's common stock. The settlement of these disputes and
related litigation did not have a significant impact on the Company's results of
operations.
F-18
<PAGE>
(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, 1996 and 1997,
are as follows (in thousands):
Year Ended
December 31, United United
1995 States Kingdom Eliminations Consolidated
--------------- --------- --------- ---------- ----------
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
========= ========= ========= ==========
Year Ended
December 31,
1997
---------------
Net sales $ 473,806 $ 286,330 $ -- $ 760,136
========= ========= ========= =========
Net income $ 5,627 $ 4,661 $ -- $ 10,288
========= ========= ========= =========
Identifiable
assets $ 224,718 $ 107,350 $ -- $ 332,068
========= ========= ========= =========
Substantially all revenues, net income and identifiable assets relate to
the remarketing of personal computer products and related services.
(8) INCOME TAXES
Income (loss) before provision for income taxes consisted of (in thousands):
1995 1996 1997
------- ------ ------
U.S. $(1,978) $1,992 $6,977
Foreign 2,313 6,993 7,800
======= ====== =======
$ 335 $8,985 $14,777
======= ====== =======
F-19
<PAGE>
The provision (benefit) for income taxes consisted of (in thousands):
1995 1996 1997
------ ------ ------
Current tax provision
U.S. Federal $ -- $ -- $250
State 150 718 375
Foreign 1,089 2,692 2,400
------ ------ ------
Total current tax $1,239 $3,410 $3,025
provision ------ ------ ------
Deferred tax provision (benefit)
U.S. Federal -- -- 468
State -- -- 257
Foreign -- -- 739
------ ------ ------
Total deferred -- -- $1,464
tax provision ------ ------ ------
Provision for income $1,239 $3,410 $4,489
taxes ====== ====== ======
The following table summarizes the significant differences between the US
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
1995 1996 1997
------ ------ ------
Statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of U.S. federal tax benefit 29.6 5.3 2.8
Foreign taxes (6.9) (0.8) (1.6)
Utilization of net operating
loss carryforwards -- (29.5) (21.0)
Non deductible goodwill and other 313.2 29.0 16.2
------ ------ ------
369.9% 38.0% 30.4%
------ ------ ------
Deferred tax assets (liabilities)consisted of the
following as of December 31,(in thousands):
1995 1996 1997
------ ------ ------
Deferred tax assets
Depreciation $ - $ 228 $ -
Nondeductible reserves 724 358 -
Capitalized inventory costs - - 497
State income taxes - - 101
Accrued expenses - - 632
Other temporary differences 400 1,121 522
Foreign net operating loss carryforwards 659 - -
Net federal and state operating
loss carryforwards 2,746 1,619 -
====== ====== ========
4,529 3,326 1,752
====== ====== ========
Deferred tax liabilities
Depreciation 170 - 374
Other intangible assets - - 620
Catalog costs - - 1,067
Other temporary differences - 671 834
------ ------ --------
170 671 2,895
------ ------ --------
Valuation allowance 4,359 2,655 -
------ ------ --------
Net deferred tax liabilities $ - $ - $(1,143)
====== ====== ========
F-20
<PAGE>
Prior to 1997, 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. Prior to
its February 1995 acquisition, Computerware (See Note 2) had elected to be taxed
as an S corporation under Section 1362 of the Internal Revenue Code. Therefore,
prior to its acquisition, Computerware's taxable income was reported on its
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
$3,300,000 at December 31, 1997. Such net operating loss carryforwards are
attributable to deductions for nonqualifying stock option exercises and
disqualifying dispositions of common stock acquired upon the exercise of
incentive stock options. The Federal and State net operating loss carryforwards
will begin to expire in 2008.
U.S. income taxes have not been provided on the undistributed net earnings
of the foreign subsidiaries. The Company plans to reinvest substantially all
such earnings outside of the U.S., thus indefinitely postponing the remittance
of taxes, which would be reduced by available foreign tax credits, on such
earnings.
(9)RELATED PARTY TRANSACTIONS
(a) Transactions with Affiliated Company
As of December 31, 1997, the Company owns approximately 22% 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 initial investment. Accounts receivable from
ShopLink at December 31, 1996 and 1997 were $326,135, and $185,250 respectively.
As of September 30, 1997, the Company sold options to acquire its entire
equity ownership interest in ShopLink. The Company received $418,000 in payment
for the options, which may be exercised through March 31, 1999. If exercised,
the Company could receive payments of up to an additional $4.2 million. The
Company has included the $418,000 received in payment for the options in other
deferred liabilities, in the accompanying consolidated balance sheets.
(b) 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 and
$1,082,000 at December 31, 1996 and 1997, respectively. Generally, these loans
are collateralized by the employees' shares of common stock or options to
acquire common stock, and accrue interest either at a fixed rate of 8% or at
rates of prime or prime plus 1%.
F-21
<PAGE>
(10) EARNINGS PER SHARE (in thousands, except per share data)
Basic and diluted earnings per share were calculated as follows:
Basic 1995 1996 1997
- ------------------------- ------- ------- -------
Net income (loss) $(904) $5,575 $10,288
======= ====== =======
Weighted average shares outstanding 18,195 26,363 26,937
======= ====== =======
Basic net income (loss) per share $(0.05) $0.21 $0.38
======= ====== =======
Diluted
- -------------------------
Net income (loss) $(904) $5,575 $10,288
======= ====== =======
Weighted average shares outstanding 18,195 26,363 26,937
Dilutive effect of stock options -- 3,376 2,524
------- ------ ------
Weighted average shares as adjusted 18,195 29,739 29,461
======= ====== ======
Diluted net income (loss) per share $(0.05) $0.19 $0.35
======= ====== ======
Options to purchase 536,000 shares of common stock at prices ranging from
$6.75 to $8.80 were outstanding at December 31, 1997 but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares in 1997.
(11) QUARTERLY INFORMATION FINANCIAL DATA (UNAUDITED)
(in thousands, except per
share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
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............. 2,240 2,514 2,736 3,798 11,288
Net income .................. 1,124 1,152 1,310 1,989 5,575
Basic net income per share... $.04 $.04 $.05 $.08 $.21
Basic weighted average
shares outstanding......... 26,022 26,363 26,495 26,568 26,363
Diluted net income per share. $.04 $.04 $.04 $.07 $.19
Diluted weighted average
shares outstanding......... 29,142 30,079 29,435 29,950 29,739
Year Ended December 31, 1997
Net sales.................... $176,279 $198,157 $198,373 $187,327 $760,136
Gross profit................. 20,202 22,692 24,036 23,464 90,394
Operating profit............. 3,559 4,095 5,764 5,501 18,919
Net income .................. 1,962 2,061 3,412 2,853 10,288
Basic net income per share... $.07 $.08 $.13 $.11 $.38
Basic weighted average
shares outstanding......... 26,739 26,869 27,017 27,117 26,937
Diluted net income per share. $.07 $.07 $.11 $.10 $.35
Diluted weighted average
shares outstanding......... 29,519 28,847 29,481 29,907 29,461
F-22
<PAGE>
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, 1995, 1996 and 1997 S-3
S-1
<PAGE>
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, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997, included in this Form 10-K,
and have issued our report thereon dated February 17, 1998. 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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 17, 1998
S-2
<PAGE>
SCHEDULE II
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1995, 1996 and 1997
(in thousands)
Balance Balance
Allowance for Beginning Utilization/ End
Doubtful Accounts of Period Additions Other (1) of Period
- ---------------------------- --------- --------- --------- ---------
Year ended December 31, 1995 $ 360 $ 472 $ 877 $1,709
======= ======= ======= ======
Year ended December 31, 1996 $1,709 $2,586 $ 17 $4,312
======= ======= ======= ======
Year ended December 31, 1997 $4,312 $3,058 $(1,896) $5,474
======= ======= ======== ======
(1) Includes allowances for doubtful accounts acquired through acquisition, net
of write-offs.
Balance Balance
Deferred Tax Beginning End
Valuation Accounts of Period Additions Utilization of Period
- ---------------------------- --------- --------- --------- ---------
Year ended December 31, 1995 $ 1,973 $ 2,386 $ -- $4,359
======== ======= ======= =======
Year ended December 31, 1996 $ 4,359 $ -- $(1,704) $2,655
======== ======= ======== =======
Year ended December 31, 1997 $ 2,655 $ -- $(2,655) $ --
======== ======= ======== =======
S-3
Exhibit 4.12
Certain Registration Rights Under
Securities Agreement between
Elcom International, Inc. and Robert J. Crowell,
Assigned to:
--------------------------------------------------
As to Number of
Shares of
Assignee Common Stock
Linda M. Cioffi 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
Robert J. Crowell, as Trustee of the 3,749,928
Robert J. Crowell Family Trust
Exhibit 10.5
AGREEMENT OF AMENDMENT
This Agreement is made and entered into this 20th day of October 1997
by and between the Trustees of Oceana Way Associates (hereinafter called
"Landlord") and Catalink Direct, Inc. (hereinafter called "Tenant").
WITNESSETH
WHEREAS, by lease dated July 15, 1993 (hereinafter called the "Lease"),
Tenant leases a premises located at 10 Oceana Way, Norwood, Massachusetts; and
WHEREAS, Landlord and Tenant desire to extend the original term of the
Lease and modify certain provisions thereof;
NOW, THEREFORE, for valuable consideration, the Lease is hereby
modified and amended as follows:
1. In Section 1.1, the definition of Term is deleted and "the period
ending July 31, 2001" is inserted in its place.
2. In Section 1.1 in the definition of Annual Fixed Rent Rate, "and
$115,000.00 thereafter" is deleted and the following inserted in
its place:
"$115,000.00 during the fourth and fifth years, $259,586.25 during
the sixth year, $295,391.25 during the seventh year, and
$331,196.25 thereafter."
3. Section 2.4 is deleted in its entirety.
Except as expressly amended hereinabove, all of the terms, conditions
and provisions of the Lease are ratified and confirmed and shall remain in full
force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this
Agreement of Amendment.
Tenant: Landlord:
Catalink Direct, Inc. Oceana Way Associates
By: /s/ Michael J. McEachern By: /s/ Roger P. Nordblom
As Trustee but not individually
Exhibit 10.15
COLLATERALIZED GUARANTY
TO: DEUTSCHE FINANCIAL SERVICES (UK) LTD. ("DFS")
1. Guaranty and Indemnification. In consideration of financing provided or to be
provided by you to Elcom Group Limited ("Dealer"), and for other good and
valuable consideration received, the undersigned (individually and/or
collectively "Guarantor") unconditionally and absolutely guaranty to DFS, from
property held separately or jointly, the immediate payment when due of all
current and future liabilities owed by Dealer to DFS, whether such liabilities
are direct or indirect ("Liabilities"). Guarantor will pay DFS on demand the
full amount of all sums owed by Dealer to DFS, together with all costs and
expenses (including, without limitation, reasonable attorneys' fees). Guarantor
also indemnifies and holds DFS harmless from and against all (a) losses, costs
and expenses DFS incurs and/or is liable for (including, without limitation,
reasonable attorneys' fees) and (b) claims, actions and demands made by Dealer
or any third party against DFS, which in any way relate to any relationship or
transaction between DFS and Dealer.
2. Consents. This Guaranty will not be released, discharged or affected by, and
Guarantor hereby irrevocably consents to, any: (a) change in the manner, place,
or terms of payment or performance in any current or future agreement between
DFS and Dealer, the release, settlement or compromise of or with any party
liable for the payment or performance thereof or the substitution, release,
non-perfection, impairment, sale or other disposition of any collateral
thereunder; (b) change in Dealer's financial condition; (c) interruption of
relations between Dealer and DFS or Guarantor; (d) claim or action by Dealer
against DFS; and/or (e) increases or decreases in any credit DFS may provide to
Dealer.
3. Unconditional Obligations. Guarantor will pay DFS even if DFS has not: (a)
notified Dealer that it is in default of the Liabilities, and/or that DFS
intends to accelerate or has accelerated the payment of all or any part of the
Liabilities, or (b) exercised any of DFS' rights or remedies against Dealer, any
other person or any current or future collateral. If Dealer hereafter undergoes
any change in its ownership, identity or organizational structure, this Guaranty
will extend to all current and future obligations which such new or changed
legal entity owes to DFS.
4. Waivers. Guarantor irrevocably waives: notice of DFS' acceptance of this
Guaranty, presentment, demand, protest, nonpayment, nonperformance, notice of
breach or default, notice of intent to accelerate and notice of acceleration of
any indebtedness of Dealer, any right of contribution from other guarantors,
dishonor, the amount of indebtedness of Dealer outstanding at any time, the
number and amount of advances made by DFS to Dealer in reliance on this Guaranty
and any claim or action against Dealer; all other demands and notices required
by law; all rights of offset and counterclaims against DFS or Dealer; all
defenses to the enforceability of this Guaranty (including, without limitation,
fraudulent inducement). Guarantor also waives all rights to claim, arbitrate for
or sue for any punitive or exemplary damages. In addition, Guarantor hereby
irrevocably subordinates to DFS any and all of Guarantor's present and future
rights and remedies: (a) of subrogation against Dealer to any of DFS' rights or
remedies against Dealer, (b) of contribution, reimbursement, indemnification and
restoration from Dealer; and (c) to assert any other claim or action against
Dealer directly or indirectly relating to this Guaranty, such subordinations to
last until DFS has been paid in full for all Liabilities. All of Guarantor's
waivers and subordinations herein will survive any termination of this Guaranty.
5. Warranties and Representations. Guarantor has made an independent
investigation of the financial condition of Dealer and gives this Guaranty based
on that investigation and not upon any representation made by DFS. Guarantor has
access to current and future Dealer financial information which enables
Guarantor to remain continuously informed of Dealer's financial condition.
Guarantor represents and warrants to DFS that Guarantor has received and will
receive substantial direct or indirect benefit by making this Guaranty and
incurring the Liabilities. Guarantor also represents and warrants to DFS that
Guarantor is
1
<PAGE>
solvent and Guarantor's execution of this Guaranty will not make Guarantor
insolvent. Guarantor further represents and warrants to DFS that: (a) the
present fair salable value of Guarantor's assets is greater than the amount
required to pay Guarantor's liabilities (including contingent, subordinated,
unmatured and unliquidated liabilities); and (b) Guarantor now has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage and is now solvent and able to pay
its debts as they mature.
6. Grant of Security Interest. To secure payment of all Liabilities and all of
Guarantor's current and future debts to DFS, whether under this Guaranty or any
current or future guaranty or other agreement, Guarantor grants DFS a security
interest in all of Guarantor's inventory, equipment, fixtures, accounts,
contract rights, chattel paper, instruments, reserves, documents, and general
intangibles; all whether now owned or hereafter acquired, and all attachments,
accessories, accessions, substitutions and replacements thereto, and all
proceeds thereof. All such assets are collectively referred to herein as the
"Collateral." All of such terms for which meanings are provided in the Uniform
Commercial Code of the applicable state are used herein with such meanings. All
Collateral financed by DFS for Dealer or Guarantor, and all proceeds thereof,
will be held in trust by Guarantor for DFS.
7. Additional Warranties and Representations. Guarantor warrants and represents
to DFS that: (a) Guarantor has good title to all Collateral; (b) DFS' security
interest in the Collateral financed by DFS for Dealer or Guarantor is not now
and will not become subordinate to the security interest, lien, encumbrance or
claim of any person, other than the security interest granted to Deutsche
Financial Services Corporation; (c) Guarantor will execute all documents DFS
requests to perfect and maintain DFS' security interest in the Collateral; (d)
Guarantor will deliver to DFS immediately upon each request, and DFS may retain,
each Certificate of Title or Statement of Origin issued for Collateral financed
by DFS for Dealer or Guarantor; (e) Guarantor will at all times be duly
organized, existing, in good standing, qualified and licensed to do business in
each state, county, or parish, in which the nature of its business or property
so requires; (f) Guarantor has the right and is duly authorized to enter into
this Guaranty; (g) Guarantor's execution of this Guaranty does not constitute a
breach of any agreement to which Guarantor is now or hereafter becomes bound;
(h) there are and will be no actions or proceedings pending or threatened
against Guarantor which might result in any material adverse change in
Guarantor's financial or business condition or which might in any way adversely
affect any of Guarantor's assets; (i) Guarantor will maintain the Collateral in
good condition and repair; (j) Guarantor has duly filed and will duly file all
tax returns required by law; (k) Guarantor has paid and will pay when due all
taxes, levies, assessments and governmental charges of any nature; (l) Guarantor
will keep and maintain all of its books and records pertaining to the Collateral
at its principal place of business designated below; (m) Guarantor will promptly
supply DFS with such information concerning it as DFS hereafter may reasonably
request; (n) all Collateral will be kept at Dealer's principal place of business
or Guarantor's place of business listed below, and such other locations, if any,
of which Dealer or Guarantor has notified DFS in writing or as listed on any
current or future Exhibit "A" attached to any Agreement for Wholesale Financing
or security agreement between Dealer and DFS or this Guaranty which written
notice(s) to DFS and Exhibit A(s) are incorporated herein by reference; (o)
Guarantor will give DFS thirty (30) days prior written notice of any change in
Guarantor's identity, name, form of business organization, ownership,
management, principal place of business, Collateral locations or other business
locations, and before moving any books and records to any other location; (p)
Guarantor will observe and perform all matters required by any lease, license,
concession or franchise forming part of the Collateral in order to maintain all
the rights of DFS thereunder; (q) Guarantor will advise DFS of the commencement
of material legal proceedings against Dealer or Guarantor; and (r) Guarantor
will comply with all applicable laws and will conduct its business in a manner
which preserves and protects the Collateral and the earnings and incomes
thereof.
