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, 1999
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
Common Stock, $.01 par value NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X. No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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 20, 2000, was approximately $417,280,000. For purposes of this
disclosure only, the registrant has assumed that its directors, executive
officers, and beneficial owners of 10% or more of the registrant's common stock
are affiliates of the registrant.
The registrant had 30,661,000 shares of Common Stock, $.01 par value,
outstanding as of March 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2000 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
Internet-based remotely-hosted automated procurement software and digital
marketplace technology which enables the conduct of interactive electronic
commerce for businesses. In addition, the Company operates Starbuyer.com, its
business-to-business digital marketplace, and through its business products
remarketing subsidiary, uses versions of its technology as well as
Internet-based technology to support the sale and marketing of business
products, primarily business and PC products to commercial customers which is
the source of substantially all of the Company's sales. Over the last seven
years, elcom.com, inc. ("elcom.com"), the Company's eBusiness technology
subsidiary, has developed its PECOS(R) (Personal Electronic Catalog and Ordering
System) technology, which is licensed to companies to enable them to
communicate, market, sell and buy various goods and services electronically over
the Internet or through private networks and digital marketplace(s). The
Company's PECOS technology can support large numbers of end-user customers,
products, suppliers and transactions and its transaction server middleware
provides a scaleable foundation for robust system performance and high
transaction capacity.
elcom.com, inc.
The eBusiness subsidiary of the Company, elcom.com, develops and
licenses stand-alone, Internet and intranet-based remotely-hosted applications,
primarily PECOS Internet Procurement Manager ("PECOS.ipm"), which can automate
virtually all stages of the procurement cycle, from product selection via
electronic catalog to EDI/electronic funds transfer-based financial settlement.
In March 1999, elcom.com commenced operating Starbuyer.com, its
business-to-business ("B2B") Internet on-line market as a "proof of concept" to
allow elcom.com to begin licensing technology for creating digital marketplaces
for various organizations and industries. As elcom.com is one of the suppliers
in its own Starbuyer.com digital marketplace, it markets products and recognizes
revenues as it sells over 250,000 products supplied by distribution fulfillment
partners, to businesses in a "24x7" environment. elcom.com commenced a branding
and marketing campaign in the fourth quarter of 1999 and intends to become a
leading Internet-based supplier of commodity-type products to businesses through
its Starbuyer.com digital marketplace. In the United Kingdom (U.K.), elcom.com
uses PECOS.web, a specific version of PECOS developed for the U.K., in
preparation for the creation of a U.K. digital marketplace, intended to be
launched in Q3 2000. As of December 31, 1999, elcom.com employed 195 full time
personnel.
In early 1999, in preparation for the introduction of its
remotely-hosted version, elcom.com introduced PECOS Procurement Manager
("PECOS.PM"). PECOS.PM is an automated procurement system designed to reduce
internal product acquisition costs by eliminating the inefficiencies associated
with traditional paper-based internal purchasing processes. PECOS.PM helps to
automate the internal processes required to identify, select and order products,
check pricing, automate the internal approval and routing process, place orders
electronically, track orders through the fulfillment process, and provide
automated financial settlement. By collecting data and targeting electronic
purchases from strategic suppliers, customers may be able to negotiate larger
discounts from those suppliers. As a prototype for the remotely-hosted version,
PECOS.PM was installed within a company's intranet (internal company networks
that are based on Internet Protocol) and designated PECOS.EPM, the Enterprise
version. In September 1999, PECOS.ipm, elcom.com's remotely-hosted automated
procurement system, went "live" with CBS Corporation in New York. To
management's knowledge, this became the first "live" remotely-hosted system of
its type in the world. Since going "live" in September 1999, the Company has
signed seven PECOS.ipm licenses through March 10, 2000. Because of the many
advantages of remote-hosting, the Company intends to focus substantially all of
its marketing and sales efforts on PECOS.ipm.
As acceptance of the Internet as an electronic medium to purchase
products on-line continues to accelerate and as intranets are used more by
companies to disseminate information internally, the Company believes that
companies are seeking to streamline their procurement and purchasing processes
to achieve
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internal cost savings while concurrently increasing productivity. Companies are
looking to "employee facing" browser-based applications to provide empowerment
on the desktop to allow employees to automate the purchasing processes for
commodity-type products with virtually no paperwork involved. Companies can now
deploy applications connecting personnel that link them to the company's
suppliers information, their vendors and their other providers through a single
"one-stop-shop" Internet-based system, such as the Company's PECOS.ipm system.
PECOS.ipm has several important differentiating points, including being
remotely-hosted by elcom.com, ability to function as a stand-alone system
without a back-end enterprise resource planning system ("ERP") in place, and
having a relatively low cost. In addition, remotely-hosted allows a client to
implement PECOS.ipm very rapidly with minimal, if any, impact on their IT
personnel or resources. The Company believes that as Internet-based
applications, especially remotely-hosted ones, become more prevalent and because
of the substantial potential savings from streamlining the manual purchasing
process and strategic supplier management, demand will expand for
remotely-hosted Internet-based automated procurement systems. As the Company is
targeting a very large market segment for PECOS.ipm, and because it is hosting
PECOS.ipm itself with hardware and software infrastructure already in place, it
can price its remote-hosting service very competitively.
elcom.com's business strategy is to leverage its seven years experience
in electronic commerce, expand the functionality of its PECOS.ipm eProcurement
system and aggressively market PECOS.ipm to the tens of thousands of businesses
which do not have ERP systems in place. Concurrently, elcom.com intends to
expand its customer base as it continues to market and sell products via
Starbuyer.com, the Company's Internet B2B digital marketplace while also
creating digital marketplace(s) in other vertical and geographic markets and
licensing digital marketplace technology to other companies. In pursuit of its
strategy, elcom.com is expanding its direct sale force in the U.S. and U.K. and
has developed and will continue to develop relationships with strategic
partners, including worldwide commercial organizations, suppliers and electronic
catalog content and credit card providers.
Business-to-Business Electronic Commerce Overview
B2B 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 which 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 WORLDCOM, Inc., Sprint Communications Company, L.P., and others, or
over a public network such as the Internet. The Company believes interest in
conducting business through Internet-based commerce is growing rapidly as the
marketplace becomes more aware of emerging Internet technology, particularly
XML-oriented Internet-based applications, and of the advantages that can be
offered to businesses and consumers in the form of low cost communications,
reduced transaction time and widespread user access.
Forrester Research, Goldman Sachs and International Data Corp., all
leading analysts in the B2B electronic commerce sector, have published reports
which indicate that B2B electronic commerce is expected to grow from $43 billion
in 1998 to over $1.3 trillion over the next five years, accounting for a
substantial majority of the dollar value of electronic commerce in the United
States.
B2B Digital Marketplace
Starbuyer.com, elcom.com's B2B digital marketplace, became operational
during 1999 and generated over $56.1 million in revenues for the fiscal year
ended December 31, 1999. A password to access the system is required for
security purposes. During 1999, many of Elcom Services Group's commodity-type
business product customers who wished to take advantage of Starbuyer.com's
value-added capabilities, including automated approval routing, transitioned
their business to elcom.com, which operates using an Internet-based digital
marketplace model. The Company continues to service its
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traditional customers which require a full range of services, through Elcom
Services Group. elcom.com outsources much of its support-oriented infrastructure
requirements to Elcom Services Group.
The Company uses its proprietary automated sourcing technology to
source and buy the majority of its products automatically. In the U.S., the
Company is linked electronically with Ingram Micro and Tech Data, the world's
largest PC product distributors. In addition, elcom.com links with S.P. Richards
and Digital River (effective February 2000), who serve as distribution
fulfillment partners for office-oriented products and for software titles,
respectively, for elcom.com in the U.S. The Company's automated sourcing
technology allows it to have multi-billion dollar on-line "virtual" inventories
available to its customers and to offer one of the broadest selections of
business products in the industry. In addition, elcom.com offers other business
products and services through business partners like Automatic Data Processing,
Inc., providing payroll, human resources and benefits administration services
and Barnesandnoble.com, who is the Company's provider of book-related products.
The Company intends to add other business services via links to other business
partners via their portals.
Elcom Services Group
Elcom Services Group, Inc.(R) ("ESG"), a wholly owned subsidiary of the
Company, markets and sells business-related products to commercial customers.
Further, leveraging its existing distribution and available IT systems
capabilities, the Company intends to position ESG to provide logistics,
distribution, and fulfillment outsourcing services to companies. ESG uses PECOS
Commerce Manager ("PECOS.cm"), the original PECOS technology providing an
electronic linkage to automate the sales order process, and more recently,
PECOS.web, an Internet-based ordering and information system. ESG commenced
operations in December 1993 as the original proof of concept of the Company's
technology, and experienced rapid growth through 1997. The Company achieved its
growth by offering its PECOS.cm and PECOS.web technology to its ESG customers
and by various marketing efforts, including the expansion of its direct sales
force nationwide, and by the acquisition of six PC remarketers.
In addition to PECOS.cm and PECOS.web, ESG intends to offer its
customers a single catalog version of PECOS.ipm, the Company's remotely-hosted
automated procurement system, thereby providing its corporate customers with the
ability to reengineer their internal procurement practices for products and
services purchased from ESG. Although there can be no assurances as to the
ultimate timing or success thereof, management believes that by offering the
single catalog version of PECOS.ipm to existing and prospective customers, ESG
sales force can be empowered with a significant competitive tool to help expand
sales and enhance penetration of existing customers by providing
service-oriented value-added solutions.
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom remarketer group operations, which accounted for
approximately 75% of U.K. revenues in both 1998 and the first seven months of
1999. Generally, the Company sold its U.K. field-based operation, its
professional services organization, its distribution business and certain of its
inventory and fixed assets. The Company retained its U.K. telemarketing group,
which it intends to transition to a B2B Internet-based digital marketplace,
similar to that conducted by elcom.com in the United States ("U.S."). The
Company also plans to use the U.K. telemarketing group to market PECOS.ipm. in
the U.K. On October 1, 1999, the ownership of the U.K operations were
transferred from ESG to elcom.com to help facilitate this strategy.
The Company introduced a strategy for ESG in early 1999 to reduce its
revenues and related inventory exposure by declining to do business with
customers that do not pay the Company on time as per agreements, or demanded
pricing which the Company would not provide due to many factors, including
decreases in marketing development funding from various manufacturers. This has
resulted in a significant decrease in revenues in 1999 compared to 1998 and will
affect subsequent quarterly comparisons, but has effectively eliminated the
majority of the Company's marginal customers. As of December 31, 1999, ESG
employed 184 full time personnel.
ESG offers thousands of products manufactured by leading companies,
such as Compaq, IBM, Toshiba and Hewlett-Packard. Orders placed through PECOS.cm
and PECOS.web for products that are in
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stock generally are fulfilled automatically from the inventory of one of ESG's
Distribution Fulfillment Partners ("DFPs"), which include Ingram Micro, Inc. and
Tech Data Corporation, the two largest PC product distributors in the world (See
"- Fulfillment/Logistics/Information Systems"). During 1999, ESG focused on
operating as more of a "virtual" inventory company with minimal inventory
on-hand and reduced its inventory levels from $40 million as of December 31,
1998 to $1.5 million as of December 31, 1999. ESG also offers a wide range of
professional services to its U.S. customers.
Products and Pricing
Products. The Company offers over 250,000 products from thousands of
manufacturers. The substantial majority of business products offered by the
Company are purchased primarily from DFPs in both the U.S. and U.K. The Company
provides customers with a large selection of business products, including
personal computer systems, monitors, printers, peripherals, software and office
supplies, as well as a broad range of professional services. The Company markets
products sold by many brand name manufacturers including:
PERSONAL COMPUTERS
Compaq IBM Apple
NEC Gateway Toshiba
Hewlett-Packard Dell Panasonic
PRINTERS
Hewlett-Packard Canon Lexmark
Epson Xerox Tektronics
PERIPHERALS
NEC Sony Cisco
Intel Xircom Kingston
Viewsonic 3Com Iomega
Hewlett-Packard Golden Ram Seagate
Viking Citrix Digi International
SOFTWARE
Microsoft Lotus Corel
Seagate Novell Computer Associates
Adobe IBM Symantec
OFFICE SUPPLIES
Papermate 3M GBC
Avery Acco Smead
Sparco Hammermill Epson
Okidata Sony Kodak
In the U.S., the Company has established electronic purchasing and
supply relationships with Ingram Micro, Tech Data, SP Richards and Digital
River, as well as traditional relationships with several other large, national
business product suppliers. The Company's purchasing relationships with DFP
suppliers are pursuant to industry-standard arrangements with negotiated pricing
based on either a percentage of all orders being offered electronically to a
supplier or anticipated volume levels, with payment generally being made through
existing floor plan financing arrangements.
Pricing. The Company believes that its business product pricing offered
through ESG is generally competitive with other remarketers. The Company
believes that the pricing offered through Starbuyer.com, the Company's digital
marketplace, is also competitive. The Company continues to review ESG's customer
orders for profitability and will decline to do business with customers who
demand pricing which cannot be provided by the Company or which create
unnecessary inventory exposure. The Company typically offers larger corporate
customers a greater discount than other customers, reflecting the economies of a
higher level of purchases by such customers. The Company uses a proprietary,
customized and automated pricing system for its customers through PECOS.cm's and
PECOS.web's back-end server
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system, which supports and tracks a variety of pricing methodologies, including
the ability to provide customized pricing for each customer, by product. In
addition, the Company believes that PECOS.ipm, its remotely-hosted automated
procurement system, is aggressively priced compared to license fees for other
eProcurement software providers.
Professional Services
elcom.com's Professional Services group offers various consulting and
supplier services to its customers. These services range from implementation of
PECOS.ipm and training, to customized coding in special cases, to interfacing
data from PECOS.ipm into non-standard back-end systems. Suppliers are also
offered services associated with catalog content and categorization, loading
procedures and automated data update methodologies.
ESG offers a wide range of professional services in the U.S., including
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. The Company's service-oriented revenues decreased in 1999 to
approximately $26 million, from $34 million in 1998, primarily reflecting the
sale of the Company's U.K. services business. The Company intends to leverage
its distribution, logistics, and IT capabilities and offer logistics,
distribution, and product fulfillment services to other companies during 2000.
Fulfillment/Logistics/Information Systems
Fulfillment. In the U.S. the Company sources the majority of its
products from a number of DFPs, including Ingram Micro, Tech Data, S.P. Richards
and Digital River. The Company sources a majority of domestically purchased
business products from these primary DFPs, both electronically and via
traditional methods. Ingram Micro and Tech Data are the two largest PC product
distributors in the world, with combined annual sales in excess of $34 billion.
Augmented by its DFPs, the Company draws from inventories which the Company
believes are well in excess of $4 billion.
PC Configuration Capabilities. For computer systems that require
configuration, the Company operates two configuration facilities in the U.S. and
one in the U.K. and also utilizes an additional outsourced facility in the U.S.
Products requiring configuration are typically shipped to these facilities. The
configuration services are offered generally on a fee basis and currently are
performed primarily by ESG at its Canton, MA and Irvine, CA facilities and in an
outsourced facility in Hartford, CT. In addition, the Company maintains a
product distribution and configuration facility in Hounslow, Middlesex, in the
U.K.
Information Systems. In the U.S., the Company licenses and utilizes
software from Oracle Corporation and other software firms as its Information
Technology ("IT") system to allow management to monitor and manage the Company.
The Company's Oracle-based IT system installation initially went "live" in the
U.S. in November of 1997. The Company experienced substantial difficulties and
inefficiencies with this implementation which significantly impacted operations,
logistics, fulfillment and resultant profitability through 1999. The IT system
incorporates modules supporting general ledger, accounts payable, purchasing,
accounts receivable, inventory and order entry. The Company's IT design is now a
unique implementation of Oracle software applications that have been and
continue to be enhanced and extended to provide functionality not found in the
standard system, including the ability to:
Accept electronically delivered sales orders such as PECOS, EDI, and
XML orders, as well as converted quotations;
automatically source product from the Company's or its principal DFPs'
inventories based on variable 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.
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During 1999, the Company continued to enhance its U.S. and U.K. IT
systems. The Company was assured by its electronic trading partners that their
information systems applications are Year 2000 compliant and the Company has yet
to experience any significant problems internally or with customers, clients or
electronic trading partners in connection with Year 2000 compliance.
The Company's operations are dependent in part upon its ability to
protect its IT network infrastructure in its Norwood, MA, Irvine, CA and Slough,
Berkshire, U.K. facilities against damage from physical break-ins, natural
disasters, operational disruptions and other events. The Company operates a
fully redundant system for the U.S. with data centers in Norwood, MA and Irvine,
CA, which also provide the hosting platform for PECOS.ipm clients. The Company
has 24x7 physical security at its Norwood data center. To protect the Company's
data and provide service if both data centers were to become inoperative, the
Company is in the process of finalizing a disaster-recovery system with a major
computer company. Although the Company believes that its technology and
operating systems will be adequate for its current needs, such IT systems will
undoubtedly require ongoing investments to modify and enhance them as the
Company expands and evolves.
Marketing and Sales
The Company uses its direct and telemarketing sales forces in the U.S. and
U.K. to market products and technology to targeted business, education, and
corporate accounts. As of December 31, 1999, the Company employed approximately
83 sales representatives, account executives and related support personnel to
service those customer segments. Of these 83 sales personnel, 49 are employees
of elcom.com in the U.S. and U.K. and 34 are employees of ESG in the U.S. The
Company intends to significantly increase its direct sales force for PECOS.ipm
in the U.S. and U.K.
As of December 31, 1999, the Company's sales and support personnel
operated from Field Support and Sales Offices ("FSSO's") in six metropolitan
areas in the U.S., as well as three locations in the U.K. ESG's primary
locations and FSSO's are listed below:
UNITED STATES
- Norwood, MA (Boston)(Headquarters) - San Diego, CA
- New York City, NY - Stamford, CT
- Bristol, PA (Philadelphia) - Edison, NJ
UNITED KINGDOM
- Basingstoke, Hampshire - Slough, Berkshire
- Redditch, Hereford
Corporate Accounts. ESG's primary target customers are large
corporations that wish to purchase business products in an efficient manner.
Corporate accounts typically employ purchasing agents or buyers with
above-average product knowledge who view most business products as commodities.
Business accounts targeted by the Company range from divisions of large
corporations to businesses with as few as fifty employees. These companies also
will be targeted customers for PECOS.ipm, the Company's remotely-hosted
automated procurement system. The Company uses both direct sales efforts and
telemarketing. The Company uses a defined business telemarketing staff operating
from certain of its U.S. and U.K. locations whose mission is to introduce the
Company to targeted businesses. Telemarketers also assist the sales
professionals by contacting and pre-qualifying accounts for follow-up and
on-site visits by the direct sales force, if appropriate. 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. The Company restructured ESG's
government and education sales operations in September 1998 and has concentrated
on building an educational sales force focused on providing Windows and
Intel-based ("Wintel") solutions to the education market in the U.S. The Company
decided to leverage its experience in cabling and network integration of
classrooms and
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schools derived from its previous Apple Educational Sales Agent relationship, to
promote this division as it focuses on a larger potential market.
Customer and Technical Services
The Company provides a wide range of customer service and technical
support, including nationwide toll-free pre-sale and post-sale telephone-based
support. The Company 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,
the Company offers its customers certain return privileges for products which
have not been used or were damaged. Typically, such products can be returned to
the Company within a certain time for a refund or credit. The Company believes
that its product return policies are competitive with those offered by other
remarketers. Historically, product returns generally have not represented a
material exposure to the Company. Typically, manufacturer warranties are
included as part of, and are packaged with, the product. When available from
manufacturers, the Company also offers on-site and extended-term warranty and/or
service policies as ancillary products available for sale through the PECOS.cm,
PECOS.web or the Starbuyer B2B digital marketplace. In addition to the Company's
telephone-based technical support and manufacturer programs, the Company offers
a full range of on-site and depot warranty and post-warranty service options in
the U.S., generally through nationwide outsourcing agreements with third party
service providers. Product returns are centralized at ESG'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
eBusiness Systems Marketplace. The market for interactive eBusiness
software is relatively new and evolving rapidly. The Company expects competition
in this market to intensify in the future. Among other factors, before licensing
an eBusiness system, the Company believes potential customers consider the cost
of the system compared to the level of features and functions available in
electronic commerce applications and the cost to acquire, implement and maintain
the system, as well as the length of time to implement a system and, as
applicable, integrate it with a company's existing IT system. 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 Ariba, Inc., Commerce One, Inc.,
Clarus Corporation and PurchasePro.com, Inc. The Company anticipates future
competition from other emerging and established companies, possibly including
Microsoft Corp., IBM, SAP AG and Oracle Corporation, 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.,
which recently announced a possible acquisition by SBC Communications, 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
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
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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.
Business Products Marketplace. The Company has invested substantial
effort and capital to develop and implement its proprietary PECOS.cm and
PECOS.web front- and back-end systems, as well as for the associated hardware
and electronic links with its primary DFPs. The overall market of companies
which sell business and PC products is highly fragmented and ESG operates in an
extremely competitive environment which is continuously 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 and business product
remarketers of various types in the U.S. and U.K. In response to competitive
pressures and declining margins, traditional remarketers are cutting costs and
acquiring or merging with other remarketers to increase scale and efficiency. A
prospective purchaser of PC products has the option to purchase directly from a
manufacturer (e.g., IBM, Compaq, Dell Computer Corp.), from a major remarketer
(e.g., MicroAge, Inc., Inacom Corp., CompuCom Systems, Inc.), from a computer
mail order company (e.g., CDW Computer Centers, Inc., Creative Computers Inc.,
Micro Warehouse Inc.), from a systems integrator (e.g., Andersen Consulting,
EDS), from computer superstores (e.g., CompUSA Inc.), from Internet-based
companies (e.g. Insight Enterprises, Inc., Cyberian Outpost, Inc.), from
electronics superstores and from local computer stores, among others. ESG
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. The advent and expansion of the Internet-based sales
companies has added substantial additional pressure to price competition in the
marketplace and has continued to exacerbate gross profit pressures. Certain of
the companies noted above 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
technology, 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 a 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 technology.