8. Negative Covenants. Guarantor will not at any time (without DFS' prior
written consent): (a) other than in the ordinary course of its business, sell,
lease or otherwise dispose of or transfer any of its assets; (b) rent, lease,
2
<PAGE>
demonstrate, consign, or use any Collateral financed by DFS for Dealer or
Guarantor; or (c) 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 Liabilities to DFS and termination of the agreements
between DFS and Dealer in accordance with the terms thereof.
9. Insurance. Guarantor will immediately notify DFS of any loss, theft or damage
to any Collateral. Guarantor will keep the Collateral insured for its full
insurable value under an "all risk" property insurance policy with a company
acceptable to DFS, naming DFS as a lender loss-payee and containing standard
lender's loss payable and termination provisions. Guarantor will provide DFS
with written evidence of such property insurance coverage and lender's
loss-payee endorsement.
10. Financial Statements. Guarantor will provide DFS with financial statements
on it each year within one hundred twenty (120) days after the end of Dealer's
fiscal year end. Guarantor warrants and represents to DFS that all financial
statements and information relating to Guarantor or Dealer which have been or
may hereafter be delivered by Guarantor or Dealer to DFS are true and correct
and have been and will be prepared in accordance with generally accepted
accounting principles consistently applied and, with respect to previously
delivered statements and information, there has been no material adverse change
in the financial or business condition of Guarantor or Dealer since the
submission to DFS, either as of the date of delivery, or if different, the date
specified therein, and Guarantor acknowledges DFS' reliance thereon.
11. Financial Covenants.
(a) Guarantor agrees that 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, 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, Guarantor 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 Guarantor'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 Guarantor'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 Guarantor
has pledged assets to secure performance, whether or not direct
recourse liability has been assumed by Guarantor; provided that
Debt shall not include any liability item on Guarantor's financial
statements
3
<PAGE>
which represents a minority ownership interest in any
Subsidiary; (iv) "Subordinated Debt" means all Debt which is
subordinated to the payment of Guarantor's liabilities to DFS by
an agreement in form and substance satisfactory to DFS plus any
liability item on Guarantor's financial statements which
represents a minority ownership interest in any Subsidiary; and
(v) "Subsidiary" means any corporation in which Guarantor or a
subsidiary of Guarantor owns or controls greater than fifty
percent (50%) of the voting securities, or any partnership or
joint venture in which Guarantor or a subsidiary of Guarantor owns
or controls greater than fifty percent (50%) of the aggregate
equitable interest. 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 Guarantor ("Financial Covenants"). The President or
Chief Financial Officer of Guarantor will certify to DFS by the
10th business day after Guarantor's filing of its 10-Q with the
SEC, or more often if requested by DFS, that Guarantor is in
compliance with the financial covenants as set forth in a form
acceptable to DFS in its sole discretion.
12. Reviews. Guarantor grants DFS an irrevocable license to enter Guarantor's
business locations during normal business hours without notice to Guarantor to:
(a) account for and inspect all Collateral; (b) verify Guarantor's compliance
with this Guaranty; and (c) examine and copy Guarantor's books and records
related to the Collateral.
13. Default. Guarantor will be in default under this Guaranty if: (a) Dealer
breaches any terms, warranties or representations contained in any agreement
between DFS and Dealer; (b) Guarantor breaches any terms, warranties or
representations contained herein or in any other agreement between Guarantor and
DFS; (c) any representation, statement, report or certificate made or delivered
by Dealer or Guarantor to DFS is not accurate when made; (d) Dealer fails to pay
any portion of Dealer's debts to DFS when due and payable under any agreement
between DFS and Dealer; (e) Guarantor fails to pay any portion of Guarantor's
debts to DFS when due and payable under any agreement between DFS and Guarantor;
(f) Dealer or Guarantor abandons any Collateral; (g) Dealer or Guarantor is or
becomes in default in the payment of any debt owed to any third party; (h) a
money judgment issues against Dealer or Guarantor; (i) an attachment, sale or
seizure issues or is executed against any assets of Dealer or Guarantor; (j) Any
general partner dies while Guarantor is a general or limited partnership, or any
member dies while Guarantor is a limited liability company, as applicable; (k)
Dealer or Guarantor shall cease existence as a corporation, partnership, or
limited liability company, as applicable; (l) Dealer or Guarantor ceases or
suspends business; (m) Dealer, Guarantor or any member while Dealer or Guarantor
is a limited liability company, as applicable, makes a general assignment for
the benefit of creditors; (n) Dealer, Guarantor or any member while Dealer or
Guarantor is a limited liability company, as applicable, becomes insolvent or
voluntarily or involuntarily becomes subject to the Federal Bankruptcy Code, any
state insolvency law or any similar law; (o) any receiver is appointed for any
assets of Dealer, Guarantor or any member while Dealer or Guarantor is a limited
liability company, as applicable; (p) this Guaranty or any other guaranty of
Dealer's debts to DFS is terminated; (q) Dealer or Guarantor loses any
franchise, permission, license or right to sell or deal in any Collateral which
DFS finances for Dealer or Guarantor; or (r) Dealer or Guarantor misrepresents
their respective financial condition or organizational structure.
14. Rights of DFS Upon Default. In the event of a default:
(a) DFS may at any time at DFS' election, without notice or demand to
Dealer or Guarantor, do any one or more of the following: declare
all or any part of the debt Guarantor owes DFS, whether
contingent or noncontingent and whether arising hereunder or
under any other agreement between Guarantor and DFS, 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,
4
<PAGE>
transfer and dispose of the Collateral); and/or cease
extending any additional credit to Guarantor, if applicable, or
Dealer.
(b) Guarantor 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.
(c) Upon DFS' oral or written demand, Guarantor 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
Guarantor, take immediate possession of the Collateral together
with all related documents.
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.
15. Sale of Collateral. Guarantor 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. Guarantor agrees that the purchase of any Collateral by a
vendor, as provided in any agreement between DFS and the vendor, is a
commercially reasonable disposition and private sale of such Collateral under
the Uniform Commercial Code, and no request for bids shall be required.
Guarantor 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). Guarantor 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 Guaranty.
16. Power of Attorney. Guarantor grants DFS an irrevocable power of attorney to:
execute or endorse on Guarantor's behalf any checks, financing statements,
instruments, Certificates of Title and Statements of Origin pertaining to the
Collateral; supply any omitted information and correct errors in any documents
between DFS and Guarantor; initiate and settle any insurance claim pertaining to
the Collateral; and do anything to preserve and protect the Collateral and DFS'
rights and interest therein.
17. Termination. Guarantor may terminate this Guaranty by a written notice to
DFS, the termination to be effective sixty (60) days after DFS receives and
acknowledges it, but the termination will not terminate Guarantor's obligations
hereunder for Liabilities arising prior to the effective termination date.
18. Binding Effect. Guarantor cannot assign this Guaranty without DFS' prior
written consent, although DFS may assign its interest herein without notice to,
or consent from, Guarantor. This Guaranty will protect and bind DFS' and
Guarantor's respective heirs, representatives, successors and assigns.
19. Notices. Except as otherwise stated herein, all notices, arbitration claims,
responses, requests and documents will be sufficiently given or served if mailed
or delivered: (a) to Guarantor at its address below; (b) to DFS at 655 Maryville
Centre Drive, St. Louis, Missouri 63141-5832, Attention: General Counsel; or
such other address as the parties may specify from time to time in writing.
20. Severability. If any provision of this Guaranty or its application is
invalid or unenforceable, the remainder of this Guaranty will not be impaired or
affected and will remain binding and enforceable.
21. Supplement. If Guarantor and DFS have heretofore executed other guaranties
or agreements in connection with all or any part of the Collateral, this
Guaranty
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shall supplement each and every other such guaranty and agreement previously
executed by and between Guarantor and DFS, and in that event this Guaranty shall
neither be deemed a novation nor a termination of such previously executed
guaranty or agreement nor shall execution of this Guaranty be deemed a
satisfaction of any obligation secured by such previously executed guaranty or
agreement.
22. Receipt of Guaranty. Guarantor has read and understood all terms and
provisions of this Guaranty. Guarantor acknowledges receipt of a true copy of
this Guaranty and of all agreements between DFS and Dealer. The meanings of all
terms herein are equally applicable to both the singular and plural forms of
such terms. Notwithstanding anything herein to the contrary: (a) DFS may rely on
any facsimile copy, electronic data transmission or electronic data storage of
this Guaranty, any agreement between DFS and Dealer, any Statement of
Transaction, billing statement, invoice from a vendor, financial statements or
other report, 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 Guaranty or
any other agreement between DFS and Guarantor, and for all evidentiary purposes
before any arbitrator, court or other adjudicatory authority.
23. NO ORAL AGREEMENTS. Oral agreements or commitments to loan money, extend
credit or to forbear from enforcing repayment of a debt including promises to
extend or renew such debt are not enforceable. To protect Guarantor and DFS from
misunderstanding or disappointment, any agreements Guarantor and DFS or Dealer
and DFS reach covering such matters are contained in this Guaranty, an Agreement
for Wholesale Financing, or another agreement between Guarantor and DFS or
between Dealer and DFS, which agreement(s) is (are) the complete and exclusive
statement of the agreement between Guarantor and DFS and between Dealer and DFS,
except as specifically provided herein, in such other agreement(s) or as
Guarantor and DFS or Dealer and DFS may later agree in writing.
24. Miscellaneous. This Guaranty will survive any federal and/or state
bankruptcy or insolvency action involving Dealer. If DFS is required in any
action involving Dealer to return or rescind any payment made to or value
received by DFS from or for the account of Dealer, this Guaranty will remain in
full force and effect and will be automatically reinstated without any further
action by DFS and notwithstanding any termination of this Guaranty or DFS'
release of Guarantor. Any delay or failure by DFS, or DFS' successors or
assigns, in exercising any of DFS' rights or remedies hereunder will not waive
any such rights or remedies. If Guarantor 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 directly owed by Guarantor to DFS, which
shall be subject to finance charges at the highest rate allowed by law; and (b)
due and payable immediately in full. Guarantor agrees to pay all of DFS'
reasonable attorneys' fees and expenses incurred by DFS in enforcing DFS' rights
hereunder. The Section titles used in this Guaranty are for convenience only and
do not define or limit the contents of any Section.
25. BINDING ARBITRATION.
25.1 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
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
Guaranty, and whether directly or indirectly relating to: (a) this Guaranty
and/or any amendments and addenda
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hereto, or the breach, invalidity or termination hereof; (b) any previous or
subsequent agreement between DFS and us; (c) any act committed by DFS or by any
parent company, subsidiary or affiliated company of DFS (the "DFS Companies"),
or by an 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 Dealer or DFS and
Guarantor; and/or (d) any other relationship, transaction, dealing or agreement
between DFS and Dealer or DFS and Guarantor (collectively the "Disputes"), will
be subject to and resolved by binding arbitration.
25.2 Administrative Body. All arbitration hereunder will be conducted in
accordance with The Commercial Arbitration Rules of 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 arbitrations will be in the
Division of the Federal Judicial District in which AAA maintains a regional
office that is closest to Dealer.
25.3 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.
25.4 Exemplary or Punitive Damages. The Arbitrator(s) will not
have the authority to award exemplary or punitive damages.
25.5 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 Guaranty
may be entered as a judgment or order in any state or federal court and may be
entered as a judgment or order within the federal judicial district which
includes the residence of the party against whom such award or order was
entered. This Guaranty concerns transactions involving commerce among the
several states. The Federal Arbitration Act ("FAA") will govern all
arbitration(s) and confirmation proceedings hereunder.
25.6 Prejudgment and Provisional Remedies. Nothing herein will be
construed to prevent DFS' or Guarantor'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
Guarantor's right to compel arbitration of any Dispute.
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25.7 Attorneys' Fees. If either Guarantor or DFS bring any other action
for judicial relief with respect to any Dispute (other than those set forth in
the immediately preceding paragraph), the party bringing such action will be
liable for and immediately pay all of the other party's costs and expenses
(including attorneys' fees) incurred to stay or dismiss such action and remove
or refer such Dispute to arbitration. If either Guarantor or DFS bring or appeal
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.
25.8 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
with respect to such Dispute.
25.9 Survival After Termination. The agreement to arbitrate will
survive the termination of this Guaranty.
26. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS GUARANTY 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. DFS AND GUARANTOR WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING.
27. Governing Law. Guarantor acknowledges and agrees that this Guaranty and all
agreements between Dealer and DFS have been substantially negotiated, and will
be performed, in the state of Massachusetts. Accordingly, Guarantor 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 will control and govern all arbitration proceedings hereunder.
THIS GUARANTY CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGES
WAIVER PROVISIONS.
Date: December 1, 1997
ELCOM INTERNATIONAL, INC.
By: /s/ Laurence F. Mulhern
[Print Name: Laurence F. Mulhern ]
Title: CFO
By:
[Print Name: ]
Title:
Address of Guarantor(s):
10 Oceana Way
Norwood, MA 02062
8
Exhibit 10.20
EMPLOYEE BENEFITS AGREEMENT
This Employee Benefits Agreement (the "Agreement") is entered into as
of the 1st day of August, 1997, by and between Elcom Systems, Inc. (the
"Company") and Peter McAree ("Employee").
WITNESSETH:
WHEREAS, Employee is a key employee of the Company; and
WHEREAS, the Company considers that providing Employee with certain
employment benefits will operate as an incentive for Employee during the period
of this Agreement, during which time Elcom International, Inc., the parent
corporation of the Company (the "Parent") may undergo a change in control or
ownership, or may cause a change in control or ownership of the Company; and
WHEREAS, this Agreement is intended to provide benefits in the event of
a change in control or ownership of Parent or the Company prior to January 1,
1999 (the "Expiration Date"); and
WHEREAS, this Agreement is also intended to provide certain benefits in
the event of a termination of Employee under certain circumstances prior to the
Expiration Date.
NOW THEREFORE, to induce Employee to remain productive, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Company and Employee agree as follows:
1. Definitions.
(a) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) The stockholders of the Parent or the Company approve (A) a
merger or consolidation of the Parent or the Company with
any other corporation, other than a merger or consolidation
which would result in the voting securities of the Parent or
the Company, as applicable, outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than eighty percent (80%) of the
combined voting power of the voting securities of the Parent
or the Company, as applicable, or such surviving entity
outstanding immediately after such merger or consolidation,
or (B) a plan of complete liquidation of the Parent or the
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Company or an agreement for the sale or disposition by the
Parent or the Company of all or substantially all the assets
of the Parent or the Company to other than the Parent or any
of its subsidiaries; or
(ii) During any period of one (1) year, a majority of the Board
of Directors of the Parent or the Company ceases to be
comprised of "Continuing Directors," which term, for
purposes of this Subsection 1(a), shall mean individuals who
at the beginning of any period of one (1) year (not
including any period which ended prior to the date of this
Agreement) constitute the Board and any new director(s)
whose election by the Board or nomination for election by
the Parent's or the Company's stockholders, as applicable,
was approved by a vote of at least a majority of the
directors then still in office who either were directors at
the beginning of the period or whose election or nomination
for election was previously so approved; or
(iii) Any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Parent or of the Company representing
fifty percent (50%) or more of the combined voting power of
such entity's then outstanding securities; provided that a
Change of Control shall not be deemed to occur under this
clause (iii) by reason of the acquisition of securities by
the Parent, the Company or an employee benefit plan (or any
trust funding such a plan) maintained by the Parent or the
Company.
(b) "Severance Payments" shall mean any payment or distribution of
compensation or benefits made pursuant to Section 3 of this
Agreement.
(c) "Separation Date" shall mean the date, if any, of termination
of Employee's employment relationship with the Company.
(d) "Voluntary Separation" shall mean the voluntary resignation by
Employee from employment with the Company other than a
voluntary resignation following either of the following two
events:
(i) any future reduction in Employee's base salary; or
(ii) a future relocation of Employee's place of employment
which results in an increase of twenty-five (25)
miles or more in the distance from Employee's
residence to Employee's place of employment.
(e) "Termination With Cause" shall mean any termination of
Employee by the Company for malfeasance, insubordination,
theft, fraud, embezzlement,
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conviction of a felony, being under the influence of
alcohol or unlawful drugs during business hours, the
violation of Section 4 of this Agreement or of any other
agreement with the Company, the removal of any equipment
without the Company's written permission, the violation of
any state or federal law, repeated tardiness without
acceptable reasons therefor, and/or the failure to comply
with any of the Company's written policies and procedures.