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 PCs, among local area networks or on the Internet. However,
due to the increasing popularity and use of PCs and the Internet, it is possible
that additional laws and regulations may be adopted with respect thereto,
covering issues such as user privacy, pricing and characteristics, taxation of
Internet sales 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.
9
<PAGE>
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, 1999, the Company had a total of 435 personnel,
including 368 salaried and 67 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, especially on the Internet, has
presented a significant challenge to the Company's personnel and management
resources. To manage its expected growth, the Company will continue to implement
and improve its information systems and solicit key candidates for open
positions as well as continuing to train 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.
Item 2. Properties
As of December 31, 1999, the Company leased the properties set forth
below, and rented seven other smaller FSSOs as well as a professional services
office in Edison, N.J. The following leases vary in length remaining, from two
years to thirteen years and, in some cases, include options to extend the lease
terms (see also Note 6 to the Company's Consolidated Financial Statements,
included elsewhere in this Annual Report on Form 10-K).
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
Norwood, Massachusetts 36,000 Headquarters; Elcom Services
Group Boston-area FSSO
Westwood, Massachusetts 12,000 elcom.com's Corporate Headquarters
Canton, Massachusetts 84,000 Elcom Services Group Configuration
and Distribution (U.S., East Coast)
Irvine, California 21,000 Elcom Services Group Configuration
and Distribution (U.S., West Coast)
Bristol, Pennsylvania 35,000 Elcom Services Group Administrative
and FSSO
Slough, Berkshire (U.K.) 7,800 elcom.com (U.K.) Administrative
and FSSO
Basingstoke, Hampshire (U.K.) 7,500 elcom.com (U.K.) FSSO
10
<PAGE>
In addition to the leased properties noted above, the square footage of
which is net of sub-leased areas, the Company also owns land and a building in
Redditch, Hereford, U.K., comprising administrative and FSSO facilities of
approximately 20,000 square feet.
The Company intends to relocate ESG to a separate facility during 2000
and subsequently relocate elcom.com's headquarters to its Norwood facility. The
Company considers these current and new facilities to be generally sufficient to
meet its near-term space requirements in light of its current plans.
Item 3. Legal Proceedings
The Company is a party to various claims, disputes and other
proceedings relating to former employees and other 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock trades on the Nasdaq National Market(R)
under the symbol ELCO. As of December 31, 1999, 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 National Market for each of the quarters in the two year period
ended December 31, 1999 are set forth in the table below. For the period from
January 1, 2000 to March 20, 2000, such high and low closing sales prices were
$35.44 and $15.63, respectively.
Quarter Ended 1999 1998
- ------------------- -------------------------- -------------------------
High Low High Low
----------- ----------- ---------- -----------
March 31, $ 4.0625 $ 1.5938 $6.6900 $5.0000
June 30, $ 7.7500 $ 2.8750 $6.0600 $3.4400
September 30, $ 6.3750 $ 3.7500 $4.1300 $1.1900
December 31, $ 36.5000 $ 4.1563 $3.1300 $1.1600
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.
Recent Sales of Unregistered Securities
The Company issued a warrant to purchase 353,418 shares of Common Stock
to Wit Capital on December 30, 1999. The warrant was issued pursuant to the
terms of a letter agreement, dated July 8, 1999, pursuant to which Wit Capital
agreed to act as a financial advisor to the Company. In that capacity, Wit
Capital introduced the Company to Cripple Creek, with whom the Company entered
into the
11
<PAGE>
Structured Equity Line Flexible Financing Agreement, dated as of December 30,
1999 (described elsewhere herein). The warrant was exercisable upon issuance
with respect 80% of the shares subject to the warrant. The warrant becomes
exercisable with respect to the remaining 20% of the shares upon the earlier to
occur of (i) effectiveness of the Company's registration statement on Form S-3
filed in connection with the Equity Line or (ii) 120 days after the date of
issuance of the warrant. The warrant expires on December 30, 2002 and has an
exercise price of $28.71 per share. Exemption from registration for the issuance
of the warrant is claimed pursuant to Section 4(2) of the Securities Act of
1933, as amended.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for
the Company for the years ended December 31, 1995 through December 31, 1999. The
historical financial data for 1999 is derived from the Consolidated Financial
Statements of the Company audited by KPMG LLP. The historical financial data for
1995 to 1998 is derived from the Consolidated Financial Statements of the
Company audited by Arthur Andersen LLP. This information should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", which are included elsewhere in this
Annual Report. The data for the periods presented are not necessarily comparable
because of various write-offs and write-downs in 1998 and 1999 and acquisitions
consummated at various times during the periods presented.
<TABLE>
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
1995 1996 1997 1998 1999
INCOME STATEMENT DATA (1): ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales .................................. $ 311,423 $ 620,115 $ 760,136 $ 763,600 $ 485,828
========== ========== ========== ========== ==========
Gross profit ............................... 39,382 70,039 90,394 76,942 43,401
Selling, general and administrative expenses 36,016 57,551 70,200 80,285 63,426
Research and development expenses .......... 1,122 1,200 1,275 1,178 1,343
Restructuring, impairment and other related
charges .................................. -- -- -- 12,892 19,272
---------- ---------- ---------- ---------- -----------
Operating profit (loss) .................... 2,244 11,288 18,919 (17,413) (40,640)
Interest and other income (expense), net ... (1,909) (2,303) (4,142) (7,664) (2,221)
---------- ---------- ---------- ---------- -----------
Income (loss) before income taxes .......... 335 8,985 14,777 (25,077) (42,861)
Provision for income taxes ................. 1,239 3,410 4,489 484 (323)
---------- ---------- ---------- ---------- -----------
Net income (loss) .......................... $ (904) $ 5,575 $ 10,288 $ (25,561) $(42,538)
========== ========== ========== ========== ===========
Basic net income (loss) per share .......... $ (0.05) $ 0.21 $ 0.38 $ (0.94) $ (1.53)
========== ========== ========== ========== ===========
Basic weighted average shares outstanding .. 18,195 26,363 26,937 27,322 27,846
========== ========== ========== ========== ===========
Diluted net income (loss) per share ........ $ (0.05) $ 0.19 $ 0.35 $ (0.94) $ (1.53)
========== ========== ========== ========== ===========
Diluted weighted average shares outstanding 18,195 29,739 29,461 27,322 27,846
========== ========== ========== ========== ===========
</TABLE>
<TABLE>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Total current assets ........................ $136,781 $210,185 $277,806 $220,415 $ 86,896
Total assets ................................ 174,231 260,769 332,068 261,851 98,039
Total current liabilities ................... 89,290 161,158 218,300 175,929 50,851
Long-term liabilities, net of current portion 91 1,008 3,465 905 260
Total stockholders' equity .................. 84,850 98,603 110,303 85,017 46,928
</TABLE>
(1) The information presented for all periods includes the results of
operations and financial condition of AMA, which was acquired in February
1996. The acquisition of AMA was 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 AMA.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
The Company was founded as Elcom Systems, Inc., in 1992 as a developer
of electronic commerce software. The Company formed another company which, to
prove and use its technology, commenced selling computer and business products,
primarily PCs and associated peripherals, in December 1993 using its electronic
commerce software, and experienced rapid growth for several years. The Company
achieved its growth by using its proprietary PECOS procurement application and
by offering the use of PECOS through ESG to its customers and by various
marketing efforts, including the expansion of its direct sales force nationwide,
and by the acquisition of six computer products remarketers. To date,
substantially all of the Company's net sales have been derived from the sale of
business and computer products in the U.S. and U.K., to business and corporate
customers. In addition, the Company, through elcom.com, licenses its PECOS
technologies, including PECOS.ipm, its recently introduced Internet-based and
remotely-hosted automated procurement system, and provides implementation and
consulting services. In March 1999, elcom.com commenced operating Starbuyer.com,
its Internet digital marketplace, to sell products. Since then, elcom.com has
added auction capabilities to its Internet site, launched office supplies and
software product lines and plans to introduce other business-oriented products
in the future.
On July 31, 1999, the Company completed the sale of the substantial
majority of its U.K. remarketer group operations. Generally, the Company sold
its U.K. field-based sales operation, its professional services organization,
its distribution business, and certain of its inventories and fixed assets, all
in the U.K. The disposed businesses accounted for approximately 75% of the
Company's U.K. revenues and 67% of its U.K. operating income in 1998 and the
first seven months of 1999 (excluding the asset impairment charge). The Company
has retained its U.K. telemarketing group, which it intends to evolve towards an
Internet-based B2B digital marketplace similar to Starbuyer.com operated by
elcom.com in the U.S. The Company also plans to expand its direct sales force
and use the U.K. telemarketing group to market PECOS Internet Procurement
Manager, its Internet-based and remotely-hosted automated procurement system.
On October 1, 1999, an internal reorganization was accomplished in
which the ownership of Elcom International Limited, the Company's United Kingdom
operations, was transferred from ESG, to elcom.com.
elcom.com, inc.
elcom.com is the eBusiness subsidiary of the Company that develops and
primarily licenses Internet-based, remotely-hosted applications that have been
designed to automate virtually all stages of the procurement cycle, from product
selection to financial settlement.
In March 1999, elcom.com launched its Internet digital marketplace as
proof of concept of its digital marketplace technologies. Through this digital
marketplace, which can be accessed at www.starbuyer.com, elcom.com markets and
sells over 250,000 business products manufactured by numerous suppliers to
corporations in a "24x7" environment. elcom.com has commenced a branding and
marketing campaign in the fourth quarter of 1999 and intends to become a leading
supplier of multiple commodity-type products to businesses. elcom.com added
auction capabilities to its site as part of its Internet-based digital
marketplace in April 1999. The Company expects to expand its customer base and
encourage repeat buying through various marketing programs, including branding,
promotional campaigns and strategic alliances intended to provide access to
global markets. To accomplish this, elcom.com plans to increase its sales and
marketing expenditures in future periods.
Beginning in the latter half of 1998, the Company shifted its focus
from marketing its PECOS.cm technology to investing in the development of
PECOS.PM, its intranet-based automated procurement management system and more
recently, to PECOS.ipm. During 1999, the Company focused primarily on fully
developing PECOS.ipm for commercial launch as it transitioned from its older
PECOS.cm
13
<PAGE>
technology, thereby negatively affecting technology-based revenues during this
product transition period. On a stand-alone basis, for the year ended December
31, 1999 and 1998, the U.S. operations of elcom.com reported revenues from
licenses, including associated professional services and maintenance fees of
approximately $1.0 million and $2.2 million, respectively. In addition,
elcom.com's digital marketplace generated product sales of approximately $56.1
million in the year ended December 31, 1999 (and none in the comparable 1998
period), substantially all of which were from customers who transitioned from
ESG. In total, elcom.com's consolidated gross profit from U.S. operations
increased from $1.5 million in the year ended December 31, 1998 to $5.1 million
in the comparable 1999 period. Consequently, because elcom.com's U.S. operations
expenses increased approximately $11.2 million from 1998 to 1999, as the Company
continued to staff the entity to support expected growth of its digital
marketplace and invested in marketing for PECOS.ipm, the operating loss from
U.S. operations increased $7.6 million, to $10.4 million during the year ended
December 31, 1999, versus an operating loss of $2.8 million in 1998 excluding
the 1998 $3.5 million restructuring charge.
Elcom Services Group, Inc.
ESG markets and sells business-related products and professional
services to commercial customers.
The Company introduced a strategy for ESG in early 1999 to reduce its
revenues and related inventory exposure by declining to do business with
customers that do not pay the Company on time as per agreements, or demanded
pricing which the Company would not provide due to many factors, including
decreases in marketing development funding from various manufacturers. This has
resulted in a significant decrease in revenues in 1999 compared to 1998 and
subsequent quarterly comparisons, but has effectively eliminated the majority of
the Company's marginal customers.
ESG's revenues and resultant gross profit are affected by price
reductions and decreases in various vendor inventory and other support programs
offered by computer manufacturers. These cutbacks have been substantial over the
last several years, and most particularly over the last year, resulting in a
corresponding decrease in gross margin. Manufacturers' price reductions require
that ESG increase its base unit volumes and associated peripheral product sales
to overcome the effect of such price decreases and increase its revenue volume
if it is to sustain its level of gross profit dollars. The Company experienced
substantial difficulties and inefficiencies with its Oracle-based systems
implementation which significantly impacted operations, logistics, fulfillment
and resultant profitability through 1999. Further, the Company experienced a
softening of demand from its customers that began in September of 1998, which,
at that time, the Company attributed to the Asian financial crisis and
subsequent fluctuations and related uncertainties in the worldwide financial
markets, that impacted some of the Company's customers and their capital
outlays. The Company believes that the relatively soft demand, which continued
during 1999, possibly related to Year 2000 projects at certain of its customers,
which may have caused delays in procuring computers and related products and
professional services, as customers focused on their management information
systems infrastructure. ESG's gross margins may vary from quarter to quarter,
depending on the level of key vendor support programs, including rebates, return
policies and price protection, as well as product mix, pricing strategies and
other factors.
Engagement of Wit Capital Corporation
On July 19, 1999, the Company announced that it had engaged Wit Capital
Corporation ("Wit Capital") as its investment bank and strategic advisor for the
purpose of assisting the Company in evaluating strategic options for itself and
for elcom.com. Wit Capital, which is partially owned by Goldman Sachs, continues
to review strategic financing options, potential strategic partners, and
possible financing alternatives (including the potential of an initial public
offering of elcom.com).
On December 30, 1999, the Company signed a structured Equity Line
Flexible Financing Agreement with Cripple Creek Securities LLC ("Cripple
Creek"), an investor introduced to the Company by Wit Capital. Under the terms
of the agreement, the Company may sell up to $50 million of Common
14
<PAGE>
Stock over and 18 month period. For additional information concerning the
financing agreement, see Note 5(d) and 5(f) of the consolidated financial
statements.
Year 2000 Readiness Disclosure
The Company has implemented an Oracle-based, Year 2000 compliant
Information Technology System ("IT System") in the U.S. In the U.K., the Company
has implemented a Year 2000 compliant upgrade to its Computer Associates
International, Inc. software system, which operates on an IBM AS-400 hardware
platform. Due to the extended timeframe of the U.S. Oracle-based system
implementation, and related ongoing enhancements, the Company has deferred
implementation of the Oracle-based system in the U.K. to the year 2000.
The Company's various Year 2000 tests on its IT Systems and non-IT
Systems did not reveal any Year 2000 issues, and the Company did not incur any
material costs related to Year 2000 issues.
During 1999, the Company continued to enhance its U.S. and U.K. IT
systems. The Company has been assured by its electronic trading partners that
their information systems applications are Year 2000 compliant, however, there
can be no assurance by the Company that its electronic trading partners will not
experience Year 2000 oriented problems which could effect the supply of products
to the Company. The Company has yet to experience any significant problems
internally or with customers, clients or electronic trading partners in
connection with Year 2000 compliance.
The Company operates a fully redundant system with data centers in
Norwood, MA and Irvine, CA, which provide the hosting platform for PECOS.ipm's
clients. The Company is dependent on its IT system and any problems with its
ongoing development and enhancement, 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 IT systems will undoubtedly
require ongoing investments, modification and enhancements as these IT systems
expand and evolve.
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, 1999:
Year Ended December 31,
1997 1998 1999
---- ---- ----
Net sales .................................. 100% 100% 100%
Gross profit ............................... 12 10 9
Selling, general and administrative expenses 9 11 13
Asset impairment, restructuring and
other related charges .................... -- 1 4
Operating profit (loss) .................... 3 (2) (8)
Interest expense ........................... 1 1 1
Provision for income taxes ................. 1 -- --
Net income (loss) .......................... 1 (3) (9)
Year ended December 31, 1999 compared to the year ended December 31, 1998
Net Sales. Net sales for the year ended December 31, 1999 decreased to
$485.8 million from $763.6 million in the year ended December 31, 1998, a
decrease of $277.8 million or 36.4%. Net sales in the United States decreased to
$292.5 million in 1999 from $449.8 million in 1998, a 35% decrease. Professional
services revenues of ESG for the year increased 0.9% from approximately $13.1
million in 1998 to $13.2 million in 1999. The Company experienced substantial
difficulties and inefficiencies with its Oracle-based systems implementation
which significantly impacted operations, logistics, fulfillment and resultant
profitability through 1999. The Company believes the decrease in U.S. sales
reflects the continued soft demand, possibly due to certain of its customers
focusing on Year 2000 efforts and possibly deferring purchases of computer
products, as well as a general softening of demand from its larger customers.
The Company believes that there is potential for a rebound or partial rebound in
U.S. computer
15
<PAGE>
product demand once its customers have completed their Year 2000 efforts. The
Company introduced a strategy in early 1999 to reduce its revenues and related
inventory exposure, by declining to do business with customers that do not pay
the Company on time, or demand pricing that the Company cannot provide due to
many factors, including decreases in marketing development funding from various
manufacturers. This has resulted in a significant decrease in revenues in 1999
compared to 1998, but has effectively eliminated the Company's marginal
customers.
Net sales of the Company's U.K. based operations decreased to $193.3
million in 1999 from $313.8 million in 1998, a decrease of 38%. Results in the
U.K. were effected by the disposal of the substantial majority of its U.K.
remarketer operations on July 31, 1999 as well as continued softening in demand,
consistent with a general economic slowdown in 1999 versus 1998 and Year 2000
concerns.
Gross Profit. Gross profit for the year ended December 31, 1999
decreased to $43.4 million from $76.9 million in the year ended December 31,
1998, a decrease of $33.5 million, or 44%. The decrease in gross profit dollars
reflects the decrease in net sales, as well as a decrease in the gross profit
percentage between 1998 and 1999. Gross profit as a percentage of net sales
decreased from 10.1% in 1998 to 8.9% in 1999. The gross profit percentage was
higher in 1998 due to direct purchasing programs with certain manufacturers in
the U.S. which have been curtailed by the Company in 1999 due to changes in
certain manufacturers' product-distribution policies, as well as a decrease in
the availability of manufacturer rebate and incremental discount programs. The
Company anticipates ongoing pressure on its business computer products gross
margins, the impact of which it intends to mitigate with a more streamlined
corporate infrastructure focused on Internet-based selling, and by leveraging
the Company's electronic commerce experience and software capabilities. The
Company experienced substantial difficulties and inefficiencies with its
Oracle-based systems implementation which significantly impacted operations,
logistics, fulfillment and resultant profitability through 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 1999 decreased
to $63.4 million from $80.3 million in the year ended December 31, 1998, a
decrease of $16.9 million or 21%. This decrease is primarily attributable to the
restructurings accomplished by the Company in late 1998, a reduction in
amortization expense, net of the cost of the Company's increased investment in
elcom.com's infrastructure to support the anticipated future growth of the
Internet-based storefront businesses and the reduction of SG&A expenses
associated with the disposed United Kingdom operations. The Company intends to
continue to increase its marketing expenditures to support the branding and
growth of elcom.com.
Overall, SG&A expenses increased as a percentage of net sales for the
year ended December 31, 1999 to 13% from 10.5% in 1998, which primarily results
from a lower level of net sales in 1999, net of expense reductions.
Research and Development Expense. Research and development expense
remained essentially flat in 1999 compared with 1998. The expenditures reflect a
transition from product development (in particular, the recently announced
Internet-based and remotely-hosted version of elcom.com's PECOS technology,
PECOS.ipm) to marketing and deployment of the product with customers, the cost
of which is not reflected in research and development expense. The Company's
research and development expense continues to focus on developing incremental
functionality and features for its PECOS product line using Java
programming/code and other tools and techniques. The Company expects to increase
its investments in research and development as it enhances PECOS.ipm, its
remotely-hosted automated procurement system.
Asset Impairment, Restructuring and Other Related Charges. In the
second quarter of 1999, the Company recorded charges of $19.5 million related to
the July 31, 1999 sale of the substantial majority of its U.K. remarketer
operations, as further described elsewhere herein. See Footnote 7 of the
consolidated financial statements.
16
<PAGE>
In the 1998 period, the Company recorded a charge of $12.9 million
related to a restructuring of certain of its U.S. operations as further
described elsewhere herein. See Footnote 7 of the consolidated financial
statements.
Interest Expense. Interest expense for the year ended December 31, 1999
decreased to $3.2 million from $8.4 million in 1998. Interest expense in both
periods reflects floor plan line of credit borrowings in support of the
Company's accounts receivable and inventory balances and for 1999 is reflective
of the decrease in the Company's net sales, improved collection of receivables
and substantially lower inventory balances compared with 1998, as well as lower
interest rates in 1999, versus 1998.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 1999 increased to $1.0 million from $0.7 million in
1998. Other income in the 1999 period includes proceeds of $418,000 resulting
from the lapsing (without exercise) of options sold in 1997 to acquire the
Company's interest in ShopLink.com, inc. The Company continues to own
approximately 3% of ShopLink.com, inc., which is a privately-held on-line
supplier of groceries and other consumables to homeowners.
Income Tax Provision. The income tax recovery in 1999 primarily relates
to the estimated recovery of income taxes by the Company's United Kingdom based
operations, net of certain estimated current state and federal income taxes
payable by the Company. The Company has net operating loss carryforwards which
were not reflected as a benefit in either the Company's 1998 or 1999 financial
statements.
Net Income. The Company reported a net loss of $42.5 million for the
year ended December 31, 1999, versus a net loss of $25.6 million in 1998 as a
result of the asset impairment charge and other factors described herein.