2. Termination of Employee.
(a) Related to Change of Control. In the event of Employee's
termination of employment with the Company within twelve (12)
months following the date on which there is a Change of
Control of the Parent or of the Company, subject to Section 13
hereof, the Company shall provide Employee with the Severance
Payments outlined in Section 3(a)(i) and 3(b), unless the
termination is a Termination With Cause or a Voluntary
Separation.
(b) Upon Certain Other Terminations. In the event that no Change
of Control of the Parent or the Company has occurred and the
Company terminates Employee's employment relationship prior to
the Expiration Date, unless such termination is a Termination
With Cause, subject to Section 13 hereof, the Company shall
provide Employee with the Severance Payments outlined in
Section 3(a)(ii) and 3(b).
(c) No Duplication. In no event shall Employee be entitled to
receive benefits or Severance Payments under both Section 2(a)
and Section 2(b) hereof.
3. Severance Payments.
(a) Compensation.
(i) Related to Change of Control. In the event that
Employee is entitled to Severance Payments pursuant
to the terms of Section 2(a), the Company shall pay
Employee an amount equal to twelve (12) months base
salary as of the Separation Date, without giving
effect to any future reduction in base salary prior
to the Separation Date, payable in accordance with
the provisions of Section 13 hereof.
(ii) Upon Certain Other Terminations. In the event that
Employee is entitled to Severance Payments pursuant
to the terms of Section 2(b), the Company shall pay
Employee an amount equal to twelve (12) months base
salary as of the Separation Date, without giving
effect to any future reduction in base salary prior
to the Separation Date, payable in accordance with
the provisions of Section 13 hereof.
(iii) Payment of Compensation. Subject to Section 13
hereof, such payments shall be made in accordance
with the Company's normal payroll practices
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as such practices shall be in effect from time to
time, provided, however, that the Company may elect
to accelerate payments required under this Section 3(a).
(b) Employee Benefits. In the event that Employee is entitled to
Severance Payments pursuant to the terms of Section 2,
Employee shall be entitled to the following benefits, subject
to Section 13 hereof:
(i) Vacation. Any accrued vacation pay due but not yet
taken at the Separation Date shall be paid to
Employee within thirty (30) days following the
Separation Date.
(ii) Health Benefits. If Employee participated in any health
benefit plan in effect immediately prior to the
Separation Date, and if Employee elects to continue
participating in such plan pursuant to the terms of
said plan and the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA"), the Company shall pay for
its normal portion of the costs of Employee's
participation in such plan from the Separation Date
until the earlier of: (a) the date which is three
months following the Separation Date; or (b) the date
of Employee's eligibility in any health benefit plan
offered by Employee's new employer, if any. Employee
shall notify the Company in writing within thirty (30)
days of any new employment.
(iii) Retirement and Benefit Plans. Notwithstanding
anything in this Agreement to the contrary,
Employee's rights in any retirement, pension, stock
option or profit-sharing plans offered by the Parent
or the Company shall be governed by the rules of such
plans as well as by applicable law.
(iv) Outplacement Assistance. The Company will provide
Employee up to two (2) months of employment
outplacement services with a Company-selected
service.
4. Continuing Obligations. In order to induce the Company to enter into
this Agreement, Employee hereby agrees that all documents, records, techniques,
business secrets and other information which have come into Employee's
possession from time to time during Employee's continued employment by the
Company or which may come into Employee's possession during Employee's
employment hereunder, shall be deemed to be confidential and proprietary to the
Company, and Employee further agrees to retain in confidence any confidential
information known to Employee concerning the Company, the Parent, any subsidiary
of the Parent, and their respective businesses so long as such information is
not publicly disclosed. Employee further agrees to cooperate fully as requested
from time to time by the Company's Board of Directors or Company Management in
connection with any transaction involving the possible sale of the Parent or of
the Company. Employee further agrees not to speak about a possible sale of the
Parent or of the Company with or otherwise respond to requests to or from any
third parties involving the possible sale of the Parent or of the Company,
unless specifically
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authorized to do so by the Company. The obligations of Employee under this
Section 4 shall be in addition to, and shall not limit, any other obligation of
Employee to the Company with respect to the matters set forth herein or
otherwise.
5. Assignments and Transfers. Employee agrees that Employee will not
assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or
involuntarily, or by operation of law, any rights or obligations under this
Agreement, nor shall Employee's rights be subject to encumbrance or the claims
of creditors. Any purported assignment shall be null and void. This Agreement
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. This Agreement shall be binding upon and shall inure to
the benefit of the Company and its successors and assigns, and the Company shall
require any successor or assign to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place,
except no assumption shall be required if this Agreement is automatically
assumed by operation of law. The term "the Company" as used herein shall include
such successors and assigns. The term "successors and assigns" as used herein
shall include a corporation or other entity acquiring at least 51% of the
outstanding shares of the Company or all or substantially all of the assets and
business of the Company.
6. Notices. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given and received when delivered, including by a national
overnight courier service or when mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to the
Company at:
Elcom Systems, Inc.
10 Oceana Way
Norwood, Massachusetts 02062
Attn: Chief Financial Officer
and to Employee at:
Peter McAree
17 Blackthorne Circle
Hopkinton, MA 01748
or such address as either party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
7. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
8. At-Will Employment. At the present time, the Company and Employee
have, and will continue to have, an at-will employment relationship. That is,
either party can terminate the
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employment relationship for any reason at any time. Nothing contained in this
Agreement shall be interpreted to amend or alter this at-will employment
relationship.
9. Entire Agreement. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to Employee's
severance benefits and supersedes any previous or contemporaneous agreements.
10. Amendments; Waivers. This Agreement may not be modified, amended,
or terminated except by an instrument in writing, signed by Employee and by a
duly authorized representative of the Company other than Employee. No failure to
exercise and no delay in exercising any right, remedy, or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy, or power provided herein or by law
or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable, or void, the
remainder of this Agreement and such provisions as applied to other persons,
places, and circumstances shall remain in full force and effect. Notwithstanding
any other provision in this Agreement to the contrary, if Employee breaches any
term of this Agreement, the Company may immediately cease making Severance
Payments.
12. Arbitration. The parties agree to submit any unresolved substantial
dispute arising under this Agreement to arbitration. Arbitration shall be by a
single arbitrator in the Norwood, Massachusetts area experienced in the matters
at issue selected by the Company and Employee in accordance with the commercial
arbitration rules of the American Arbitration Association. The decision of the
arbitrator shall be final and binding as to any matter submitted to arbitration
under this Agreement. All costs and expenses incurred in connection with any
such arbitration proceeding shall be borne by the party against whom the
decision is rendered as provided by the arbitrator.
13. Release. As a condition to and in consideration for the receipt of
Severance Payments to which Employee may be entitled pursuant to Section 3
hereof, Employee agrees to execute a Release Agreement with the Company, in
substantially the same form as that attached hereto as Exhibit A (the "Release
Agreement"), within the 30-day period beginning 21 days after Employee's
Separation Date. The Company shall not be obligated to make any Severance
Payments unless and until the Company shall have received from Employee a
validly executed Release Agreement that shall not have been revoked by Employee
during the applicable Revocation Period as such term is defined in the Release
Agreement, in compliance with applicable law. Provided that Company receives
from Employee a validly executed Release Agreement which is not revoked during
the applicable Revocation Period, the Company agrees to commence making any
Severance Payments theretofore withheld within 30 days of the expiration of such
Revocation Period.
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14. Expiration Date. This Agreement shall be null and void if an event
which would entitle Employee to Severance Payments does not occur on or before
the Expiration Date.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year set forth above.
ELCOM SYSTEMS, INC.
("Company")
By /s/ Robert J. Crowell
Robert J. Crowell
Chairman and Chief Executive Officer
By /s/ Peter McAree
Peter McAree
("Employee")
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RELEASE AGREEMENT
This Release Agreement (the "Agreement") is entered into as of the
Effective Date of the Agreement stated on the signature page below, by and
between Elcom Systems, Inc. (the "Company") and Peter McAree ("Employee").
WITNESSETH:
WHEREAS, Employee and the Company have entered into a Employee Benefits
Agreement dated as of August 1, 1997 (the "Employee Benefits Agreement"); and
WHEREAS, Employee is entitled to certain benefits under the Employee
Benefits Agreement, pursuant to Section 13 of which payment of such benefits is
made conditional upon and in consideration for Employee's valid execution of a
Release Agreement, all as more completely described in the Employee Benefits
Agreement. (Capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Employee Benefits Agreement.)
NOW THEREFORE, to induce the Company to make the Severance Payments
pursuant to the Employee Benefits Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Employee agree as follows:
1. Release. Employee does hereby, for Employee and for Employee's
heirs, executors, successors and assigns, release and forever discharge the
Company, Elcom International, Inc., the parent corporation of the Company
("Elcom"), and the subsidiaries, divisions and affiliated businesses of either
the Company or Elcom, together with all of their officers, directors,
management, representatives, employees, shareholders, agents, successors,
assigns, attorneys and other affiliated persons, both known and unknown, in both
their personal and agency capacities (collectively, the "Releasees"), of and
from any and all claims, demands, actions or causes of action, damages, or suits
at law or equity, of whatsoever kind or nature, including, but not limited to,
all claims and/or demands for back pay, reinstatement, hire or re-hire, front
pay, group insurance or employee benefits of whatsoever kind (except as to
rights expressly provided for herein and in the Employee Benefits Agreement),
claims for monies and/or expenses, any claims arising out of or relating to the
cessation of Employee's employment with the Company, the sale of the stock or
assets of the Company or of Elcom, any claims for failing to obtain employment
at any other company or with any other person or employer, and/or demands for
attorneys' fees and legal expenses that Employee has or may have by reason of
any matter or thing arising out of, or in any way connected with, directly or
indirectly, any act and/or omission that has occurred prior to the Effective
Date of Agreement (as hereinafter defined). Employee further agrees not to
directly or indirectly pursue or initiate any action or legal proceeding of any
kind against the Releasees arising out of or related to the claims released in
the preceding sentence of this Section 1, or the sale of the stock or assets of
the Company or Elcom
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and also waives any right to recover as a result of any such proceedings
initiated on Employee's behalf. Notwithstanding the foregoing, Employee and the
Company agree and acknowledge that this Release shall not apply to the
obligations of the Company arising solely under this Agreement or under the
Employee Benefits Agreement.
2. ADEA. Employee recognizes and understands that, by executing this
Agreement, employee shall be releasing the Releasees from any and all claims
that Employee now has, or subsequently may have, under the Age Discrimination in
Employment Act of 1967, 19 U.S.C. ss.ss.621 et seq., as amended (the "ADEA"), by
reason of any matter or thing arising out of, or in any way connected with,
directly or indirectly, any acts or omissions which have occurred prior to and
including the Effective Date of this Agreement. In other words, Employee will
have none of the legal rights against the aforementioned Releasees that Employee
would have had otherwise under federal age discrimination law by signing this
Agreement.
3. "Consideration Period." The Company hereby notifies Employee of his
right to consult with Employee's chosen legal counsel before executing this
Agreement. The Company shall afford, and Employee acknowledges receiving, not
less than twenty-one (21) calendar days in which to consider this Agreement to
insure that Employee's execution of this Agreement is knowing and voluntary. In
signing below, Employee expressly acknowledges that Employee has had at least
twenty-one (21) days to consider this Agreement and that Employee's execution of
same is with full knowledge of the consequences thereof and is of Employee's own
free will.
4. Revocation Period. Employee and the Company agree and recognize
that, for a period of seven (7) calendar days following Employee's execution of
this Agreement (the "Revocation Period"), Employee may revoke this Agreement by
providing written notice revoking the same, within the Revocation Period, to
Elcom Systems, Inc., 10 Oceana Way, Norwood, Massachusetts 02602, Attn: Chief
Financial Officer. Such revocation of this Agreement by Employee will
automatically revoke the Severance Payments provided for in the Employee
Benefits Agreement and Employee will not be entitled to any of the amounts
described therein.
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IN WITNESS WHEREOF, Employee and the Company have executed this
Agreement effective and binding as of the Effective Date.
Date of Execution by Employee
"Effective Date of Agreement" is AGREED TO AND ACCEPTED BY
the 8th calendar day after this Date EMPLOYEE
Peter McAree
Execution witnessed by:
Date of Execution by the Company AGREED TO AND ACCEPTED BY
THE COMPANY
ELCOM SYSTEMS, INC.
By:
Its:
Execution witnessed by:
- -------------------------------------------------------------------------------
Date of Receipt by Employee RECEIPT ACKNOWLEDGED BY
EMPLOYEE
Peter McAree
Receipt witnessed by:
Page 3
Exhibit 10.22
First Amendment To Employment Agreement
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made
as of the 5th day of November 1997, by and between Elcom International, Inc., a
Delaware corporation with its principal place of business at Ten Oceana Way,
Norwood, Massachusetts 02062 ("Elcom" or the "Company"), and James Rousou (the
"Executive").
WITNESSETH:
WHEREAS, the Executive and the Company have entered into an
Employment Agreement as of April 1, 1996 (the "Original Agreement" and together
with this Amendment, the "Agreement"), which the parties recognize has become
somewhat out of date; and
WHEREAS, the Executive is considered a key employee of the
Company; and
WHEREAS, it is the desire of the Company and Executive, in
order to insure Executive's continued employment with the Company, to amend the
existing employment agreement in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the Company and the Executive agree as follows:
The Sections numbered 1, 2, 3, 5B, 5E, 7 and 14 are hereby
deleted in their entirety from the Original Agreement and replaced with the
sections of this Amendment that are correspondingly numbered. Certain of such
deleted sections have been combined with other sections of this Amendment and,
accordingly, have not been separately replaced. References in the Original
Agreement to Sections deleted therefrom shall be deemed to be references to the
specific replacement Section and/or the contextually consistent Section
contained in this
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Amendment. Capitalized terms not otherwise defined herein shall have the meaning
ascribed to them in the Original Agreement.
1. Duties. The Company hereby employs Executive to be Co-Chief
Executive Officer of Catalink Direct, Inc. ("Catalink"), and Corporate Executive
Vice President of the Company. Executive shall report directly to Robert J.
Crowell as the Chairman of Catalink and in addition, as the Chairman and Chief
Executive Officer of Elcom International, Inc. ("Chairman"). During the course
of his employment, Executive shall have responsibility to perform such duties,
consistent with such position, as generally described below and as may be
assigned to him by the Chairman and/or Board of Directors of the Company. During
the Employment Period, Executive agrees to devote full business time and best
efforts to the business activities and welfare of the Company except as
otherwise mutually agreed.
The Company recognizes that the Executive can perform a significant
amount of his duties via telephone and electronic mail from any location;
however, as Executive has requested that he be allowed to travel between various
Company locations in the U.S., U.K., and his new home in Guernsey, his business
travel schedule might result in a higher than normal proportion of travel time
impinging the Executive's work week. If this occurs, Executive agrees that,
following any work week where such abnormal travel time has occurred, the
Executive shall report the amount of such time via electronic mail, by the
Wednesday of the following week. The Chairman shall then, at his discretion,
have the ability to allocate such time against Executive's accrued vacation
time, or if vacation time is not available, the Chairman may, at his sole
discretion, decrease Executive's next payment of base salary pro-rata to reflect
the amount of such abnormal travel time.
Executive shall have Co-Chief Executive Officer ("Co-CEO")
responsibilities for Catalink with Robert J. Crowell, who is also the Chairman.
These responsibilities will include line responsibilities for Catalink's U.K.
and U.S. operations, subject to consent where appropriate with the Chairman, on
any significant issues relating to Catalink's U.S. sales or operations.
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When the Executive cannot be reached in a timely fashion, the Chairman shall use
his judgment as to what, if any, action should be taken in any set of
circumstances.
Executive is aware that the Company is currently conducting an
executive search for a President and CEO for Catalink (U.S.). Executive
understands that when said search is successfully completed, Executive's duties
and responsibilities will change, as defined by the Chairman who, as in the
Original Agreement, reserves the right to reassign duties of the Executive as
appropriate or necessary except that Executive's business location or work place
may not be changed to any location (other than the Executive's then main place
of employment) without the Executive's consent. It is currently anticipated the
search for a new President and CEO for Catalink (U.S.) will be completed by
April 15, 1998. Upon completion of the search and hiring of a new President and
CEO for Catalink (U.S.), Executive will fully cooperate with the transitioning
of his U.S. responsibilities to the new President and CEO of Catalink (U.S.). As
of April 15, 1998, or such other date that may be mutually agreed to in writing
between the Executive and the Chairman (the "Change Date"), Executive will cease
to be the President and Co-CEO of Catalink and will continue as a Corporate
Executive Vice President of the Company. At such time, Executive's
responsibilities will initially be to direct and review the strategies, policies
and operational performance of Catalink's non-U.S. operations.