Year ended December 31, 1998 compared to the year ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 increased to
$763.6 million from $760.1 million in the year ended December 31, 1997, an
increase of $3.5 million or 0.5%. Net sales in the United States decreased to
$449.8 million in 1998 from $473.8 million in 1997, a 5.1% decrease, which
reflected the impact of several factors, including substantial product price
decreases, increased price competition in the marketplace, as well as overall
softer demand from the Company's domestic customers for PC products in 1998. The
Company's Oracle IT system installation initially went "live" in the U.S. in
November of 1997. The Company experienced substantial difficulties and
inefficiencies with this implementation which significantly impacted operations
and profitability through 1999. Net sales of the Company's United Kingdom-based
operations increased to $313.8 million in 1998 from $286.3 million in 1997, an
increase of 9.6%, which generally reflected an increase in the level of
distribution sales (to other resellers) in 1998 over 1997.
Gross Profit. Gross profit for the year ended December 31, 1998
decreased to $76.9 million from $90.4 million in the year ended December 31,
1997, a decrease of $13.5 million, or 15%. Gross profit as a percent of net
sales decreased from 11.9% in 1997 to 10.1% in 1998. The decrease in gross
profit percentage in 1998 reflected a significant decrease in the level of
direct purchases from manufacturers in the United States and a substantial
decrease in manufacturer funding and incremental discounts available to the
Company. The decline in the gross profit percentage also reflected a higher
proportion of the Company's sales being to its larger customers in the United
States, which typically generated higher than average volume, but at lower gross
profit margins than other customers. The United Kingdom group was authorized to
"distribute" certain product lines to other PC remarketers through its
distribution entity and these sales, which were at lower margins than sales to
end users, increased in 1998 over 1997 levels, thereby lowering overall gross
profit margins. Increases in professional services sales, which are generally at
higher margins than product sales, were not significant enough to offset the
above described factors. The Company's Oracle IT system installation initially
went "live" in the U.S. in November of 1997. The Company experienced substantial
difficulties and inefficiencies with this implementation which significantly
impacted operations and profitability through 1999.
17
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses for the year ended December 31, 1998 increased
to $80.3 million from $70.2 million in the year ended December 31, 1997, an
increase of $10.1 million or 14%. This increase is attributable primarily to the
Company's investment in sales and technical services personnel, as well as
associated operational and administrative infrastructure to support the
anticipated growth of the Company's traditional remarketer and professional
services business. The level of sales personnel and associated infrastructure
put in place by the Company in 1998 anticipated a significantly higher level of
net sales and gross profit than was generated by the Company in 1998.
Accordingly, at the end of 1998, the Company took certain steps to "rightsize"
its workforce to mitigate this situation. See "- Restructuring, Impairment and
Other Related Charges".
Overall, S,G&A expenses increased as a percentage of net sales for the
year ended December 31, 1998 to 10.5% from 9.2% in 1997, reflecting the combined
impact of the Company's 1998 investment in sales and other personnel and
infrastructure, while sales remained essentially flat with 1997.
Research and Development Expense. Research and development expense
remained essentially flat in 1998 compared with 1997. The Company's research and
development expenses were focused on developing incremental functionality and
features for its PECOS product line, including developing the PECOS.PM
technology acquired in 1997 in current, state-of-the-art code, as well as
modifications to allow its PECOS technologies to communicate and operate using
the Internet and the continued development of its browser-based and Java-enabled
version of its PECOS technologies for license to other companies.
Asset Impairment, Restructuring and Other Related Charges. In the
1998 period, the Company recorded a charge of $12.9 million related to a
restructuring of certain of its U.S. operations as further described elsewhere
herein.
Interest Expense. Interest expense for the year ended December 31, 1998
increased to $8.4 million from $5.2 million in 1997. Interest expense in both
years primarily resulted from borrowings in support of the Company's accounts
receivable and inventory and reflected the substantial increases in such assets
which began in the second half of 1997 and continued during substantially all of
1998, prior to the Company's significant reduction of both its inventory and
accounts receivable balances in the fourth quarter of 1998. The increase in
interest expense also reflected higher interest rates in the United Kingdom in
1998 compared to 1997.
Interest Income and Other, Net. Interest income and other, net, for the
year ended December 31, 1998 decreased to $.7 million from $1.1 million in 1997
and reflected a reduction in average on-hand balances of cash and cash
equivalents available for investment. Interest income and other, net in 1997
included a gain of $.4 million 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 were phased-out and
consolidated into the Company's headquarters and 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 1998 and 1997
primarily related to the income taxes of the Company's United Kingdom-based
operations, as well as certain current federal (alternative minimum tax) and
state income taxes provided by the Company, partially offset by the tax benefit
associated with reversal of the 1997 United States deferred tax liability due to
the Company's tax loss in 1998. Because of the uncertainty related to
realizability of the Company's net operating loss carryforward, the Company
recorded a full valuation allowance against its United States deferred tax
assets.
Net Income. The Company reported a net loss of $25.6 million for the
year ended December 31, 1998, versus net income of $10.3 million in 1997, as a
result of the factors described herein.
Liquidity and Capital Resources. Net cash provided by operating
activities for the year ended December 31, 1999 was $94.7 million, which
primarily reflected a total of $35.6 million in depreciation,
18
<PAGE>
amortization and impairment of intangible assets, as well as a decrease in
inventory of $37.4 million, and a $106.1 million decrease in accounts
receivable. Net cash used in investing activities was $5.1 million, consisting
primarily of additions to property, equipment and software. Net cash used in
financing activities was $69.7 million, including a $73.5 million net decrease
in borrowings under floor plan lines of credit.
Net cash provided by operating activities for the year ended December
31, 1998 was $38.8 million, which primarily reflects a total of $20.3 million in
depreciation, amortization and impairment of intangible assets, as well as a
decrease in inventory of $20.9 million, and a $12.3 million decrease in accounts
receivable. Net cash used in investing activities was $6.8 million, consisting
primarily of $7.3 million in additions to property, equipment and software. Net
cash used in financing activities was $51.1 million, including a $50.0 million
net decrease in borrowings under floor plan lines of credit.
At December 31, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $34.2 million, accounts receivable and
floor plan lines of credit from Deutsche Financial Services Corporation
("DFSC"). As of December 31, 1999, the Company had borrowings aggregating
approximately $29.9 million outstanding under its DFSC borrowing facilities,
which approximated its maximum availability thereunder. For detailed information
concerning the line of credit, see Note 3.
The Company is dependent upon the DFSC lines of credit to finance its
eligible accounts receivable arising from sales of computer products as well as
its United States inventory purchases. The DFSC lines of credit limit borrowings
to defined percentages of eligible inventory (in the United States) and accounts
receivable and contain customary covenants, including financial covenants with
respect to the Company's net income, net worth and debt-to-equity ratios, as
defined in the agreements, and customary default provisions related to
non-payment of principal and interest, default under other debt agreements and
bankruptcy. After receiving a waiver from DFSC concerning the net income
covenant for 1999, the Company is in compliance with all other covenants of the
facility as of December 31, 1999. There can be no assurance, however, that the
DFSC lines of credit will continue to be available, or that they can be
increased if necessary to support the Company's requirements.
The Company also has a $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, 1999, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
The Company is currently seeking to minimize the level of inventory it
stocks by leveraging its electronic commerce capabilities to quickly and
efficiently source product and/or by drop shipping product to customers whenever
possible. These efforts, and the disposal of the substantial majority of the
Company's United Kingdom remarketer operations, have resulted in a decrease in
inventory of $38.2 million (96%) since December 31, 1998. As a result of the
Company's policy changes, as well as manufacturer revisions to their rebate and
incremental discount programs, the Company received a significantly reduced
amount of manufacturer funding support in 1999 versus 1998, and there can be no
assurance that the Company will purchase the levels of product necessary to
continue to receive these reduced levels of funding support in the future, or
that manufacturers will continue to make such support available. Reductions in
manufacturer funding support reduce the Company's gross profit. The Company
intends to continue to maintain logistical and traditional relationships with
selected distributors and/or aggregators and is further investigating
outsourcing of certain activities. The July 31, 1999 sale of the substantial
majority of the Company's United Kingdom remarketer group, resulted in a further
reduction in its inventory position.
On December 30 , 1999, the Company entered into a Structured Equity
Line Flexible Financing Agreement ("Equity Line") Cripple Creek. Under the terms
of the agreement, the Company may sell up to $50 million of its Common Stock to
Cripple Creek over an 18 month period. For details concerning the agreement, see
Note 5(f).
On January 14, 2000, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission for the registration of
2,853,418 shares of Common Stock, which consists of
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<PAGE>
2,500,000 shares of Common Stock issuable under the Equity Line and 353,418
shares of Common Stock issuable upon exercise of warrants held by Wit Capital,
the Company's financial advisor.
The Equity Line will be in effect for a period of 18 months, beginning
on a date shortly after the Registration Statement is declared effective. The
Company may, at its option, terminate this agreement at any time.
The Company's principal commitments consist of leases on its office
facilities, obligations under lines of credit, which are demand facilities and
are treated as current liabilities, and capital leases. In addition, the Company
will require ongoing investments in property, equipment and software, and
research and development.
The Company believes that its cash, cash equivalents and accounts
receivable, together with its existing sources of equity and its liquidity and
cash generated from operations, will be sufficient to meet its working capital
and capital expenditure requirements for the next year, unless management
decides to accelerate spending, and so long as its financing sources continue to
make lines of credit available. However, there can be no assurance the Company's
lines of credit will continue to be available to the Company or that replacement
financing could be arranged if necessary, or that the Company will be able to
timely collect its accounts receivable.
Seasonality and Impact of Inflation
In prior years, the Company has not experienced observable seasonality
in its business. Generally, however, sales in the business and computer products
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, the Company's sales have reflected this seasonality in 1999 and it is
likely that the sales of the Company will continue to experience some level of
industry seasonality in the future.
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 Northeastern United States and the United Kingdom.
The Company's revenues are affected by general price reductions by
computer product manufacturers, which have been substantial. Such price
reductions require that the Company increase its base unit volumes and
associated peripheral product sales to existing and newly acquired customers in
order to overcome the effect of this price 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 the Company'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," "intends," "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:
availability and terms of appropriate working capital and/or other financing,
the potential dilutive effect of the Equity Line, the overall marketplace and
customer'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
20
<PAGE>
demand for and availability of PC products, changes in manufacturer policies
reducing price protection, returns and other policies, the success and timing of
implementing the Company's new management information system, 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 (including without limitation, under Item 1 and this
Item 7) and in the Company's other SEC reports and statements, including the
Company's prospectus included as part of the S-3 Registration Statement filed on
January 14, 2000 as amended from time to time.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in inventory values,
interest rates and exchange rates, which could affect its future results of
operations and financial condition. The Company's risk associated with inventory
values is discussed elsewhere in this Form 10-K.