2. Term. This Amendment is effective as of December 15, 1997 and covers
the period through December 31, 1998 and will automatically renew each January
1, for another calendar year unless the Executive or the Company notifies the
other party no later than six (6) months prior to the end of each employment
year (ending December 31st), that such party is terminating the Agreement. After
an acquisition or merger where the Company is not the surviving entity or where
the Company is the surviving entity but in which the Company's stockholders at
the time of the merger cease to own 50% or more of the surviving company's
voting capital stock after the merger, Executive, upon six (6) months notice may
terminate the Agreement, and the Agreement shall terminate six months from such
notice date (or such later date as specified in such notice) whereupon, the
duties of the Company and the Executive, one to the other, under this Agreement
shall terminate, except that the provisions of Sections 9 through
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13 hereof shall survive any such termination; except in the case of termination
for "Good Reason" as described in Section 7, which shall occur as provided for
in that Section. In order to assure the Company that it has access to the
Executive's significant expertise and knowledge base, within five (5) days
thereafter, the Company and the Executive shall enter into a Consulting
Agreement providing for Executive's specified availability for a two (2) year
period for $40,000 per year pursuant to the form of Consulting Agreement
attached hereto as Exhibit A.
3. Salary. During the course of employment (the "Employment Period"),
the Company will pay Executive for his performance of the duties specified
herein an annual base salary of at least $300,000 per year payable in the manner
that the Company normally pays its employees until the Change Date. From and
after the Change Date, Executive's base salary will continue based upon
Executive's time commitment and duties, and is initially expected to be
approximately $120,000 per year.
5. Benefits.
B. Additional Compensation. Executive shall be eligible to
participate in the Company's Executive Profit Performance Bonus Program ("EPPB")
during his employment. The extent of participation is subject to the terms of
the EPPB and shall be determined by the Compensation Committee of the Company's
Board of Directors for each year (1998 participation level has been set at 8.8%
of the bonus pool, if any). Executive's participation in the EPPB shall
supersede his participation in any existing bonus plan(s). The Executive shall
also be eligible to participate in incentive, deferred compensation, stock
option, supplemental retirement and any other similar plans, if any, maintained
by the Company for the benefit of its executives generally, in accordance with
the eligibility and other terms thereof and at the discretion and written
approval of the Board of Directors and/or the Compensation Committee thereof.
E. Payment of Compensation. The annual Base Salary described
in Section 3 hereof shall be paid throughout the term of this Agreement in the
same manner and at the same times as the Company pays its other personnel,
subject to the following:
i. Such compensation shall not terminate, but rather
shall be payable to the extent of two times the amount
of the Executive's then applicable annual
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<PAGE>
Base Salary, upon the Executive's death or disability
as described in Section 6A and B of this
Agreement, respectively; and
ii. Such compensation shall terminate upon either (a) the
Executive's resignation other than for "Good Reason"
in the circumstances described in Section 7 hereof, or
(b) the termination of the Executive's employment by
the Company "For Cause" as described in Section 6E of
this Agreement; and
iii. Such compensation shall not terminate, but rather
shall be payable to the extent of two times the amount
of the Executive's then applicable annual Base Salary,
in a lump sum within ten (10) days of termination,
upon either (a) the Executive's resignation for "Good
Reason" in the circumstances described in Section 7 of
this Agreement, or (b) the termination of the
Executive's employment by the Company other than "For
Cause" (as described in Section 6E hereof); and
iv. Except in the case of (a) Executive's termination For
Cause (as described in Section 6E of this Agreement) or
(b) Executive's resignation other than for "Good
Reason" (as described in Section 7 of this Agreement),
Executive shall have the choice of exercising all
vested stock options up to the longer of (i) one year
after his termination of employment, or (ii) the
exercise period following such termination provided for
in the applicable option agreement, provided that this
provision shall not extend the term of any of
Executive's options beyond their term as initially
granted and this provision shall only apply to the
extent the Company can cause such post-employment
exercise to be allowed (including following the request
of the Compensation Committee to permit such exercise)
pursuant to the Company's Stock Option Plan(s) and/or
the comparable provision of any future plan or
agreement; and
v. Except in the case of (a) Executive's termination For
Cause (as described in Section 6E of this Agreement) or
(b) Executive's resignation other than for "Good
Reason" (as described in Section 7 of this Agreement),
Executive shall have the right to have the Company
maintain in full force and effect, following the
cessation of the Executive's active employment by the
Company, so long as the Company is paying monies to
Executive, all employee medical, dental or other fringe
benefit plans and arrangements in which Executive was
entitled to participate immediately prior to the date
of Notice of Termination as in effect under Section 5
hereof at the time of such termination, provided that
if such continued coverage would jeopardize the tax
qualified status of such plan or arrangement with
respect to any other employee or the Company, the
Company may elect to provide said benefit on an
individual basis or provide cash compensation
equivalent
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to the benefit which otherwise would have
been provided, so that the Executive shall suffer no
financial loss whatsoever due to such substitution.
In the event that payments are due to Executive pursuant to Section
5E(i) hereof then the Company shall pay fifty percent (50%) of such amount
(determined by reference to his Base Salary as set forth in Section 2 hereof) on
a monthly basis and in equal payment amounts through the date that is twelve
monthly payments thereafter (irrespective of the then remaining term of this
Agreement) and fifty percent (50%) of such amount within ten (10) days of
termination. In the event that payments are due to Executive pursuant to Section
5E(i) or 5E(iii) hereof then the Company shall also provide the Executive with
full participation (without proration) in the EPPB (if applicable) or similar
applicable plan for that year if Executive's termination of Employment is on or
after March 1 of the respective fiscal year (which amount, if any, will be paid
in accordance with the terms of the EPPB) and the Company will also provide
Executive with full participation in any other applicable performance award if
the performance measuring period ends within six months following his
termination of employment.
Except for provision 5.E.iv hereof, nothing in this Agreement shall be
construed as amending any fringe benefit plan of the Company. All rights of the
Executive under any such plans or arrangements upon his termination of
employment must be determined under the terms of such plans or arrangements at
the time of the Executive's termination of employment. Executive expressly
agrees not to discuss, except with his official advisors, any information or
aspects of his employment regarding the Company or his termination circumstances
and further, in addition to the Company immediately canceling any and all
remaining severance payments, agrees that injunctive relief may be granted in
connection with any violation of this covenant.
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Notwithstanding any of the other provisions of Sections 6A, 6B and/or 6D, the
Company's obligations to make payments under the circumstances set forth in this
Section 5E shall override Section 6.
7. Involuntary Termination Other Than For Cause or Termination for
"Good Reason". If the Executive's employment with the Company shall be
terminated during the Employment Period by the Company other than For Cause or
Death or Disability (as defined in Section 6B); then the Executive shall be
entitled to the severance benefits provided in Section 5E. If within twelve (12)
months after an acquisition or merger where the Company is not the surviving
entity or where the Company is the surviving entity but in which the Company's
stockholders at the time of the merger cease to own 50% or more of the surviving
company's voting capital stock after the merger, the Executive voluntarily
leaves the employ of the Company during the Employment Period for "Good Reason"
as hereinafter defined, Executive shall be entitled to the payments specified in
Section 5E but shall not be entitled to any Consulting Agreement as described in
Section 2. "Good Reason" means the occurrence of any reduction in the aggregate
direct remuneration of the Executive or any reduction in the position, authority
or office of the Executive, any reduction in the Executive's responsibilities or
duties with the Company or any reduction in the Executive's support staff or
direct or secondary reports, any pattern of events or circumstances which
impedes the Executive in the exercise of his authorities, powers, functions or
duties hereunder in the manner in which they would normally be exercised by the
Co-Chief Executive Officer of a major corporation that was a subsidiary of a
public company, any adverse change or reduction in the aggregate Executive
benefits, perquisites or fringe benefits provided to the Executive as of the
date of this Agreement (provided that any reduction in such aggregate Executive
benefits, perquisites or fringe benefits that is required by law or applies
generally to all employees of the Company shall not constitute "Good Reason" as
defined hereunder), a change in the Executive's reporting relationship, any
relocation of the Executive's principal place of work with the Company to a
place more than twenty-five (25) miles from Catalink's Langley facility or such
other facility to which the Executive, with the approval of the Chairman, has in
the future relocated the Company's U.K. headquarters (as applicable), or default
by the Company
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of any of its agreements or obligations under any provision of this Agreement.
Notwithstanding the provisions of this Section 7, the definition of Good Reason
shall not include a change in Executive's role to that of President and CEO,
Managing Director, or similar title of only Catalink Direct, Inc.'s non-U.S.
operations, which would be in connection with the employment of a new President
and Chief Executive Officer of Catalink Direct, Inc. (U.S.) as contemplated in
Section 1 hereof. The Executive shall give sixty (60) days written notice to the
Company before the date of termination of employment for Good Reason specifying
the reasons for such termination.
14. Clarification of Noncompetition and Nonsolicitation Periods.
Notwithstanding the definitions contained in the Original Agreement, the terms
"Noncompetition Period" and "Nonsolicitation Period" shall mean and shall refer
only to the two (2) year period commencing on the date of Executive's cessation
of employment with the Company for whatever reason and such two (2) year period
shall be the only time period during which Executive shall be subject to such
restrictive covenants.
Executive and the Company agree that other than as specifically amended
in this Amendment the Original Agreement is hereby ratified and confirmed and
continues in full force and effect.
"Company"
"Executive" Elcom International, Inc.
/s/ James Rousou /s/ Robert J. Crowell
James Rousou Robert J. Crowell
Chairman and Chief Executive Officer
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<PAGE>
Ehibit A
CONSULTING AGREEMENT
THIS AGREEMENT is made this ____ day of _______, ____between
ELCOM INTERNATIONAL, INC., a Delaware corporation (the "Company"), and JAMES
ROUSOU, an individual (the "Consultant").
RECITALS:
A. Pursuant to an Employment Agreement dated as of April 1,
1996 and Amended effective December 15, 1997 (the "Employment Agreement"),
Consultant is the Co-Chief Executive Officer of Catalink Direct, Inc. and a
Corporate Executive Vice President of the Company.
B. Consultant is a key employee of the Company and has
obtained valuable knowledge and experience pertaining to the sale of personal
computer products and services (the "Business") of the Company, specifically
including the financing of such Business, acquisition strategies and
implementation and management information systems ("Areas of Expertise").
C. In order to assure that the Company continues to receive
the benefit of Consultant's knowledge and expertise following the termination of
his employment with the Company, the parties hereto desire to enter into this
Agreement pursuant to Section 2 of the Employment Agreement.
NOW, THEREFORE, in consideration of and in reliance upon the
mutual benefits provided hereunder, the Company and the Consultant hereby agree
as follows:
1. Services. For the two (2) year period commencing on the
date that Consultant terminates the Employment Agreement, in accordance with the
terms of the second sentence of Section 2 of the Employment Agreement, (the
"Consulting Period"), the Consultant shall serve as a management and financial
consultant to the Company. As such, Consultant shall make himself generally
available to the Company between the hours of 9:00 a.m. and 5:00 p.m., U.K.
time, on the first Monday of each month during the Consulting Period for a total
of eight (8) hours per month, to render such advice and assistance regarding
day-to-day operations of the Business, relationships with and service to
existing customers, development of new accounts, strategic planning, financial
matters and other matters within his Areas of Expertise as may reasonably be
requested of him by the Company. Consultant agrees to provide such services in
person at any location of the Company located within fifty (50) miles of the
facility in Langley, U.K. (or its replacement facility), or otherwise shall make
himself available by telephone. Further, the Company and Consultant shall be
entitled to mutually agree on alternative times and/or places for the provision
of such services to the extent that mutually satisfactory arrangements can be
made.
<PAGE>
2. Restrictive Covenants.
2.1 Noncompetition. Consultant agrees that during
(the "Noncompetition Period") the period commencing on the date hereof and
continuing so long as Consultant receives payments under this Agreement, he will
not, without prior written consent of the Chairman of the Company, either
directly or indirectly, in any capacity whatsoever, (a) compete with the Company
(which for purposes of Sections 2.1, 2.2 and 2.3 of this Agreement shall mean
the Company and any affiliates controlling, controlled by or under common
control with Elcom International, Inc. including their predecessors), by
soliciting the sale of personal computer products (such as computers, printers,
monitors, software, etc.) to any customer (including affiliates of such
customer) of the Company by whatever method or (b) operate, control, advise, be
employed and/or engaged by, perform any consulting services for, invest in
(other than the purchase of no more than 5 percent of the publicly traded
securities of a company whose securities are traded on a national stock
exchange) or otherwise become associated with, any person, company or other
entity who or which, at any time during the Noncompetition Period, competes with
the Company via the use of an electronic ordering methodology as defined herein.
As used in clause (b) above, "compete" is defined as
the marketing, distribution or sale of desktop, laptop, notebook or other
commonly called "personal computer" equipment, software, services, peripherals
or accessories by any company or entity or subdivision thereof in the
geographical area in which the Company maintains offices, sales agents, or
otherwise conducts business. The Consultant further expressly represents and
understands that this Agreement will prohibit the Consultant from employment
during the Noncompetition Period with companies that compete with the Company,
as defined in this Agreement, and as such, will constrain some of the
Consultant's overall possibilities for future employment. By Consultant's
signature to this Agreement, Consultant expressly represents that his training,
education and background are such that his ability to earn a living shall not be
impaired by the restriction in this Agreement. The definition of compete can be
modified by mutually agreed addendum, if and when the Company enters additional
types or lines of businesses.
2.2 Nondisclosure. Consultant agrees during the
ten year period (the "Nondisclosure Period") commencing on the date of this
Agreement to hold as secret and confidential (unless disclosure is required
pursuant to court order, subpoena, in a governmental proceeding, arbitration, or
pursuant to other requirement of law) any and all knowledge, technical
information, business information, developments, trade secrets, know-how and
confidences of the Company or its business, including, without limitation, (a)
any information or business secrets relating to the products, customers,
strategies, business, conduct or operations of the Company, its subsidiaries or
any of their respective clients, customers, consultants, providers, licensors or
licensees (collectively, "Company Affiliates"); (b) any information regarding
any current or prior employees of the Company or any of its affiliates (except
where a job reference has been requested by an ex-employee in writing and the
employee asked to give such reference consents; (c) the existence or betterment
of, or possible new uses or applications for, any of the Company's products or
services or those of any Company Affiliates; (d) any of the Company's customer
lists, pricing and purchasing information or policies of the Company or any
Company Affiliates; and (e) any
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methods, ways of business etc., used in the use, sale or marketing of the
Company's products or services or those of any Company Affiliates,
(collectively, "Confidential Information") of which he has acquired knowledge
during or after his or her employment with the Company, to the extent that such
matters (i) have not previously been officially made public or are not
thereafter made public, or (ii) do not otherwise become available to Consultant,
in either case, via a source not bound by any confidentiality obligations to the
Company or Company Affiliates. The phrase "made public" as used in this
Agreement shall apply to matters within the domain of the general public or the
Company's industry. During the Nondisclosure Period, Consultant agrees not to
use, directly or indirectly, such knowledge for his/her own benefit or for the
benefit of others and agrees not to disclose any of such Confidential
Information without prior written consent of the Company. At the cessation of
the Consulting Period, or sooner if requested by the Company, the Consultant
agrees to promptly return all Company property to the Company as well as any and
all Confidential Information which relates in any way to any of the foregoing
items covered in this paragraph and to destroy any transcripts or copies the
Consultant may have of such Confidential Information unless an alternative
method of disposition is approved by the Company.
2.3 Nonsolicitation/Noninterference. Consultant
agrees that during the two (2) year period (the "Nonsolicitation Period"),
commencing on the date of this Agreement he will not at any time, without prior
written consent of the Company, discuss employment opportunities with an
employee, directly or indirectly solicit, induce, or attempt to solicit or
induce any employee, former employee (as herein defined), agent, consultant, or
other representative or associate of the Company for the purpose of providing
employment opportunities with any entity or to terminate his/her relationship
with the Company. Consultant further covenants and agrees that, during the
Nonsolicitation Period, he will not, without the prior written consent of the
Company, directly or indirectly, induce or attempt to induce any actual or
prospective licensors, licensees, customers or suppliers of the Company to
terminate, alter or change its relationship with the Company or otherwise
interfere with any relationship between the Company and any of its actual or
prospective licensors, licensees, suppliers or customers or their employees or
former employees. A "former employee" shall mean any person who was employed by
the Company at any time during the one (1) year period prior to Consultant's
cessation of employment with the Company.
2.4 Severability; Certain Exclusions. In the
event that Sections 2.1, 2.2 or 2.3 or any portion (the "Restrictive
Covenants") thereof, shall be found by a court of competent jurisdiction to be
invalid or unenforceable as written as a matter of law, the parties hereto agree
that such court(s) may exercise its discretion in reforming such provision(s) to
the end that Consultant shall be subject to noncompetition, nondisclosure and
nonsolicitation/ noninterference covenants that are reasonable under the
circumstances and enforceable by the Company.