The Company's cash and cash equivalents, lines of credit and long term
debt are sensitive to interest rate fluctuations. Changes in interest rates
would result in changes in interest income and interest expense resulting from
the difference between historical interest rates on these financial instruments
and the interest rates that these variable-rate instruments may adjust to in the
future. Based on December 31, 1999 balances, the Company estimates that a 1%
change in interest rates would have an effect of approximately $0.4 million on
income before income taxes.
The Company's investment in its United Kingdom subsidiaries is
sensitive to fluctuations in the exchange rate between the United States dollar
and the United Kingdom pound sterling. The effect of such fluctuations is
included in accumulated other comprehensive income in the Consolidated
Statements of Stockholders' Equity. To date, such fluctuations have amounted to
a positive accumulated amount of $538,000.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements beginning on page F-1.
Supplemental earnings(loss) per share and quarterly financial information for
the Company are included in Notes 11 and 12, respectively, of the Notes to
Consolidated Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
In September 1999, the Audit Committee of the Board of Directors of the
Company solicited proposals for the year-end audit of its calendar 1999
consolidated financial statements. The Company solicited proposals from four
independent accounting firms, including Arthur Andersen LLP ("Andersen"), who
had been previously engaged by the Company as its principal auditor. The Audit
Committee took this action to ensure that the Company would continue to receive
the best possible audit services at a competitive price.
During September and October 1999, management met with and provided
appropriate information to the independent accounting firms involved. On October
19, 1999 the Audit Committee met and decided it would not engage Andersen to act
as the Company's independent accountants for calendar year 1999. Andersen, the
Company's independent accountants in 1998 and prior years was informed of the
Audit Committee's decision on October 20, 1999.
Andersen, in its reports on the Company's consolidated financial
statements for each of the calendar years ended December 31, 1998 and 1997,
neither expressed an adverse opinion or a disclaimer of opinion, or qualified or
modified such reports as to uncertainty, audit scope or accounting principles.
During each of the years ended December 31, 1998 and 1997, and during
the period from January 1, 1999 through the date of this report, (i) there were
no disagreements between the Company and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing
21
<PAGE>
scope or procedure, which disagreements if not resolved to the satisfaction of
Andersen, would have caused Andersen to make reference thereto in its report on
the financial statements of the Company for such years; and (ii) there have been
no reportable events (as defined in Regulation S-K Item 304 (a) (1) (v)).
The Audit Committee decided to offer its year end audit engagement for
calendar 1999 to KPMG LLP ("KPMG") as its new independent accountants in October
1999. KPMG entered into an engagement letter with the Company in December 1999
to act as the Company's new independent accountants. During the two most recent
fiscal years and through the date of this report, the Company has not consulted
with KPMG on items that were or should have been subject to SAS 50 or concerned
the subject matter of a disagreement or reportable event with Andersen, the
former independent accountants of the Company, as described in Regulation S-K
Item 304 (a) (2).
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 1999 Annual Meeting of
Stockholders to be held at Occasions Banquet Facility, 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 Related 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.
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 Schedule for each of the
Three Years in the Period Ended December 31, 1999:
Reports of Independent Auditors on Supplementary Information
Schedule II - Valuation and Qualifying Accounts
22
<PAGE>
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.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated October 19,
1999, regarding the Company's change in independent accountants on October 26,
1999 and amended such report on December 8, 1999.
(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.
23
<PAGE>
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 30, 2000 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 30, 2000
- ---------------------------- Board of Directors
Robert J. Crowell and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter A. Rendall Corporate Executive March 30, 2000
- ---------------------------- Vice President,
Peter A. Rendall Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
/s/ William W. Smith Vice Chairman and Director March 30, 2000
- --------------------------
William W. Smith
/s/ Richard J. Harries, Jr. Director March 30, 2000
- ----------------------------
Richard J. Harries, Jr.
/s/ John W. Ortiz Director March 30, 2000
- ----------------------------
John W. Ortiz
24
<PAGE>
Company Confidential
Company Confidential
ELCOM INTERNATIONAL, INC.
1999 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. (14)
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) and Renouncement of related Board Observer
Right effective December 16, 1999 (x)
4.16 Form of Lantec Warrant Agreement, dated January 7, 2000, with attached
Second Amended List of Holders of Warrants to Purchase Common Shares
of the Registrant. (x)
4.17 AMA Securities Agreement, dated February 29, 1996, by and among the
Registrant and the former stockholders of AMA (UK) Limited. (9)
E-1
<PAGE>
Exhibit No. Description
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)
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. (18) (*)
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 $80,000,000 Business Credit and Security Agreement Dated as of March
1, 1997 among Elcom Services Group, Inc. and Deutsche Financial
Services Corporation (9), and Amendments to Business Credit and
Security Agreement. (12)(15)(18)
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. (14)
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)
10.7 Structured Equity Line Flexible Financing Agreement, dated December
30, 1999, between the Registrant and Cripple Creek Securities, LLC.
(20)
10.8 Registration Rights Agreement, dated December 30, 1999, between the
Registrant and Cripple Creek Securities, LLC. (20)
10.9 Form of Warrant and Minimum Commitment Warrant of the Registrant
issuable to Cripple Creek Securities, LLC. (20)
10.10 Warrant Agreement, dated as of December 30, 1999, between the Company
and Wit Capital Corporation. (20)
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. (14)
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) (*)
10.22 Employment Agreement by and between the Registrant and James Rousou,
dated December 8, 1999. (x)
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. (14)
E-2
<PAGE>
Exhibit No. Description
10.25 Agreement for the Sale and Purchase of Debts dated December 3, 1997,
between Elcom Group Limited and Deutsche Financial Services (UK) LTD.
(14)
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 Elcom Services Group,
Inc.'s indebtedness to Deutsche. (1)
10.34 Guaranty by the Registrant in favor of Deutsche Financial Services
Corporation, dated March 31, 1999, guarantying elcom.com, inc.'s
indebtedness to Deutsche. (18)
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) (*) and Amendment and Waiver under
Employment Agreement and Executive Profit Performance Bonus Plan dated
October 1, 1999. (x)
10.38 The 1997 Stock Option Plan of Elcom International, Inc. (11), and
Amendments One and Two thereto. (14) (17) (*)
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) (*)
10.42 Wit Capital Corporation Engagement Letter, dated July 8, 1999. (19)
21.1 List of the Registrant's Subsidiaries. (x)
23.1 Consent of KPMG LLP. (x)
23.2 Consent of Arthur Andersen LLP. (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.
E-3
<PAGE>
(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.
(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.
(14) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, and incorporated herein by reference.
(15) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, and incorporated herein by
reference.
(16) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, and incorporated herein by
reference.
(17) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference.
(18) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, and incorporated herein by
reference.
(19) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, and incorporated herein by
reference.
(20) Previously filed as an exhibit to Registration Statement No. 333-94743 on
Form S-3 and incorporated herein by reference.
(x) Filed herewith.
(*) Management contract or compensatory plan or arrangement.
E-4
<PAGE>
Company Confidential
CONSOLIDATED FINANCIAL STATEMENTS
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The following consolidated financial statements of Elcom International,
Inc. are included in response to Item 8:
Page
Independent Auditors' Report F-2
Report of Other Independent Public Accountants F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-4
Consolidated Statements of Operations and Other Comprehensive
Income for the years ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 1998 and 1999 F-7
Notes to Consolidated Financial Statements F-8 to F-24
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
Elcom International, Inc.
We have audited the accompanying consolidated balance sheet of Elcom
International, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations and other comprehensive income,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, 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, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
February 9, 2000
F-2
<PAGE>
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To Elcom International, Inc.:
We have audited the accompanying consolidated balance sheet of Elcom
International, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations and other comprehensive income,
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audits, 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, 1998,
and the consolidated results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 23, 1999
F-3
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
ASSETS 1998 1999
CURRENT ASSETS: --------- ---------
Cash and cash equivalents $14,315 $34,159
--------- ---------
Accounts receivable (Note 3):
Trade 134,753 45,571
Other 36,068 8,321
--------- ---------
170,821 53,892
Less-Allowance for doubtful accounts 6,796 3,838
--------- ---------
Accounts receivable, net 164,025 50,054
Inventory (Note 3) 39,617 1,462
Prepaids and other current assets 2,458 1,221
--------- ----------
Total current assets 220,415 86,896
--------- ----------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software 26,556 24,730
Land, buildings and leasehold improvements 3,507 2,710
Furniture, fixtures and equipment 9,228 5,755
--------- ----------
39,291 33,195
Less -- Accumulated depreciation and amortization 25,034 22,230
--------- ----------
14,257 10,965
--------- ----------
GOODWILL AND OTHER ASSETS, NET OF
ACCUMULATED AMORTIZATION (Note 1) 27,179 178
--------- ----------
$261,851 $ 98,039
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit (Note 3) $104,772 $ 29,870
Accounts payable 49,341 12,440
Accrued expenses and other current liabilities 20,747 8,230
Current portion of capital lease obligations (Note 6) 991 311
Current portion of long-term debt (Note 4) 78 --
--------- ---------
Total current liabilities 175,929 50,851
OTHER DEFERRED LIABILITIES (Note 10) 418 --
CAPITAL LEASE OBLIGATIONS, NET OF
CURRENT PORTION (Note 6) 191 260
LONG TERM DEBT, NET OF CURRENT PORTION (Note 4) 296 --
COMMITMENTS AND CONTINGENCIES (Note 6) -- --
--------- ---------
Total liabilities 176,834 51,111
--------- ---------
STOCKHOLDERS' EQUITY (Note 5):
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 -- 27,547,061
and 29,128,585 shares 275 291
Additional paid-in capital 101,271 106,111
Accumulated earnings (deficit) (16,192) (58,730)
Treasury stock, at cost -- 236,338 and 257,739 shares (1,182) (1,282)
Accumulated other comprehensive income 845 538
--------- ---------
Total stockholders' equity 85,017 46,928
--------- ----------
$ 261,851 $ 98,039
========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(in thousands, except per share data)
For Years Ended December 31,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net sales .................................................. $ 760,136 $ 763,600 $ 485,828
Cost of sales .............................................. 669,742 686,658 442,427
---------- ---------- ----------
Gross profit ............................................... 90,394 76,942 43,401
---------- ---------- ----------
Operating Expenses:
Selling, general and administrative ...................... 70,200 80,285 63,426
Research and development ................................. 1,275 1,178 1,343
Asset impairment, restructuring and other related
charges(Note 7) -- 12,892 19,272
---------- ---------- ----------
Total operating expenses ................................... 71,475 94,355 84,041
---------- ---------- ----------
Operating profit (loss) .................................... 18,919 (17,413) (40,640)
Interest expense ........................................... (5,203) (8,355) (3,174)
Interest income and other, net ............................. 1,061 691 953
---------- ---------- ----------
Income (loss) before income taxes .......................... 14,777 (25,077) (42,861)
Income tax expense (benefit)(Note 9)........................ 4,489 484 (323)
---------- ---------- ----------
Net income (loss) .......................................... $ 10,288 $ (25,561) $ (42,538)
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments ................... (653) 360 (307)
---------- ---------- ----------
Other comprehensive income (loss)........................... $ 9,635 $ (25,201) $ (42,231)