2.5 Acknowledgment. Consultant specifically
acknowledges that the covenants set forth herein restricting competition,
disclosure and solicitation/interference are reasonable, appropriate, and
necessary as to duration, scope, and geographic area in view of the nature of
the relationship between Consultant and the Company and the investment by the
Company of significant time and resources in the training, development, and
employment of Consultant. Consultant warrants and represents that in the event
that any of the restrictions set forth
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in these covenants become operative, he will be able to engage in other
activities for the purpose of earning a livelihood, and shall not be impaired by
these restrictions.
Consultant further acknowledges that the remedy at law for any
breach of these covenants, including monetary damages to which the Company may
be entitled, will be inadequate and that the Company, its successors and/or
assigns, shall be entitled to injunctive relief against any breach without bond.
Such injunctive relief shall not be exclusive, but shall be in addition to any
other rights or remedies which the Company may have for any such breach.
3. Payments. As compensation for his consulting services to
the Company during the Consulting Period and the non-disclosure, non-competition
and non-interference covenants contained herein, the Company shall pay
Consultant Forty Thousand Dollars ($40,000.00) per year, commencing on the date
hereof, and payable in twenty-four (24) equal, bi-monthly payments on the 1st
(first) and 15th (fifteenth) day of each month, for two years and until the
payment of an aggregate of Eighty Thousand Dollars ($80,000.00) hereunder.
3.1 Benefits. Consultant will not, by reason of
this Agreement, participate in any employee benefit or insurance plan or any
other plan or receive any other fringe benefit which is provided by the Company
for its executives or employees, but may receive such benefits to the extent
provided for in the Employment Agreement or otherwise.
3.2 Reimbursement of Expenses. The Company shall
reimburse Consultant for all reasonable expenses incurred by him on behalf
of the Company in the course of performing those services which the Consultant
has been requested to perform by the Company; provided that the Consultant shall
submit to the Company all documentation of such expenses necessary for tax
purposes. Notwithstanding anything to the contrary herein, the Consultant shall
be reimbursed for reasonable expenses for training related to his performance of
his services hereunder; provided, the Consultant first obtains the consent of
the Company for such training.
4. Assignment. Any attempt by Consultant to assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Company will be void. The Company may assign this Agreement as
part of the sale of its business without the prior written consent of the
Consultant so long as the purchaser expressly agrees to assume and be
responsible for the obligations hereunder.
5. Independent Contractor. It is expressly understood and
agreed that Consultant is an independent contractor and is not in any manner an
agent or employee of the Company, nor is Consultant authorized or empowered to
conduct business under the name of, or for the account of, the Company or to
incur obligations of any kind, express or implied, on behalf of the Company, or
to make any promise, warranty or representation on the Company's behalf with
respect to any product or service of the Company.
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6. Construction.
6.1 Waiver. Failure of the Company at any time
to enforce any provision of this Agreement or to require performance by
Consultant of any provision hereof shall in no way affect the validity of this
Agreement or any part hereof or the right of the Company thereafter to enforce
its rights hereunder; nor shall it be taken to constitute a condonation or
waiver by the Company of that default or any other or subsequent default or
breach. To the extent permitted by Massachusetts law, each party waives any
provision of law which renders any provision of this Agreement unenforceable or
void in any respect.
6.2 Governing Law. This Agreement shall be
governed by Massachusetts law, without regard to conflict of laws principles
thereof.
6.3 Counterparts. This Agreement may be
executed in multiple counterparts each of which shall be deemed an original
but all of which together shall constitute one and the same document.
6.4 Headings. The headings in this Agreement
are intended solely for convenience of reference and shall be given no effect
in the construction or interpretation of this Agreement.
6.5 Entire Agreement. This Agreement constitutes
the entire understanding and agreement among the parties hereto concerning
the subject matter hereof. All negotiations among the parties hereto concerning
the subject matter hereof are merged into this Agreement, and there are no
representations, warranties, covenants, understandings, or agreements, oral or
otherwise, in relation thereto among the parties hereto other than those
incorporated herein. No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties hereto.
INTENDING TO BE LEGALLY BOUND, the parties or their duly
authorized representatives have signed this Agreement on the date first above
written.
------------------------------
James Rousou
(the "Consultant")
ELCOM INTERNATIONAL, INC.
By: _________________________
Title: _________________________
(the "Company")
-5-
Exhibit 10.24
STANDARD CONDITIONS FOR THE
SALE AND PURCHASE OF DEBTS
BETWEEN
Elcom Group Ltd
AND
DEUTSCHE FINANCIAL SERVICES (UK) LTD
<PAGE>
DEUTSCHE FINANCIAL SERVICES (UK) LIMITED
STANDARD CONDITIONS FOR THE SALE AND PURCHASE OF DEBTS
VERSION 10/97
1. Definitions
1.1 The headings in the Agreement and these Conditions are for convenience
only and shall in no way affect their construction. The following
expressions shall have the meaning set out opposite each:
Administration Fee - a charge for the services provided or to be provided
by DFS, in respect of each Debt vesting in DFS, calculated
in accordance with the Particulars.
Approved Debt - a Debt referred to in a Schedule delivered to DFS
which at the time such Schedule is delivered or any time
thereafter
(i) is not an Ineligible Debt; and
(ii) in relation to which the Client is not and has not been
in breach of any warranty or undertaking contained in
this Agreement; and (iii) which is undisputed.
Associate - any person, partnership or body corporate in which
the Client or any director, shareholder, agent or employee
of the Client has a material interest or any officer,
director, shareholder, affiliate, parent, partner or
subsidiary of the Client or any other form of associate of
the Client's as set out in section 184 of the Consumer
Credit Act 1974.
Base Rate - the Base Rate or any replacement or substituted rate
as quoted by National Westminster Bank plc or its successor
for the currency in which any Prepayment is made.
Client - the entity shown as the Client in the Particulars.
Collection Date - two clear Working Days after a remittance in respect of a
Debt appears on DFS' bank account.
Concentration Percentage - the percentage (referred to in the
Particulars) which the total of Prepayments made to the
Client by DFS in relation to unpaid Debts due by any one
Customer bears to the total of all unpaid Debts vested in
DFS from time to time.
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Confidential Information - all information relating directly to
the Client's or any Subsidiary's business and/or operations
which is of a secret and proprietary nature, as disclosed by
the Client or any Subsidiary to DFS. "Confidential
Information" includes customer lists and any information
relating to customers or entities which are or have been
customers of the Client or any of the Subsidiaries and any
information relating to suppliers, supplier lists or
requirements, price lists or price instructions, marketing
and sales information, business plans or dealings, employees
or officers, financial information and plans, new products,
research and product development activities, any document
marked "confidential", any information which DFS has been
told or is aware is confidential and any information which
has been given to DFS in confidence. "Confidential
Information" does not include information which: (i) was
already in DFS' possession prior to its disclosure by the
Client or any Subsidiary; or (ii) becomes generally
available to the public, other than as a result of a
disclosure by DFS.
Contract of Sale - any contract for the supply of Goods by the Client or
a Subsidiary.
Contracted Amount - in relation to a Debt, the total amount under
a Contract of Sale payable to the Client or a Subsidiary by
a Customer including any tax or duty but before any
deduction or allowance for prompt payment or otherwise.
Credit Limit - an amount which may from time to time be
established (by DFS in DFS' reasonable discretion) in
relation to any Customer. Its purpose is to determine the
extent to which the aggregate indebtedness of any Customer
at any one time comprises Approved Debts for the purposes of
making Prepayments.
Cure Period - such period as shall be determined by DFS in its
absolute discretion and be conveyed by written notice from
DFS to the Client by the expiry of which the Client must
cease to breach the obligation or liability referred to in
DFS' notice.
Current Account - an account maintained by or on behalf of DFS in
the Client's name, to show the balance at any time between:
(i) all payments made to the Client and all costs expenses,
charges and other sums paid or payable by the Client to DFS
(including contingent liabilities); and
(ii) the amount of all Purchase Prices credited.
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Customer - any entity which incurs or may incur any obligation to
make payment under a Contract of Sale.
Debt - the amount (or where the context so admits a part of the
amount) of any obligation incurred or to be incurred by a
Customer under a Contract of Sale (including any tax or duty
payable and all Related Rights).
Debts Purchased - an account maintained by DFS to show the anticipated
Account Purchase Price of Debts
Defaulted Debt (i) a Debt which remains unpaid for ninety days or more from
the Invoice Date; or (ii) a Debt due by an Insolvent
Customer; or (iii) a Debt which in DFS' reasonable opinion
is uncollectable.
Delivered - in relation to Goods - despatched to the Customer in
accordance with a Permitted Contract; and
- in relation to work done or services rendered - complete
performance. "Deliver" and "delivery" shall be construed
accordingly.
DFS - Deutsche Financial Services (UK) Ltd.
Discounting Charge - a charge calculated daily, at the rate shown in the
Particulars on the basis of a 360 day year, on the debit
balance on the Current Account and which shall be debited
monthly to the Current Account. The credit of any part of
the Purchase Price to the Current Account prior to
Collection Date shall not be taken into account in making
such calculation.
Event of Default - has the meaning given to that expression in the US
Agreement.
Funding Limit - the amount of the debit balance, specified in the
Particulars, on the Current Account which must not at any
time be exceeded or such higher sum as DFS in its absolute
discretion determines.
Goods - goods, services, work and materials or licences.
Indebtedness - all of the Client's liabilities and indebtedness for
borrowed money of any kind and nature whatsoever, whether
direct or indirect, absolute or contingent, secured or
unsecured.
Ineligible Debts (i) Defaulted Debts; or
(ii) any sums due from credit insurers; or
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<PAGE>
(iii) any Debt payable by a Department or Ministry or Agency
of the Crown or similar in relation to a foreign government:
or (iv) any Debts whose invoice shall be addressed to a
Customer outside a Permitted Country or expressed in a
currency other than sterling (unless approved of by DFS); or
(v) any Debt subject to a contra account by the Customer; or
(vi) any Debts in excess of the Concentration Percentage in
the date order of their creation; or (vii) any Debt which is
to be rebated to the Customer; or (viii) any Debt on account
of a Contract of Sale which has not been completely
performed; or (ix) any Debt payable by a Customer who is an
Associate; or (x) all Debts of any Customer whose instrument
in or towards the discharge of a Debt shall not be honoured
on first presentation; or (xi) all Debts under the Contract
of Sale payable by stage or instalment payments; or (xii)
all Debts in respect of which the Client cannot comply with
its warranties and undertakings to DFS; or (xiii) all Debts
disputed by Customers; or (xiv) any Debt due by a Customer
which is not a commercial or institutional entity; or (xv)
Debts which do not conform to the terms of payment as
provided in the Particulars; or (xvi) all Debts payable by a
Customer if more than half of the indebtedness of such
Customer which is due and owing to the Client at any time
exceeds the Recourse Period specified in the Particulars; or
(xvii) Debts in excess of Credit Limits. (xviii) Debts whose
invoices are addressed to Customers in Permitted Countries
referred to in clause 1.6 outside the United Kingdom in
aggregate in excess of (pound)500,000 in their Invoice Date
order.
Initial Survey Fee - the fee payable by the Client to DFS for the first Survey
Insolvency - in relation to an individual:
(i) his bankruptcy; or
(ii) his sequestration.
- in relation to a Partnership:
(i) its winding up; or
(ii) the Bankruptcy or sequestration of any or all the
partners;
- in relation to any Limited Company:
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<PAGE>
(i) the passing of a resolution for a voluntary winding up
(other than for the purpose of a solvent reorganisation or
reconstruction); or (ii) the making of a winding up order;
or (iii) the appointment of an administrator pursuant to the
Insolvency Act 1986; or (iv) a Receiver or an Administrative
Receiver being appointed to all or any part of its property.
- in relation to any entity:
(i) any voluntary arrangement under the Insolvency Act 1986;
or (ii) the appointment of a judicial factor.
and "insolvent" shall be construed accordingly.
Invoice Date - in respect of any Debt, the date of Client's invoice to
the relevant Customer for the sale of Goods giving rise to
such Debt.
Net Value - the Contracted Amount of each Scheduled Debt less any
deduction allowed or allowable for prompt payment or
otherwise.
Offer - an unconditional offer from the Client in such form as DFS
may stipulate, to sell a Debt to DFS with full title
guarantee which DFS shall be free in its reasonable
discretion to accept or reject and where more than one Debt
is at the same time included in an Offer each Debt shall be
considered as being subject to an individual offer.
Particulars - the matters referred to in that part of the Agreement
headed "Particulars".
Permitted Contract - any Contract of Sale entered into by the Client or a
Subsidiary in the course of its Business (specified in the
Particulars) with a Customer carrying on business in a
Permitted Country and which provides for payment in sterling
or the Euro or such other currency as DFS may in writing
approve.
Permitted Country - a country or territory listed in the Particulars or
otherwise agreed in writing by DFS (provided that such
agreement has not been withdrawn).
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<PAGE>
Prepayment - the amount up to which DFS, at the Client's request, shall
prepay before Collection on account of the Purchase Price of
an Approved Debt and which shall be calculated at the
percentage shown in the Particulars of the Net Value.
Purchase Price - the amount payable by DFS to the Client pursuant to
condition 5.1 for each Debt, with its Related Rights,
purchased by DFS.
Reasonable - reasonable by the standards of a prudent purchaser in
England, of Debts of the nature, quality and value of those
being sold by the Client, when dealing with a seller of the
nature and financial standing of the Client and taking into
account all matters of fact and opinion known regarding the
Client and its Customer (and "reasonably" shall be construed
accordingly).
Recourse - DFS' right, by oral or written notice, to require the
Client to repay to DFS all Prepayments made in respect of a
Scheduled Debt.
Recourse Period - the period referred to in the Particulars at the expiry of
which DFS may require Recourse in respect of any Scheduled
Debt.
Related Rights - the benefit of all guarantees, indemnities, insurances,
instruments and securities given to or held by the Client or
a Subsidiary in relation to any Debt; and
- any ledger, computer data, statement or other record and
any invoice, delivery note or other document on which or by
which any Debt is recorded or evidenced; and
- all the Client's or, as the case may be, the relevant
Subsidiary's rights pursuant to the Contract of Sale but
without any obligation on DFS to complete the Contract of
Sale; and;
- all bank statements evidencing receipt of monies towards
settlement of a Debt;
- ownership of any Transferred Goods.
Schedule - in relation to a Debt not previously scheduled to DFS -
the delivery by the Client to DFS of a schedule of Debts
which shall have come into existence in such form and by
such method, whether in writing, by electronic data
transfer, or other means, as shall be reasonably prescribed
by DFS from time to time and where appropriate its receipt
by DFS.
Scheduled - included in a Schedule or Offer delivered to DFS.
Survey - the exercise by DFS of its rights under Condition 12.1.
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<PAGE>
Termination Event - any event set out in clause 20 entitling DFS to terminate
this Agreement whether or not DFS shall so terminate.
Terms of Payment - the Client's, or as the case may be, the relevant
Subsidiary's conditions, approved by DFS, as to the method
and time for payment of a Debt and included in the Contract
of Sale; these may include a settlement discount up to 5% or
such higher amount as may be agreed between DFS and the
Client; the conditions of payment set out in the Particulars
shall be so approved.
Transferred Goods - Goods which any Customer shall reject, or shall return or
attempt to return to DFS or the Client or indicate a wish to
do so; or - which the Client or, as the case may be, the
relevant Subsidiary or DFS recover from the Customer in the
exercise of the Client's or, as the case may be, the
relevant Subsidiary's rights under the relevant Contract of
Sale.
Trading Conditions - that portion of the standard conditions (other than the
Terms of Payment) upon which the Client or a Subsidiary
enters into Contracts of Sale which will be approved by DFS
from time to time in writing (the initial Trading Conditions
having been initialled for the purpose of identification by
DFS and the Client on the date hereof).
United Kingdom - United Kingdom of Great Britain and Northern Ireland and
the Channel Islands and the Isle of Man.
US Agreement - the meaning given to that expression in the Particulars.
Working Day - a day other than a Saturday or Sunday when both DFS and
banks in the City of London shall be open for the conduct of
all normal business.
1.2 Unless the context otherwise indicates, the singular includes the
plural and any gender shall include any other gender.
1.3 Where in or in relation to any place outside England and Wales the
meaning of a word or expression used in this Agreement is to be
considered and such word or expression has no counterpart in that
place, it shall, unless the context otherwise requires, have the
meaning of its closest equivalent in that place.
1.4 Headings to clauses and conditions are for convenience only. They shall
not affect the interpretation of this Agreement. References to clauses
are to clauses of the Agreement and to conditions are to the numbered
sections appearing in this document.
8
<PAGE>
1.5 References to an Act of Parliament shall be deemed to include each Act
as amended, modified or re-enacted or any order, rule or regulation
made thereunder.
1.6 The meaning of general words introduced by the word "other" shall not
be limited by reference to any proceeding word or enumeration
indicating a particular class of acts matters or things.
1.7 If any provision of this Agreement shall to any extent be invalid or
unenforceable then the remainder of this Agreement shall not be
affected or impaired.
2. Duration
2.1 This Agreement shall begin on the Commencement Date referred to in the
Particulars and shall continue except as provided in Condition 2.2, for
the Minimum Period also referred to in the Particulars. DFS or the
Client may terminate this Agreement by giving to the other notice in
writing, at any time, of at least the Minimum Notice Period referred to
in the Particulars to expire at any time after the Minimum Period. In
the event that the US Agreement terminates, this Agreement shall be
deemed to have terminated on the same date.
2.2 DFS shall have the right at any time immediately to terminate this
Agreement by giving written notice upon or at any time after the
happening of a Termination Event for so long as the same is continuing
unremedied and unwaived.
2.3 Except as otherwise provided, termination shall not affect the rights
or obligations of either the Client or DFS in relation to any Debt then
vested in DFS. This Agreement shall continue to bind both the Client
and DFS for so long as may be necessary to satisfy such rights and
obligations and, in any event, until all sums due to DFS hereunder have
been paid in full.
2.4 This Agreement shall remain effective notwithstanding any change in the
Client's name or constitution.
2.5 The Client shall have the right at any time immediately to terminate
this Agreement in the event that DFS commits any material breach of its
obligations under this Agreement and (if capable of remedy) such breach
is not remedied within three Working Days following receipt by DFS of
notice from the Client requiring the same to be remedied (in the case
of any obligation in relation to the discounting of Debts) or within
fifteen Working Days of notice from the Client requiring the same to be
remedied (in any other case).
2.6 Without prejudice to the other provisions of this Clause 2, if at any
time after the Minimum Period the Client in writing requests that the
Funding Limit be increased and DFS is unwilling to agree to such
increase then the Client may serve on DFS
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<PAGE>
thirty days' notice of its intention to terminate this Agreement
provided that such notice is accompanied with a formal offer from an
alternative discounter or factor of Debts including:
(i) discounting charges and administration fees;
(ii) all charges;
(iii) prepayment percentages;
(iv) eligibility for prepayments;
(v) the funding limit ("Revised Terms")
Within thirty days of such notice DFS may offer substantially to meet
such Revised Terms in respect of the services provided by DFS under
this Agreement. If the Client accepts DFS' offer then this Agreement
will continue in full force except that the Revised Terms will apply.
If the Client elects not to accept DFS' offer, then (unless the Client
elects to withdraw its notice of termination) this Agreement shall
terminate on the day which is thirty days after the Client notified DFS
of its decision not to accept DFS' offer (and, in that event, the
Client must pay to DFS a fee of (pound)18,000).
3. Applicability, Title to Debts and Schedules
3.1 This Agreement shall apply only to the Debts or classes of Debts
referred to in the Particulars.
3.2 As soon as possible on or after the Commencement Date the Client will
make an Offer to DFS in respect of each Debt due to the Client on the
Commencement Date together with its Related Rights. DFS shall accept
the Client's Offer by crediting the value of each accepted Debt to the
Debts Purchased Account. Upon such acceptance beneficial ownership of
such Debts and their Related Rights shall vest in DFS. Debts, together
with their Related Rights, coming into existence after the Commencement
Date shall vest in DFS automatically upon such Debts coming into
existence. If for any reason any Debt or any Related Rights shall fail
effectively to vest in DFS then the Client or the relevant Subsidiary
will hold them in trust for DFS. Following a Termination Event, for so
long as the same is continuing unremedied and unwaived, DFS may at any
time give notice to the Customer or any other person of the existence
of such trust and that payment is to be made to DFS. By DFS' execution
hereof DFS acknowledges intimation of such trust.
3.3 In respect of Debts coming into existence after the Commencement Date
the Client shall furnish Schedules of Debts to DFS within two days of
the Delivery of Goods or at such later time as DFS may reasonably
stipulate. Each Schedule shall be accompanied by such documents and
information as DFS may reasonably require. However, DFS may at any time
give written notice to the Client that certain Debts need not
thereafter be Scheduled.
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3.4 Following a Termination Event, for so long as the same shall continue
unremedied and unwaived, DFS may at any time require the Client, at the
Client's reasonable expense, to complete and deliver to DFS a duly
executed written assignment of any Debt or its Related Rights with all
stamp duty thereon paid by the Client and in a form approved by DFS.
4. Credit Limits and Approved Debts
4.1 DFS may in DFS' reasonable discretion, at any time, establish a Credit
Limit for any Customer and will promptly notify the Client of any such
Credit Limit. A Credit Limit shall be subject to such terms as may be
specified by DFS.
4.2 DFS may in DFS' reasonable discretion increase, reduce or cancel any
Credit Limit by notice, including oral notice, which shall have
immediate effect. However (except as provided in condition 4.5) no
reduction or cancellation shall affect any existing Approved Debt
arising from Goods Delivered prior to the service of such notice
provided that such Debt shall otherwise continue to be an Approved
Debt.
4.3 If the total of Debts outstanding from any one Customer is in excess of
the Credit Limit relating to that Customer then to the extent that any
Debt within the Credit Limit shall be paid or otherwise discharged, the
next Debt of that Customer (in the order in which such Debts have been
Scheduled) shall come within the Credit Limit prevailing at the time of
such payment or discharge.
4.4 If more than half of the indebtedness of a Customer at any time remains
unpaid beyond the expiry of the Recourse Period specified in the
Particulars, no part of the entire indebtedness of that Customer shall,
until further notice by DFS, be treated as consisting of Approved
Debts.
4.5 All Credit Limits shall automatically be cancelled upon termination of
this Agreement. Thereupon no unpaid Debt shall be an Approved Debt.
Following a Termination Event, for so long as the same continues
unremedied or unwaived, (whether or not DFS terminate this Agreement)
DFS may by notice to the Client immediately cancel all or any Credit
Limits. Thereupon no Outstanding Debt of the Customer referred to in
such notice shall then be an Approved Debt and no further Debts of such
Customer shall be Approved Debts.
4.6 Should the Client reveal to any person, including any Customer, the
existence, absence or amount of any Credit Limit or any reason for the
same, it will not reveal the name of DFS.
4.7 In establishing any Credit Limit DFS shall not act as a credit
reference agency. Credit Limits will be established for DFS' own
purposes and may not be taken as an indication or warranty as to the
creditworthiness of any Customer. Except in relation to DFS'
obligations in respect of Approved Debts, DFS shall have no other
liability to the Client arising out of the establishment, modification
or withdrawal of a Credit Limit.
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5. Purchase Price and Payments by DFS
5.1 The Purchase Price of each Debt (together with its Related Rights)
purchased by DFS shall be the amount paid by the Customer in or towards
the discharge of the Debt less the Discounting Charge, the
Administration Charge and the Charge referred to in Condition 6.1(v).
The Client's right to payment of the Purchase Price of any Debt shall
be exercisable solely by withdrawals from the Current Account, within
the Funding Limit and subject to the restrictions imposed by these
Conditions.
5.2 Upon any Debt being Scheduled, DFS shall provisionally enter the
Purchase Price of such Debt in the Debts Purchased Account referred to
in Condition 7.2. For administrative convenience DFS shall make such
entry at its Scheduled value. DFS may subsequently make any necessary
adjustment.
5.3 The amount of each Collection shall be credited to the Debts Purchased
Account on its Collection Date in or towards settlement of the Purchase
Price of the Debt and on the same day an equivalent amount shall be
credited to the Current Account. If a Collection is only for part
payment of a Debt, then only a proportionate amount of the Purchase
Price shall be payable following such Collection.
5.4 Subject to DFS' other rights in this Agreement, at the Client's request:
(i) DFS will pay to the Client in respect of all Approved Debts:
- the Prepayment (prior to expiry of the Recourse Period) on
the day of the Client's faxed or written request for such
payment provided that such request is received no later than
noon on the day of such request and that a verbal estimate of
the amount of such payment is provided to DFS by 11.00 am; and
(ii) in respect of all Scheduled Debts in settlement of or on account
of the Purchase Price:
- an amount equivalent to any remittance received in or
towards settlement of any Debt (less any Prepayment previously
made) on the Collection Date provided that such request is
received no later than noon on the day of such request and
that a verbal estimate of the amount of such payment is
provided to DFS by 11.00 am; and
(iii) - All payments to the Client shall be made by CHAPS in same
day funds to such bank account of the Client as may from time
to time be advised by the Client to DFS.
5.5 The amounts of all payments by DFS pursuant to Condition 5.4 shall be
debited to the Current Account. The Client will repay to DFS promptly
upon demand any amount by which any Prepayment shall exceed the amount
of the Purchase Price tendered by the relevant Customer in final
settlement of the Debt.
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5.6 DFS shall not be obliged to make any payment to the Client in
circumstances when:
(i) such payment would cause the debit balance on the Current
Account to exceed the lesser of either (a) the percentage
referred to in clause 1.9 of all outstanding Approved Debts or
(b) the Funding Limit; or
(ii) any petition or application for the Client's Insolvency shall be
pending.
5.7 On or at any time after the occurrence of any Termination Event
(whether or not DFS exercises DFS' right to terminate this Agreement)
DFS shall not be obliged to make any Prepayment or any other payment
before the Collection Date and shall be entitled on demand to the
repayment of all such Prepayments previously made in respect of all or
any Debts then outstanding.
5.8 DFS shall not be obliged to make any Prepayment before the Collection
Date in circumstances where DFS, acting reasonably, considers it
necessary or desirable to verify the existence or amount of such Debt.
5.9 The Client will promptly on demand repay to DFS a sum equivalent to the
amount by which the debit balance on the Current Account exceeds the
lesser of either the Funding Limit or an amount calculated by applying
the Prepayment Percentage shown in the Particulars to the Net Value of
all Outstanding Approved Debts.
6. DFS' Fees and Charges
6.1 The Client shall pay to DFS:
(i) - The Administration Fee monthly in advance on the First
Working Day of each month; and
(ii) - the Discounting Charge which for administrative convenience
shall be debited monthly to the Current Account; and
(iii) - all reasonable costs, claims, charges and expenses, legal or
otherwise reasonably incurred or payable by DFS on the basis
of a full indemnity in respect of the enforcement of the
provisions of this Agreement or in obtaining any release or
waiver in respect of Debts or Related Rights.
(iv) - following termination of the Client's agency in accordance
with clause 7.6 and in DFS' absolute discretion an amount
equal to a maximum of 5% of:
(i) the Scheduled value of the Debts unrecovered at the
date of the Termination Event; and
(ii) all Debts coming into existence thereafter;
provided that no such amount shall be payable in respect of
any Debt arising at any time after this Agreement is terminated and the balance
of the Current Account is zero.
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6.2 All fees and charges payable by the Client exclude any applicable value
added tax.
7. Accounts
7.1 DFS shall maintain the Current Account in the Client's name.
7.2 DFS shall maintain the Debts Purchased Account in the Client's name to
which the Scheduled value of Debts shall be debited and all Collections
shall be credited.
7.3 Following the termination of the Client's agency to procure the
collection of Debts,DFS shall maintain accounts in the names of each
Customer to which Debts at their Scheduled value shall be debited and
their respective Collections shall be credited.
7.4 DFS shall send to the Client at monthly intervals, or more frequently
as requested by the Client, statements of the Current Account and the
Debts Purchased Account together with such other information as DFS
shall consider appropriate. Such accounts and information shall be
treated as correct and binding upon the Client (except as to manifest
errors) unless DFS is notified in writing of any errors within fifteen
Working Days of the date of receipt by the Client of such accounts and
information.
7.5 Once a week or more frequently on such days as DFS shall specify, the
Client will prepare and forward to DFS a compliance certificate
relating to all Debts purchased, prepared as of the Working Day
immediately preceding such certificate and computed in accordance with
the example annexed hereto.
7.6 After receipt from DFS of a copy of each Debts Purchased Account
pursuant to condition 7.4, the Client will complete a reconciliation in
such manner as DFS may reasonably require. This form will reconcile the
sales ledger control account balance shown in the Client's books to the
Debts Purchased Account shown in DFS' books. The Client shall deliver
such reconciliation to DFS together with the Client's aged debtor
analysis no later than the Reporting Date stated in the Particulars.
7.7 Following termination of the Client's agency in accordance with clause
7.6 DFS shall render statements of account to Customers at such
intervals as DFS shall consider necessary.
7.8 Any account maintained by DFS and certified by DFS' Company Secretary
to be a true and accurate copy shall be prima facie evidence in any
proceedings as to the sums received and paid by DFS or due by the
Client at the date to which the certificate relates, except only to the
extent that specific errors and omissions shall be proved.
8. Currencies
8.1 The Purchase Price of a Debt shall, unless otherwise agreed, only be
paid in sterling.
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8.2 Where DFS has agreed that a Debt may be expressed in a currency other
than sterling DFS may provisionally calculate the Purchase Price by
converting the Scheduled amount of the Debt at the rate of exchange
supplied by DFS' bankers for the time of receipt by DFS of the relevant
Schedule. Any necessary adjustments shall be made on the day of each
collection.
8.3 All bank charges for collection and/or conversion of a Debt expressed
in a currency other than sterling and any risk of loss (between the
currency for payment of a Debt and the currency for payment of the
Purchase Price) arising from any currency fluctuation and/or conversion
shall be the Client's responsibility and shall be debited by DFS to the
Current Account.
9. Set -off and Other Rights
9.1 DFS shall have the right at any time to combine and balance accounts or
exercise retention. Any amounts payable by the Client to DFS (whether
under this Agreement or otherwise and whether payable presently,
prospectively or contingently) may be set off against monies payable by
DFS to the Client. DFS may in DFS' absolute discretion, make a
reasonable estimate of such amounts payable where the same cannot
immediately be determined. The parties declare hereby that it is not
their intention by this clause to create any charge or other security.
10. Client's Undertakings and Warranties
10.1 The Client undertakes that, throughout the currency of this Agreement,
the Client will promptly disclose to DFS any material changes in the
identity of the holders of the Client's share capital and all material
adverse credit information which comes to its attention and which
relates to its Customers.
10.2 The delivery of a Schedule shall, in relation to each Debt referred to
in it, be deemed to constitute warranties that, save as previously
disclosed in writing to DFS:
(i) payment of the Scheduled amount of the Debt is an existing and
binding obligation of the Customer referred to in the Schedule
and that the invoice arises out of a Permitted Contract which
is subject to and is not in breach of the laws of England and
which is subject to the Client's or the relevant Subsidiary's
Terms of Payment, referred to in the Particulars, and Trading
Conditions and is payable in sterling or Euros or another
currency approved by DFS;
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<PAGE>
(ii) the Goods have been delivered and to the best of the Client's
knowledge and belief the Customer will accept the Goods sold
and will pay the Debt without any dispute or set-off or
counterclaim, whether justified or not, within the Recourse
Period (and if the Customer is Insolvent or deceased that the
person having the duty to administer the Customer's estate
will accept a claim or proof of debt for the unpaid balance of
the Debt);
(iii) The Client has the unconditional right to assign the Debt
which is unencumbered by any charge, lien, equity trust or
tracing or other right which affects or may affect the Debt or
its Related Rights and that upon notice of assignment being
given to the Customer the Debt will be payable only to DFS;
(iv) no other person has or will have any interest in or other
right relating to any such Debt or its Related Rights;
(v) the Customer has a verifiable delivery point, is not an
Associate and to the best of the Client's knowledge and belief
has no right, other than under the Terms of Payment, the
exercise of which would reduce or extinguish the Scheduled
amount of the Debt;
(vi) The Client and each Subsidiary has all requisite consents
licenses and permits for the performance of the Contract of
Sale and, in the case of the Client, to enter into this
Agreement and for the Client or the Client's assignees to
receive payment in the permitted currency of the Debt;
(vii) there is no breach of any obligation owed or owing to any
Customer under a Contract of Sale related to such Debt; and
that the Client and each Subsidiary will pay all carriage and
shipping charges in accordance with the Contract of Sale;
(viii) The Client and each Subsidiary will have no obligations to
Customers other than under the Contract of Sale which in the
aggregate give rise to financial liabilities that can be
offset against the Debts or entitle a Customer to delay or
refuse payment and which exceed (pound)100,000 at any one
time;
(ix) to the best of the Client's knowledge and belief no Debt may
be reduced except in accordance with the terms of a Contract
of Sale approved by DFS or by the prompt issue of a credit
note on a sound commercial basis;
(x) the Debt has not arisen from an agreement regulated by the
Consumer Credit Act 1974;
(xi) to the best of the Client's knowledge and belief, all
signatories contained in or appearing on every order, invoice,
notification or other document supplied to DFS and relating to
a Debt are genuine (and, in the case only of documents
originated by the Client, the statements contained therein are
true);
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<PAGE>
(xii) other than Customers' payments paid to DFS, no payment has
been made by, nor has any invoice been rendered to, a Customer
before Delivery of the whole of the Goods to which the
Contract of Sale relates unless agreed in writing by DFS.