========== ========== ==========
Basic net income (loss) per share .......................... $ 0.38 $ (0.94) $ (1.53)
========== ========== ==========
Basic weighted average shares outstanding .................. 26,937 27,322 27,846
========== ========== ==========
Diluted net income (loss) per share ........................ $ 0.35 $ (0.94) $ (1.53)
========== ========== ==========
Diluted weighted average shares outstanding................. 29,461 27,322 27,846
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
Common Stock Accumulated
--------------------- Additional Accumulated Treasury Other Total
Number $.01 Par Paid-in Earnings Stock, Comprehensive Stockholders'
Of Shares Value Capital (Deficit) At cost Income Equity
--------------------- ---------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of common stock options ...... 328,822 3 545 -- -- -- 548
Purchase of treasury stock ............ -- -- -- -- (633) -- (633)
Net loss .............................. -- -- -- (25,561) -- -- (25,561)
Cumulative translation adjustment ..... -- -- -- -- -- 360 360
------------ ------ ---------- ----------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1998 .............. 27,547,061 $ 275 $101,271 $ (16,192) $ (1,182) $ 845 $ 85,017
Exercise of common stock options ...... 1,581,524 16 4,840 -- -- -- 4,856
Purchase of treasury stock ............ -- -- -- -- (100) -- (100)
Net loss .............................. -- -- -- (42,538) -- -- (42,538)
Cumulative translation adjustment ..... -- -- -- -- -- (307) (307)
============ ====== ========== ========== ========== ============= ============
BALANCE, DECEMBER 31, 1999 .............. 29,128,585 $ 291 $106,111 $(58,730) $ (1,282) $ 538 $ 46,928
============ ====== ========== ========== ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) .......................................... $ 10,288 $(25,561) $(42,538)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization .......................... 8,795 9,691 16,313
Restructuring, impairment and other related charges .... -- 10,652 19,272
Provision for doubtful accounts ........................ 3,058 4,975 4,626
Changes in current assets and liabilities, net
of purchase acquisitions --
Accounts receivable ................................. (30,168) 12,266 106,099
Inventory ........................................... (26,088) 20,939 37,418
Prepaids and other current assets ................... (1,995) 799 1,313
Accounts payable .................................... 5,088 5,860 (35,241)
Accrued expenses and other current liabilities ...... (15,356) 1,013 (12,164)
Increase (decrease) in other deferred liabilities ....... 2,183 (1,795) (418)
--------- --------- ---------
Net cash provided by (used in) operating activities (44,195) 38,839 94,680
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ............... (7,723) (7,284) (5,288)
(Increase) decrease in other assets and deferred costs ..... (321) 527 194
Purchase of Prophet Group, net of cash acquired ............ (625) -- --
Purchase of Data Supplies, net of cash acquired ............ (2,660) -- --
--------- --------- ---------
Net cash used in investing activities ................ (11,329) (6,757) (5,094)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit ............ 64,570 (50,041) (73,523)
Repayment of capital lease obligations and long-term debt .. (731) (965) (971)
Exercise of common stock options including
related tax benefit ...................................... 1,776 548 4,856
Purchase of treasury stock ................................. -- (633) (100)
--------- --------- ---------
Net cash provided by (used in) financing activities .. 65,615 (51,091) (69,738)
--------- --------- ---------
FOREIGN EXCHANGE EFFECT ON CASH .............................. (185) 159 (4)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 9,906 (18,850) 19,844
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ........................................ 23,259 33,165 14,315
========= ========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................... $ 33,165 $ 14,315 $ 34,159
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid .............................................. $ 5,141 $ 8,232 $ 3,420
========= ========= =========
Income taxes paid .......................................... $ 1,620 $ 636 $ 258
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations ...................... $ 1,488 $ 510 $ 480
========= ========= =========
Purchase of procurement technology ......................... $ 289 $ -- $ --
========= ========= =========
Acquisitions of businesses (Note 2):
Fair value of assets acquired ........................... $ 6,332 $ -- $ --
Less cash paid .......................................... 1,600 -- --
--------- --------- ---------
Liabilities assumed .................................. $ 4,732 $ -- $ --
========= ========= =========
Disposition of Assets:
Cash proceeds from sale of assets in U.K ................ $ -- $ -- $ 18,805
U.K. net book value of assets sold ...................... -- -- (18,805)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
Company Confidential
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF 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 business products remarketing
subsidiary, uses a version of the procurement software technology (primarily the
Personal Electronic Catalog and Ordering System, hereinafter referred to as
"PECOS"), as well as certain Web-based technologies to support the sale and
marketing of business and PC products, the source of substantially all of the
Company's net sales since inception. elcom.com, the Company's eBusiness
subsidiary, develops and licenses automated procurement systems and operates a
B2B Internet storefront.
(a) Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned 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. Certain amounts from prior years have been restated to conform to
the current presentation.
(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 consolidated financial
statements and accompanying notes. Actual results may differ from such
estimates.
(c) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1998 and 1999 consists of
deposits with banks and financial institutions which are unrestricted as to
withdrawal or use and which have original maturities of three months or less.
Interest earned on all cash equivalents is included in interest income and
other, net in the Consolidated Statements of Operations and Other Comprehensive
Income.
(d) Accounts Receivable
Other accounts receivable consists primarily of receivables from
vendors and manufacturers relative to returned goods and manufacturers' rebates.
(e) Inventory
Inventory consists of purchased personal computer products, peripherals
and accessories available for resale. Inventories are stated at the lower of
cost (first-in, first-out) or market. The Company constantly minimizes its
inventory and periodically reviews its inventory for potential excess,
slow-moving, nonsaleable or obsolete inventory.
(f) Prepaids and Other Current Assets
Consistent with the provisions of the American Institute of Certified
Public Accountants' Statement of Position ("SOP") No. 93-7, Reporting on
Advertising Costs, the costs of maintaining, reproducing and mailing the
Company's PECOS front-end software, which constitute direct-response advertising
costs, are deferred and charged to operations over the estimated periods during
which related sales are expected to be realized, which is estimated to be five
months. Such net capitalized costs totaled $55,000 and $0 at December 31, 1998
and 1999, respectively.
F-8
<PAGE>
The Company charged approximately $590,000, $227,000 and $55,000 in 1997, 1998
and 1999 respectively, of these costs to operations, none of which represented
write-downs to net realizable value of the capitalized costs.
For all other advertising expenditures, the Company expenses the production
costs of advertising the first time the advertising takes place. In 1999, a
branding campaign was launched on behalf of the Company's PECOS.ipm product.
$2.6 million of costs were expensed, of which $1.2 million remained accrued on
the balance sheet at December 31, 1999.
(g) Depreciation and Amortization
Depreciation and amortization are provided on a straight-line basis
over the estimated useful lives of the assets which are three to five years.
Buildings are depreciated over a useful life of 50 years. The capitalized cost
of leased equipment and leasehold improvements are amortized over the shorter of
the estimated useful life of the related assets, or related lease instrument.
(h) Software, Goodwill and other Assets
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use which provides guidance on accounting for such costs.
SOP 98-1 requires computer software costs that are incurred in the preliminary
project stage to be expensed as incurred. Once the capitalization criteria of
SOP 98-1 have been met, directly attributable development costs should be
capitalized. It also provides that upgrade and maintenance costs should be
expensed. The Company's treatment of such costs has historically been consistent
with SOP 98-1, with the costs capitalized being amortized over the expected
useful life of the software, ranging from eighteen months to four years.
Costs related to the research and development of new software products
and enhancements to existing software products are expensed as incurred since
the time period between technological feasibility, general release of a product
and development of a new version is not significant and related costs incurred
during each time period are not material.
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
was amortized on a straight-line basis over an estimated useful life of 15
years. Goodwill (net of accumulated amortization of $6,405,000 and $0) was
$26,529,000 and $0 at December 31, 1998 and 1999, respectively. Other intangible
assets (net of accumulated amortization of $354,000 and $0 ) associated with
acquisitions amounted to $270,000 and $0 at December 31, 1998 and 1999,
respectively, and was assigned a five-year life. Amortization of goodwill and
such other intangibles amounted to $3,252,000, $3,178,000 and $701,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of any asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. See Note (7) to the financial statements. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
(i) Revenue Recognition
The Company derives substantially all of its revenue from sales of
personal computer products, peripherals and accessories. The Company provides
for estimated returns at the time of sale. Revenue from product sales is
recognized upon shipment.
Revenue is recognized on fixed price implementation contracts while the
contract is in progress using the percentage of completion method, by reference
to the proportion of the total contract which has been completed at
F-9
<PAGE>
the financial statement date. Revenue on contracts for the supply of
professional services at pre-determined rates is recognized when the services
are rendered and billed, irrespective of the duration of the contract.
The Company derives license fees, user fees and maintenance fees from its
PECOS.ipm licensees. License fees are recognized upon the signing of an
applicable license agreement unless there are performance conditions required,
in which case the revenue is recognized upon completion of those performance
conditions. User fees and maintenance fees are recognized ratably over the terms
of the related licenses.
The Company recognizes software license revenue in accordance with SOP
No. 97-2, Software Revenue Recognition as amended by SOP No. 98-4. The Company
believes its current revenue recognition policies and practices are consistent
with SOP 97-2 and SOP 98-4. In December 1998, the AICPA issued SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions, which amends SOP 97-2, Software Revenue Recognition, and
supersedes SOP 98-4. The Company does not expect SOP 98-9 to have a material
effect on its financial position, results of operations, or cash flows. The
Company will adopt SOP 98-9 in fiscal 2000.
(j) Accrued Expenses
At December 31, 1999 accrued expenses consisted of $2.9 million related to
salaries, wages and employee benefits and $5.3 million related to other
expenses. At December 31, 1998 accrued expenses consisted of $5.0 million
related to salaries, wages and employee benefits and $15.7 million related to
other expenses.
(k) Post Retirement Benefits
The Company has no material obligations for post retirement benefits.
The Company and an indirect U.K. 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 U.K. defined contribution plan for
the years ended December 31, 1997, 1998 and 1999 were $263,000, $300,000, and
$205,000, respectively.
(l) Foreign Currency Translation
The accounts of the Company's indirect U.K. 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 and reported as part of other
comprehensive income in the statement of operations and other comprehensive
income.
(m) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the asset and 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 9.)
(n) Stock-Based Compensation
The Company accounts for employee stock option in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under APB 25, the Company recognizes no compensation
expense related to employee stock options, as no options are granted at a price
below the market price on the day of the grant.
In 1996, SFAS No. 123, Accounting for Stock-Based Compensation, became
effective for the Company. SFAS 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant
F-10
<PAGE>
date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming hypothetical fair value method application. See
Note (5) for pro forma disclosures required by SFAS 123 plus additional
information on the Company's stock options.
(o) 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. Basic EPS
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS gives effect to all potential common shares outstanding
during the period. In 1998 and 1999, diluted EPS is the same as basic EPS
because the Company has reported a net loss, in which case dilutive securities
are not included in the determination of per share calculations (see Note 11).