10.3 The Client undertakes to DFS that:
(i) the Client and each Subsidiary will not grant any extension of
time for payment nor waive, modify or terminate any Contract
of Sale except in accordance with the Client's credit policy
statement previously agreed with DFS;
(ii) the Client will promptly perform all the Client's and will
procure that each Subsidiary promptly perform such
Subsidiary's further or continuing obligations to the Customer
under the Contract of Sale and , at DFS' request will provide
evidence reasonably satisfactory to DFS of such performance;
in the event of any failure of such performance, the Client
will permit DFS, on such terms as DFS may reasonably consider
appropriate, to perform any such obligations at the Client's
expense;
(iii) upon a Customer becoming entitled to a credit against a
Scheduled Debt the Client will promptly or will procure that
the relevant Subsidiary will promptly issue and dispatch
credit notes to which the relevant Customer isentitled and
will promptly include details of credit notes in Schedules
(but DFS shall at all times have reasonable discretion to
require that DFS' prior approval is to be obtained before the
issue of a credit note to a Customer);
(iv) as trustee for DFS the Client will hold and will procure
that each Subsidiary will hold and keep separate from the
Client's or as the case may be the relevant Subsidiary's
other money, any remittance in payment of or on account of
or in any way relating to a Debt or its Related Rights
vested in DFS and shall promptly and in any event no later
than close of business the following Working Day deliver to
DFS the identical remittance or, when required by DFS, shall
pay the identical remittance direct into DFS' bank account
or any other bank account stipulated by DFS; by DFS'
execution hereof DFS acknowledges intimation of the
foregoing trust; if it be necessary for any cheque or
remittance to be endorsed to DFS to enable DFS to receive
payment then Client will endorse the same to DFS and give
DFS' bankers any indemnity in respect of non transferable
cheques;
(v) the Client indemnifies DFS against all reasonable costs and
expenses incurred by DFS in the collection or attempted
collection of any Debts following the cancellation of the
Client's Agency pursuant to clause 7.6;
(vi) in respect of any existing Debt on the Commencement Date and
in respect of any future Debt, promptly upon it coming into
existence, the Client will make an appropriate entry in the
Client's books of account that it has been sold to
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DFS and shall procure that all records of Debts maintained
in the Client's books of account or other records in the
names of Customers bear a conspicuous notation that they
have been assigned to and are only payable to DFS;
(vii) no Contract of Sale if the aggregate of such Contracts of Sale
exceeds (pound)50,000 will provide for Delivery of the Goods
to be spread over a period exceeding ninety days unless agreed
in writing by DFS;
(viii) all covenants in respect of Debts shall remain fulfilled until
all monies due to DFS (whether from the Client, any Customer
or otherwise) under the Agreement and these Conditions shall
have been paid in full;
(ix) it will advise DFS promptly upon becoming aware of the same
should an event occur which if not remedied will result in a
Termination Event;
(x) it will not create in favour of any other party any
assignment, mortgage, charge, lien, trust, pledge or
encumbrance in respect of Debts or any monies due from the
Client to DFS; or do anything which will affect DFS' right to
be treated as the beneficial owner of each Debt;
(xi) upon becoming aware of any circumstances which would result in
any previously Scheduled Debt becoming an Ineligible Debt, it
will promptly notify DFS;
(xii) it will procure that, by no later than 31 December 1998, none
of the Subsidiaries shall continue to originate new Debts.
10.4 Where the Client is unable to give all of the warranties or comply
with the Client's obligation herein relating to a Debt the Client will
enter such Debt on a separate Schedule with full particulars of such
inability. Any event or circumstance so disclosed shall be deemed not
to give rise to any breach of the warranties contained in this Clause
10.
10.5 During the currency of this Agreement the Client will not without DFS'
prior consent enter into any other agreement for the purchase or
discounting of the Debts.
11. Recourse and Repurchase
11.1 DFS may exercise Recourse in respect of:
(i) each Approved Debt where the Collection Date has not
occurred before the expiry of the Recourse Period; or
(ii) each Approved Debt upon breach of any of the Client's
undertakings, warranties or obligations to DFS relating to
such Debt; or
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(iii) all or any uncollected Scheduled Debts (whether or not
Approved Debts) upon termination of this Agreement; or
(iv) all or any uncollected Scheduled Debts following the happening
of a Termination Event for so long as the same is continuing
unremedied and unwaived; or
(v) the uncollected Scheduled Debts referred to in any notice
making all or any Approved Debts into Ineligible Debts; or
(vi) any Scheduled Debt to which Condition 10.4 applies; or
(vii) each Approved Debt upon the Insolvency of the relevant Customer.
11.2 The Client will promptly pay all amounts due to DFS by way of Recourse
upon receipt of any notice from DFS demanding Recourse hereunder, to
the extent that DFS cannot exercise set-off.
11.3 Alternatively DFS may serve a notice on the Client requiring the Client
to repurchase the Debts referred to in condition 11.1(i) to (vii)
inclusive in the same situations at a repurchase price equivalent to
the amount of the Prepayments made in respect of each Debt. The
repurchase price shall be promptly paid by the Client to DFS upon
receipt of the repurchase notice.
11.4 Until the repurchase price of all Debts subject to repurchase notices
has been paid together with all other sums due to DFS such Debts and
their Related Rights shall remain vested in DFS.
11.5 Upon DFS serving notice of repurchase of all outstanding Debts in the
circumstances contemplated in sub-conditions 11.1(iii) or 11.1(iv) ,
the repurchase price shall be treated as being paid when the Client
pays to DFS an amount equivalent to the debit balance on the Current
Account, together with all or any accrued or contingent fees, charges,
expenses and other sums due to DFS at the date of such payment.
11.6 After payment of the repurchase price of a Debt, and provided that the
Client owes no other sum to DFS, DFS shall promptly pay to the Client
any amount received in relation to such Debt and in the meantime hold
it on trust for the Client.
11.7 Whether before or after the termination of this Agreement the Client
will repay to DFS an amount equivalent to any monies collected in
respect of a Debt if payment be set aside at any time under the laws
relating to insolvency.
11.8 Upon termination of this Agreement for any reason the Client will
repurchase all outstanding Debts for a price equivalent to the debit balance on
the Current Account but so that no Debt shall revest in the Client until such
price shall have been paid.
12. Client's Accounts and Records
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12.1 The Client irrevocably agrees to allow any duly authorised
representative or agent of DFS at all reasonable times following a
Termination Event and on reasonable notice prior to a Termination Event
to attend at and enter any of the Client's and each Subsidiary's
premises to inspect, verify, check and copy (making free use of the
Client's facilities) all books, accounts, computer or other records,
orders, proofs of completion of the Contract of Sale, banking records
and statements, files, business procedures and original correspondence,
and such other papers as DFS may reasonably require in relation to
Debts, Related Rights, and the Client's compliance with this Agreement.
12.2 The Client will supply DFS with the Client's internal management
accounts within twenty days of the end of each month or at such other
intervals as DFS may specify.
12.3 The Client will furnish DFS within one hundred and eighty days of the
end of each of its financial years with its annual financial statements
prepared in accordance with generally accepted accounting principles,
certified or audited by an independent professional firm of accountants
showing the Client's financial position and the results of the Client's
operations as at the end of such financial year.
13. Credit Balances
13.1 After a Termination Event and so long as the same remains unremedied
and unwaived, the Client irrevocably authorises DFS to make payment to
any Customer in respect of a credit balance on that Customer's account,
whether arising from the issue of a credit note by the Client or
otherwise.
14. Transferred Goods
14.1 All Transferred Goods not in DFS' possession but in the possession of
the Client shall be held by the Client on trust for DFS.
14.2 DFS shall have the right to take possession of any Transferred Goods
and to sell them on such terms as DFS may reasonably deem fit. The
proceeds of sale, after deduction of all costs and expenses relating to
such possession or sale, shall be treated by DFS as a payment of or on
account of the Debt to which such goods relate.
15. Allocation of Receipts, Credits and Allowances
15.1 Following a Termination Event or at any other time after giving notice
of intent to the Client, DFS may appropriate any Collection, or any
credit, allowance or dividend, in or towards the discharge of any
Approved Debt in priority to any other Scheduled Debt, despite any
contrary appropriation by the Client or the Customer.
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16. Discounts, Commission or Allowances Claimed by Customers
16.1 DFS shall not be liable to the Client for the amount of discounts,
commissions or other allowances wrongly claimed or deducted by
Customers. The Purchase Price shall be correspondingly reduced.
17. Notification to Customers, Collection of Debts and Disputes
17.1 Following the termination of the Client's agency in accordance with
clause 7.6 DFS may notify the assignment of Debts to each Customer who
is or may become indebted to the Client in such form and at such
intervals as DFS may determine. DFS may also require the Client to give
such notification at the Client's reasonable expense at such intervals
and upon such documents as DFS may reasonably stipulate.
17.2 Following the termination of the Client's agency in accordance with
clause 7.6 DFS shall have the sole and exclusive right of collecting
and enforcing payment of any Debt and its Related Rights vested in DFS,
in such manner as DFS in DFS' absolute discretion may decide including
the resolution of disputed Debts. DFS may institute, conduct, defend or
compromise in the name of either the Client or DFS on such terms as DFS
may think fit, any legal proceedings by or against DFS or the Client in
relation to such Debt and its Related Rights. Without affecting the
generality of the above DFS will not pursue sums of (pound)35.00
(thirty five pounds) or less unpaid by a Customer. The Client will be
bound by anything done by DFS under this condition, including any
corresponding reduction in the Purchase Price.
17.3 Following the termination of the Client's agency in accordance with
clause 7.6 the Client will and will procure that each Subsidiary will,
upon request and at the Client's own cost, provide every reasonable
assistance and co-operate fully in such collection or enforcement. At
all times the Client will, as reasonably required by DFS, exercise any
rights as seller to recover Goods in accordance with the Client's
Contracts of Sale or enforce any Related Rights.
17.4 The Client will take all proper steps to resolve any disputed Debt. .
17.5 DFS or DFS' agents, may take such reasonable steps as DFS believe
necessary to verify the existence and amount of Debts or the
creditworthiness of Customers.
18. Communications with Banks, Auditors, and Accountants
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18.1 The Client irrevocably authorises DFS to provide the Client's banks,
auditors and accountants with such information as they may require in
relation to the Client's dealings with DFS.
18.2 The Client confirms that the Client will promptly after the execution
of this Agreement irrevocably authorisethe Client's bank, auditors and
accountants to provide DFS with such information as DFS may reasonably
require. DFS is authorised to request such information provided that at
the time of such request a copy of such request is sent to the Client.
19. Transfer of Agreement
19.1 DFS shall not assign any of its rights and benefits hereunder unless a
Termination Event has occurred and is continuing unremedied and
unwaived, provided that DFS may, in connection with a reorganisation of
the Deutsche Bank group, assign its rights and benefits hereunder to
another wholly owned subsidiary (as that expression is defined in
section 736 of the Companies Act 1985) of Deutsche Bank AG, and
provided further that DFS may, in connection with a securitisation of
its assets, grant a security interest over its rights and benefits
hereunder. DFS may perform its obligations hereunder through
sub-contractors or agents provided that DFS shall continue to be
responsible for the performance of such obligations. The Client may not
assign, transfer, charge, sub-contract, delegate or otherwise deal with
this Agreement or the rights, benefits and obligations under this
Agreement without DFS' prior written consent.
20. Termination Events
20.1 DFS may, at any time, by written Notice to the Client, terminate this
Agreement forthwith at any time after the happening of any of the
following events:
(i) the Client breaching any of the provisions contained in
clauses 7 and 8 and in conditions 3.4, 5.9, 6, 7.5, 10.3(iv),
10.3(x), 10.5, 11.2 or 11.3 and (in each case) such breach (if
capable of remedy) continuing for three Working Days following
receipt by the Client of notice from DFS requiring the same to
be remedied; or
(ii) the Client's failing for a period of five Working Days to
deliver a Schedule containing Debts not previously notified;
or
(iii) the Client breaching any other provision of this Agreement and
such breach (if capable of remedy) continuing for fifteen
Working Days following receipt by the Client of notice from
DFS requiring the same to be remedied; or
(iv) DFS having served 5 notices at any time under Condition 20.1
(i) or DFS having served 15 notices at any time under
Condition 20.1 (ii) in any rolling 12 month period.
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(v) the Client's Insolvency or any petition (other than a
frivolous or vexatious petition which is removed within ten
Working Days of its issue) being presented or meeting being
called for the Client's Insolvency or any arrangement, whether
formal or informal, or the execution of a trust deed, being
made or proposed for the benefit of creditors generally; or
(vi) the Client's income or assets being seized under any execution
of legal process, distress for rent; or
(vii) a garnishee order in respect of the Client is made on DFS; or
(viii) the Client's ceasing, or threatening to cease, to carry on the
Client's business;
(ix) any final judgement decree or award exceeding
(pound)250,000.00 is entered against the Client which remains
unsatisfied for seven days; or
(x) any holder of a charge or mortgage, over the Client's or any
Subsidiary's Debts or Related Rights, who has given a waiver,
release or priority agreement to DFS or any other person who
has so given a waiver, release or priority giving notice to
terminate amend or withdraw the same; or
(xi) any guarantee given by a third party in respect of the
Client's obligations under this agreement is terminated
without the prior consent of DFS or otherwise ceases to be of
full force and effect; or
(xii) if any of the events referred to in sub-Conditions 20.1 (iv)
to (ix) inclusive and 20.1 (xiv) shall occur in relation to
any guarantor or indemnifier incorporated in the United
Kingdom of the Client's obligations to DFS; or
(xiii) if any of the Client's obligations to third parties for the
repayment of borrowed monies in excess of (pound)250,000 shall
be declared due prior to their stated maturity dates by reason
of default or shall not be paid when due or within any
applicable grace period; or
(xiv) if any representation to DFS made by the Client or on the
Client's behalf at any time (whether before or after the
Commencement Date of this Agreement) shall prove to be untrue
in any material respect; or
(xv) the occurrence of an Event or Default (as defined) in the US
Agreement; or
(xvi) DFS is unable, by 31 January 1998, to obtain a
security interest position in the assets of Elcom
International Inc and Catalink Direct Inc which is
immediately behind the security interest position held by
Deutsche Financial Services Corporation in such assets, and
such Termination Event continues for thirty
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Working Days following the receipt by the Client of notice
from DFS requiring the same to be remedied.
20.2 DFS may at any time by 90 days written notice to the Client terminate
this agreement if the Client ceases to be a Subsidiary (as that
expression is defined in section 736 of the Companies Act 1985) of
Elcom International Ltd.
21. Preservation of DFS' Rights and Variations
21.1 DFS' rights under the Agreement shall not be affected by the grant of
time or indulgence to the Client or to any Customer or to any other
person nor by any waiver of or failure or delay in exercising any
rights or options whether under the Agreement or otherwise.
21.2 DFS shall be entitled to rely upon any act done or document signed or
communication sent by any person who DFS reasonably believes to be a
director, company secretary, controller, accountant or treasurer of the
Client or any person on a list of authorised signatories provided by
the Client from time to time.
21.3 The Client will carry out the reasonable procedural steps stipulated by
DFS for the efficient working of the Agreement.
21.4 Any variation of the Agreement must be in writing and signed by or on
behalf of both the Client and DFS but may be constituted by one or more
document.
22. Notices
22.1 Any notice given by either party under this Agreement (unless otherwise
indicated) may be delivered, posted, sent by facsimile transmission or
other means of electronic data communication to the other party at such
other party's address stated in the Agreement or to such other party's
registered office or to any other place at which such other party
conducts business or handed personally to any of such other party's
Directors or Company Secretary.
22.2 Any such notice shall be treated as served;
(i) if delivered, at the time of delivery;
(ii) if sent by post, on the second day following the date of posting;
(iii) if sent by facsimile transmission or electronic data
communication at the time of receipt;
(iv) if handed personally, at the time of such handing.
22.3 Any oral notice permitted by this Agreement to be given by DFS shall be
effective upon being communicated to any director or company secretary
of the Client.
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23. Confidential Information
23.1 DFS undertakes and agrees with the Client that all Confidential Information
which comes into the possession of DFS will be held by DFS in the strictest
confidence and that DFS will not disclose, divulge or grant access to such
Confidential Information other than to:-
(i) its professional advisers; or
(ii) any reputable outsourcing company for the time being engaged by
DFS to supply computer or other outsourcing services; or
(iii) collection agents, tracing agents, credit reference or fraud
prevention agencies (but only to the extent that such disclosure is in
accordance with established market practice); or
(iv) Deutsche Bank AG, Deutsche Financial Services Inc and any
affiliate, subsidiary or parent company thereof.
(each a "Permitted Person") and DFS undertakes to procure that any
Permitted Person will hold such Confidential Information in the strictest of
confidence. DFS shall, promptly upon termination of the Agreement for any
reason, return all Confidential Information to the Client without keeping any
copies thereof, provided that nothing in this Condition 24 shall prevent DFS
from retaining Confidential Information to the extent necessary to allow DFS to
recover the Debts and enforce DFS' rights against Customers.
23.2 Unless otherwise agreed in writing by DFS and the Client or required
by law or by the rules of any stock exchange upon which the securities
of the Client's ultimate holding company are listed, no press release
or other announcement shall be made by either of the parties hereto in
respect of the subject matter of this Agreement.
Proper Law and Jurisdiction
This Agreement shall be subject to the laws of England without prejudice to DFS'
right to take proceedings in the courts of any other competent jurisdiction.
The above are the Standard Terms and Conditions for the Purchase of Debts
incorporated in the Agreement whose Commencement Date is 3rd December 1997
between Deutsche Financial Services (UK) Ltd. and the Client, namely, Elcom
Group Ltd.which have been signed on behalf of both parties for the purposes of
identification.
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DEUTSCHE FINANCIAL SERVICES (UK) LIMITED)
Signed on behalf of )
Deutsche Financial Services )
(UK) Ltd. by )
)
By William Nolin )/s/ William Nolin
*Insert full names )Signature of Director/Company Secretary
of Director/Company Secretary )
CLIENT
Signed on behalf of )
Elcom Group Limited )
)
by Kevin Morrison ) /s/ Kevin Morrison
*insert full names )Signature of Director/Company Secretary
of Director/Company Secretary) )
Exhibit 10.25
AGREEMENT FOR THE
SALE AND PURCHASE
OF DEBTS
BETWEEN
ELCOM GROUP LTD
AND
DEUTSCHE FINANCIAL SERVICES (UK) LTD
<PAGE>
DEUTSCHE FINANCIAL SERVICES (UK) LTD.
AGREEMENT FOR THE SALE AND PURCHASE
OF DEBTS
PARTICULARS
1. PARTIES: 1.1 DFS: Deutsche Financial Services (UK)
Limited.
Of: 1 Station View
Guildford
Surrey
GU1 4JY
Incorporated in England and Wales
with official number 2549477
AND
1.2 The Client: Elcom Group Ltd
Of: Elcom House
Langley Business Centre
Langley
Berkshire
SL3 8YR
Incorporated in England and Wales
with official number 297666
1.2 DATE: This Agreement is made on the day that the last of either DFS
or the Client executes it.
1.3 The Commencement date shall be 3rd December 1997 and the Minimum Period
of this Agreement shall be 12 months, provided that if the financing
agreement between Catalink Direct Inc and Catalink Direct
(Pennsylvania) Inc and Deutsche Financial Services Corporation (the "US
Agreement") terminates, then the minimum period shall end on the date
that such termination takes effect. (Condition 2.1)
1.4 The Client and DFS must give at least 6 months written notice to the
other at any time to terminate this Agreement or such shorter period
as may be permitted for the giving of notice to terminate the US
Agreement. ("the Minimum Notice Period") (Condition 2.1)
1.5 This Agreement shall apply to the following Debts or classes of Debts:
All Debts arising from Goods supplied .
(Condition 3.1)
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1.6 Permitted Countries: The United Kingdom and the other member states of
the European Union as at the date hereof and Switzerland and Norway.
(Definition of "Permitted Contract").
1.7 The Client's maximum Terms of Payment are 60 Days from invoice date.
(Definition of "Terms of Payment" and Condition 10.2(i)).
1.8 The Business of the Client and the Subsidiaries is:
The supply, sale and distribution of computer and related equipment and
the provision of related services.
(Definition of Permitted Contract and Condition 20.1(viii)).
1.9 The prepayment in respect of each Scheduled Approved Debts shall be an
amount equal to 85% (eighty five per cent) of the Net Value of each
Scheduled Approved Debt. (Conditions 5.4(i) and (ii) and 5.6(i))
1.10 The Concentration Percentage shall be 20%.
(Definitions of "Concentration Percentage" and "Ineligible Debt").
1.11 The Funding Limit shall be (pound)30,000,000 (Thirty Million Pounds).
(Condition 5.6(i)(b)).
1.12 The Administration Fee shall be (pound)6,000 per month. (Condition 6.1
(i)).
1.13 The Discounting Charge shall be 1.25% ( one and one quarter per cent)
above the Base Rate of National Westminster Bank plc from time to time
in force.
(Condition 6.1 (ii)).
1.14 The Reporting Date shall be 15 days from month end.
(Condition 7.6)
1.15 The Recourse Period shall be 90 days from the Invoice Date.
(Condition 11.1(i))
PURPOSE
2. This Agreement is for the sale by the Client and the purchase by DFS of
those Debts to which this Agreement applies.
INCORPORATION OF CONDITIONS
3. This Agreement incorporates DFS' Standard Terms and Conditions for the
Purchase of Debts ("the Conditions") which have been supplied to the
Client and are signed for identification purposes on behalf of both
parties. Reference to the "Agreement" here and in the Conditions shall
include both this document and the Conditions. The terms set out in
this document and the Conditions are the only terms agreed between the
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Client and DFS. Certain words and phrases with initial letters in
capitals have special meanings which are explained in Condition 1. In
the event of any inconsistency between this document and the
Conditions, the Conditions shall prevail.
SALE AND PURCHASE OF DEBTS
4. Subject to the terms of this Agreement, the Client agrees to sell and
DFS agrees to purchase all of the Debts to which this Agreement applies
and their Related Rights arising under Contracts of Sale entered into
by the Client with its Customers which shall be in existence on the
Commencement Date or which shall arise during the currency of this
Agreement.
THE PARTICULARS
5. The Particulars, which apply to this Agreement are those set out above.
The Conditions referred to in parentheses in the Particulars indicate
where, inter alia, such Particulars apply to the Conditions.
ABSENCE OF NOTICE OF ASSIGNMENT
6. Until notice from DFS to the Client, which notice may be given at any
time following a Termination Event for so long as the same is
continuing unremedied and unwaived, neither DFS nor the Client shall
give notice to Customers of the assignment of Debts. However, on
request by DFS, following a Termination Event for so long as the same
is continuing unremedied and unwaived (whether or not the Client's
agency referred to in Clause 7 below shall have been terminated) the
Client shall promptly give notice, in such form as DFS may reasonably
require, to all or any of its Customers of the assignment to DFS of the
Debts.
CLIENT TO ACT AS AGENT TO PROCURE COLLECTION OF DEBTS
7.1 Until further notice from DFS to the contrary, the Client is appointed
to act as the collection agent in respect of Debts vested in DFS. The
Client hereby accepts such appointment.
7.2 As DFS' collection agent the Client shall collect and attempt to
enforce payment of all sums due in respect of Debts as and when they
become due and administer the accounts of and render statements to
Customers at the Client's cost and expense, subject at all times to
DFS' right in its reasonable discretion to direct and control such
activities.
7.3 In performing the functions and duties as the collection agent of DFS,
the Client shall exercise the same care that the Client would exercise
in the collection of Debts for its own account, which standard of care
shall not be less than the standard of care prevalent in the industry
in which the Client engages.
7.4 DFS may request from time to time information relating to all Debts and
Client will promptly provide DFS with any information reasonably
requested. If DFS appoints
4
<PAGE>
another person as the collection agent, DFS may make credit
adjustments for the Client's account.
7.5 In no event shall the Client knowingly take any action that would make
DFS a party to any litigation without DFS' express prior written
consent.
7.6 DFS may at any time following a Termination Event, for so long as the
same is continuing unremedied and unwaived, terminate the Client's
functions as the collection agent by delivery to the Client of a
written notice of such termination. Upon such termination, and without
limitation:
(i) DFS, or a third party designated by DFS, shall administer the
administrative, servicing and collection functions with
respect to Debts vested in DFS to the standard of a reasonable
and prudent purchaser of Debts, and
(ii) DFS shall, at any time thereafter, be entitled to notify
Customers to make payment of amounts due thereunder directly
to DFS at an address designated by DFS or to such third party
or a bank or other recipient as may be designated by DFS; and
(iii) The Client will pay all reasonable costs and expenses, legal
or otherwise, incurred or payable by DFS thereafter in
maintaining the Customers accounts or in exercising its rights
under Condition 17 in respect of Debts and of enforcing
Related Rights.
7.7 The Client will not hold itself out as DFS' agent for any other
purpose. The Client will not appoint any other person as agent for the
collection of Debts (including external debt collection agents or
lawyers) without DFS' prior approval, such approval not to be
unreasonably withheld or delayed provided that the Client shall be
entitled to appoint such an agent in circumstances where:-
(i) the aggregate indebtedness in respect of which all such agents
have been appointed is less than (pound)50,000; or
(ii) the Debt or Debts in question have been outstanding for 90
days or more after the relevant Invoice Date(s).
Whilst such agency subsists Conditions 17.1 to 17.3 inclusive will not
be enforced by DFS and Condition 17.5 will only be used without
referring to DFS by name.
ACCOUNTS
8. Until further notice from DFS, the Client will maintain accounts in the
names of each Customer to which Debts at their Scheduled value shall be
debited and their respective Collections shall be credited. The Client
will supply up to date copies of such accounts to DFS at any time upon
request. Each day the Client will send DFS a list showing all
Collections from Customers on that day. The Client will allocate such
Collections to the accounts of Customers.
5
<PAGE>
POWER OF ATTORNEY
9.1 As security for the performance of the Client's obligations, the Client
irrevocably appoints DFS, its Directors, its Company Secretary and
every Manager of DFS jointly and each of them severally to be the
Client's attorney, both during and after termination of the Agreement
however occurring and until all monies due to DFS have been paid and
all obligations of the Client to DFS have been discharged. The power of
attorney granted pursuant to this Clause 9 shall only be used for the
purpose of perfecting DFS' title to any Debt or its Related Rights,to
obtain payment of Debts and to secure performance of any of the
Client's obligations under the Agreement or otherwise or to Customers.
9.2 By such irrevocable appointment DFS may at any time (but subject as
provided in clause 9.1):
(i) execute or sign deeds and documents (including assignments); (ii)
obtain payment of Debts; (iii) complete, deal with or endorse cheques
and other instruments and remittances; (iv) institute, conduct or
defend proceedings; (v) settle the Client's indebtedness to DFS or to
Customers;
(vi) perform such other lawful acts as DFS may in its reasonable
discretion consider necessary or expedient.
9.3 The Client irrevocably authorises DFS to allow any assignee of DFS to
perform any of the acts set out in Clause 9.2.
9.4 The Client agrees to ratify anything lawfully done by any attorney, or
agent under the powers set out above.
UNDERSTANDING
10. The Client acknowledges:
(i) having read and understood the Agreement; and
(ii) having had the opportunity before signing to take independent
legal advice as to the rights and obligations of the Client
and DFS under this Agreement.
ASSIGNMENT BY SUBSIDIARIES
11. It is acknowledged by the Client and DFS that each of the Client's
subsidiary companies listed below (each of which is called a
"Subsidiary") has assigned or has agreed to assign to the Client the
debts due and to become due by each such subsidiary's customers
together with their related rights ("Subsidiaries' Debts") and has
permitted to the Client to discount and assign such debts to DFS. In
consideration of the Client accounting for the net proceeds of them to
each Subsidiary, DFS
6
<PAGE>
has agreed that Subsidiaries' Debts shall be sold by the Client and
purchased by DFS in accordance with the terms of this Agreement and its
conditions.
THE SUBSIDIARIES
Data Supplies Limited - Company Number 1645676
AMA (UK) Limited.. - Company Number 2419522
Portable Computers Limited - Company Number 2448018
Elcom Information Services Limited - Company Number 2834456
12. Accordingly this Agreement and its Conditions shall be treated as
having been amended mutatis mutandis. Without affecting the generality
of the foregoing. DFS will not keep separate accounts for each
Subsidiary and shall treat the Client as the only party to whom it has
any obligations.
CONDITIONS PRECEDENT
13. Prepayments will not be available until:
(i) Elcom International Inc and Catalink Direct Inc have each
entered into a collateralised guarantee with DFS in an agreed
form;
(ii) Elcom International Inc and Catalink Direct Inc have executed
and have delivered to DFS, UCC financing statements which
evidence DFS' security interest in the collateral set forth in
the collateralised guarantees referenced above in (i);
(iii) Each of the Subsidiaries and Elcom Holdings Limited, Prophet
Group Limited, Able Computer Distribution Limited, Portable
Computers Limited, DS Datacare Limited, Elite Computer
Distribution Limited, Rapid Recall Limited, and Elcom
Information Services Limited have given guarantees to DFS in
respect of the Client's obligations hereunder and passed and
carried into effect such resolutions in respect thereof as DFS
may reasonably require;
(iv) Each of the Subsidiaries and the Client have entered into
charges over non-vesting debts in DFS' favour;
(v) Each of the Subsidiaries have entered into an Agency Agreement with
the Client and DFS;
(vi) Trust Bank Accounts as specified by DFS have been opened.
To indicate their respective intentions to be bound by the terms of this
document it has been duly executed as a deed on behalf of DFS and the Client.
7
<PAGE>
SIGNED and DELIVERED as a Deed on... )
behalf of ELCOM GROUP LIMITED )
)
on 3rd December 1997 )
)
by (insert full name of Director) )
)
Kevin P. Thackrah ) /s/ Kevin P. Thackrah
Director ) Signature of Director
)
and by (insert full name of )
(Company Secretary) )
)
Kevin Morrison ) /s/ Kevin Morrison
) Signature of Company Secretary
DEUTSCHE FINANCIAL SERVICES (UK) LTD.
SIGNED and DELIVERED as a Deed on )
behalf of DEUTSCHE FINANCIAL SERVICES )
(UK) LTD. on 3rd December 1997 )
by )
Full Names: William Nolin ) /s/ William Nolin
(Director) ) Signature of Director
and by )
Full Names: Nigel W. Pearson ) /s/ Nigel W. Pearson
(Company Secretary) ) Signature of Company Secretary
*Delete as applicable.
Exhibit 10.33
[LOGO]
September 2, 1997
Mr. Laurence F. Mulhern
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. ("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
Acknowledgment, 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: September 8, 1997
CORPORATE, PARTNERSHIP OR
LIMITED LIABILITY COMPANY GUARANTOR:
Elcom International, Inc., a Delaware Corporation
(Name of Corporate, Partnership or
Limited Liability Company Guarantor)
By: /s/ L. F. Mulhern
Print Name: L. F. Mulhern
Title: Chief Financial Officer
Exhibit 10.38
AMENDMENT ONE
TO
THE 1997 STOCK OPTION PLAN
OF ELCOM INTERNATIONAL, INC.
WHEREAS, subject to stockholder approval, the Board of
Directors of Elcom International, Inc. (the "Company") approved the following
amendment to The 1997 Stock Option Plan of Elcom International, Inc., effective
February 17, 1998; and
WHEREAS, the undersigned officer is authorized, subject to
stockholder approval, to integrate this amendment into the Company's 1997 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 1997 Stock Option Plan of Elcom
International, Inc. is hereby amended as follows:
A. The first sentence 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 2,000,000 shares of Common Stock."
IN WITNESS WHEREOF, Elcom International, Inc., by the
undersigned officer duly authorized, has executed this document as of the 17th
day of February, 1998.
THE COMPANY
ELCOM INTERNATIONAL, INC.
By: /s/ Laurence F. Mulhern
Laurence F. Mulhern
Its: Corporate Executive Vice President,
Chief Financial Officer, Treasurer and Secretary
Exhibit 21.1
ELCOM INTERNATIONAL, INC., AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT AND STATE OF INCORPORATION
AS OF MARCH 2, 1998
Place of
Name Incorporation
Elcom International, Inc. Delaware
Elcom Systems, Inc. Delaware
Catalink Direct, 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
Elite Computer Distribution Limited United Kingdom
Prophet Group Limited United Kingdom
Portable Computers Limited United Kingdom
Able Computer Distribution Limited United Kingdom
Data Supplies Limited United Kingdom
DS Datacare Limited United Kingdom
Lantec Information Services Limited United Kingdom
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Nos. 333-34193, 333-24809 and 333-00362.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 12, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-00362, 333-24809 and 333-34193 of Elcom International, Inc. on Form S-8 of
our reports each dated 21 March, 1997 (relating to the 1996 and 1995 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, 1997.
/s/ Deloitte & Touche
Chartered Accountants
London, England
12 March 1998
<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-22
</LEGEND>
<CIK> 0000900096
<NAME> Elcom International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 33,165
<SECURITIES> 0
<RECEIVABLES> 186,423
<ALLOWANCES> 5,474
<INVENTORY> 60,437
<CURRENT-ASSETS> 277,806
<PP&E> 34,099
<DEPRECIATION> 17,649
<TOTAL-ASSETS> 332,068
<CURRENT-LIABILITIES> 218,300
<BONDS> 0
0
0
<COMMON> 272
<OTHER-SE> 110,031
<TOTAL-LIABILITY-AND-EQUITY> 332,068
<SALES> 760,136
<TOTAL-REVENUES> 760,136
<CGS> 669,742
<TOTAL-COSTS> 71,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,203
<INCOME-PRETAX> 14,777
<INCOME-TAX> 4,489
<INCOME-CONTINUING> 10,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,288
<EPS-PRIMARY> .38
<EPS-DILUTED> .35
</TABLE>