(p) 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.
(q) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and displaying comprehensive income and its components. The Company's
comprehensive income consists of net income (loss) and foreign currency
translation adjustments.
(r) Current Pronouncements
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS No. 131) in 1998. This statement
establishes standards for the reporting of information about operating segments
in annual and interim financial statements and requires restatement of prior
year information. Operating segments are defined as components of an enterprise
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker(s) in deciding how to allocate
resources and in assessing performance. SFAS No. 131 also requires disclosures
about products and services, geographic areas and major customers. The adoption
of SFAS No. 131 did not affect results of operations or financial position but
did affect the disclosure of segment information, as presented in Note 8.
In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company does not expect the adoption of SFAS No. 133
to have a material impact on its financial position, results of operations or
cash flows. The Company will be required to adopt SFAS No. 133 in fiscal 2001 in
accordance with SFAS No. 137, which delays the required implementation of SFAS
No. 133 for one year.
F-11
<PAGE>
(2) ACQUISITIONS
The Company has consummated the following acquisitions:
<TABLE>
Method of
Entity Date Consideration Accounting
<S> <C> <C> <C>
Computer Specialties, Inc. October 1994 510,345 shares of common stock Pooling of
Interests
Computerware, Inc. February 1995 1,326,417 shares of common stock Purchase
Lantec June 1995 2,899,820 shares of common stock, Purchase
$6.4 million of cash and
750,000 warrants to purchase common
stock
AMA (UK) Limited February 1996 3,247,371 shares of common stock Pooling of
Interests
Prophet Group Limited December 1996 $8.9 million of cash Purchase
Data Supplies Limited February 1997 $1.6 million of cash and an Purchase
interest bearing note of $752,000
</TABLE>
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(h)). Results of operations of those companies are included from
their respective dates of acquisition.
(3) LINES OF CREDIT
At December 31, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $34.2 million and accounts receivable and floor
plan lines of credit from Deutsche Financial Services Corporation ("DFSC").
During 1998, the United States DFSC facility provided for borrowings of up to
$120 million, and interest was charged at a rate of prime minus 1%. The facility
was amended in connection with its March 1999 renewal to include elcom.com and
to provide for aggregate borrowings of up to $80 million, and as of April 1,
1999, the interest rate was increased to prime minus 0.5%. As of February 10,
2000, the facility was amended to provide for aggregate borrowings of up to $50
million and as of April 1, 2000, the interest rate was increased to prime plus
0.25%. Approximately one-half of the Company's United States borrowings do not
bear interest until after interest-free periods of 30 to 60 days have lapsed.
In addition, the Company has agreed that its interest rate will
increase .25% for each quarter that it reports a loss, as defined in the DFSC
agreements. The interest rate at December 31, 1999 was prime (8.5%) minus 0.25%.
The Company's reported loss in the fourth quarter of 1999 resulted in an
interest rate increase of 0.25% commencing January 1, 2000. Availability of
United States borrowings is based on DFSC's determination as to eligible
accounts receivable and inventory. As of December 31, 1999, the Company's
borrowings from DFSC on its United States floor plan line of credit were $23.9
million. 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.
F-12
<PAGE>
In December 1997, the Company established a United Kingdom DFSC credit
facility which provides for aggregate borrowings of up to (pound)30 million, or
approximately $48.5 million, as of December 31, 1999. 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 (6.75% at December 31, 1999) plus 1.25%. As of December 31,
1999, the Company's borrowings under its United Kingdom DFSC facility were
(pound)3.7 million, or $6.0 million, which approximated the Company's
availability thereunder.
The Company is dependent upon the DFSC lines of credit to finance its
eligible accounts receivable arising from sales of computer products as well as
its United States inventory purchases. The DFSC lines of credit limit borrowings
to defined percentages of eligible inventory (in the United States) and accounts
receivable and contain customary covenants, including financial covenants with
respect to the Company's net income, net worth and debt-to-equity ratios, as
defined in the agreements, and customary default provisions related to
non-payment of principal and interest, default under other debt agreements and
bankruptcy. After receiving a waiver from DFSC concerning the net income
covenant for 1999, the Company is in compliance with all other covenants of the
facility as of December 31, 1999. There can be no assurance, however, that the
DFSC lines of credit will continue to be available, or that they can be
increased if necessary to support the Company's requirements.
As of December 31, 1999, the Company had borrowings aggregating
approximately $29.9 million outstanding under its DFSC borrowing facilities,
which approximated its maximum availability thereunder.
The Company also has a $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, 1999, the
Company had no borrowings outstanding from IBMCC on its floor plan line of
credit.
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
1998 1999
-------- --------
Mortgage payable to a bank, interest at the greater
of the bank's base rate (7.50% at December 31, 1998)
plus 3% or 10.25%, due in monthly installments of
principal plus interest through June 2005,
secured by certain land and buildings. $ 374 $ -
This mortgage was paid in full in August, 1999.
Less current portion: 78 -
======== ========
$ 296 $ -
======== ========
(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, with the Board of Directors authorized to fix the rights,
privileges, preferences and restrictions of any series thereof as it may
designate.
(c) Stock Options
The Company's Board of Directors has adopted five stock option plans
and stockholders have approved the adoption of all five such stock option plans
(the "Option Plans"). As of December 31, 1999, the Option Plans
F-13
<PAGE>
provided that up to an aggregate of 11,650,000 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 on varying dates, as determined by the Compensation
Committee for each plan, 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 ratably
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 and March 11, 1999 it amended, The 1997 Stock Option Plan of Elcom
International, Inc. (the "1997 Plan"). As of December 31, 1998, the 1997 Plan
provided that an aggregate of up to 2,000,000, and as amended on March 11, 1999,
up to 3,000,000 ISOs 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,
ISOs 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.
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.
Information relating to the Company Option Plans during each of the years
in the three year period ended December 31, 1999 is as follows:
- --------------------------------------------------------------------------------
Weighted
Average
Number Option Price Price
of Shares Per Share Exercise
------------ -------------- ---------
Outstanding, December 31, 1996 6,429,114 $0.11 - 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 $0.11 - 8.80 $ 4.73
Granted ..................... 1,691,000 1.28 - 6.22 3.14
Terminated .................. (1,793,489) 1.44 - 7.69 5.30
Exercised ................... (328,822) 0.11 - 5.99 1.67
------------ -------------- ---------
Outstanding, December 31, 1998 7,299,114 $0.11 - 8.80 $ 4.40
Granted ..................... 4,786,985 1.64 - 31.13 3.42
Terminated .................. (2,122,259) 1.28 - 7.69 4.30
Exercised ................... (1,581,524) 0.11 - 6.75 3.10
------------ -------------- ---------
Outstanding, December 31, 1999 8,382,316 $0.11 - 31.13 $ 4.08
============ ============== =========
Exercisable, December 31, 1997 3,665,547 $0.11 - 8.80 $ 3.86
============ ============== =========
Exercisable, December 31, 1998 4,538,781 $0.11 - 8.80 $ 4.43
============ ============== =========
Exercisable, December 31, 1999 3,640,392 $0.11 - 8.80 $ 4.60
============ ============== =========
F-14
<PAGE>
The following table summarizes information about stock options outstanding as of
December 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- --------------- -------------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
$.011 - 1.64 1,650,484 8.04 years $1.41 309,888 $0.44
1.69 - 1.84 525,699 8.96 years 1.82 212,150 1.84
2.55 - 3.16 202,800 7.05 years 3.04 93,975 3.00
3.56 - 3.81 1,407,615 9.54 years 3.81 32,000 3.63
3.86 - 4.09 1,267,875 6.34 years 4.03 1,190,725 4.03
4.16 - 4.63 992,400 9.65 years 4.18 29,398 4.46
4.81 - 5.03 609,575 7.53 years 5.02 508,425 5.03
5.06 - 12.63 1,724,868 6.95 years 7.27 1,263,831 6.59
31.13 1,000 10.00 years 31.13 - -
=============== =============== =========
8,382,316 3,640,392 $4.60
=============== =============== =========
</TABLE>
As of December 31, 1999, 8,700,518 shares of common stock have been
reserved for issuance under the Company's stock option plans.
Had compensation costs for awards in 1997, 1998 and 1999 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 (loss) and per share amounts would have been
as follows:
1997 1998 1999
-------- -------- --------
(in thousands, except per share data)
Net income (loss):
As reported............... $10,288 $(25,561) $(42,538)
Pro forma................. $ 5,981 $(29,762) $(45,530)
Net income (loss) per share:
As reported - basic....... $ 0.38 $ (0.94) $ (1.53)
Pro forma - basic......... $ 0.22 $ (1.09) $ (1.64)
As reported - diluted..... $ 0.35 $ (0.94) $ (1.53)
Pro forma - diluted....... $ 0.20 $ (1.09) $ (1.64)
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:
1997 1998 1999
---------- ---------- -----------
Volatility...................... 60.25% 60.25% 113.71%
Risk-free interest rate......... 5.94% 5.41% 6.77%
Expected life of options ....... 5 years 5 years 6 years
Expected dividend yield ........ 0% 0% 0%
The weighted average fair value per share of options granted during 1997,
1998 and 1999 were $3.28, $1.76, and $2.92 respectively.
F-15
<PAGE>
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.com, also maintains
a stock option plan pursuant to which two million shares of its common stock are
reserved for issuance. The plan has provisions similar to the Company's Option
Plans, and none of the options issued thereunder were exercisable as of December
31, 1999. elcom.com, inc. has 18.25 million shares outstanding, all of which are
owned by the Company.
(d) Warrants
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, 1999, all of these warrants are
outstanding and exercisable. The warrants expire in June 2005.
On July 19, 1999, the Company announced the engagement of Wit Capital
Corporation ("Wit Capital") as its investment banker and strategic advisor for
the purpose of assisting the Company in evaluating strategic options. In the
event the Company completes an equity placement with an investor introduced by
Wit Capital, the terms of the engagement call for Wit Capital to receive Elcom
International, Inc. warrants equal to 1% of the Company's fully-diluted (as
calculated by the Treasury Method) common stock and a placement fee of $700,000.
In accordance with the Wit Agreement, the Company issued warrants to Wit Capital
to purchase 353,418 shares of the Company's common stock at $28.71 for each
common share. The warrants expire on December 30, 2002.
On December 30, 1999, the Company signed a Structured Equity Line Flexible
Financing Agreement with Cripple Creek Securities, an investor introduced to the
Company by Wit Capital. The Company has reserved 750,000 shares for issuance
pursuant to the warrants that may be issuable to Cripple Creek in connection
with the Equity Line financing. (See Note 5(f)).
(e) Open Market Stock Purchase Plan
On May 28, 1998, the Board of Directors of the Company authorized the
purchase of up to an aggregate of 800,000 shares of common stock to be held as
treasury stock targeted 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 upon then-existing market conditions. During
1998, the Company purchased 180,019 shares of the Company's common stock at an
aggregate cost of $633,000 pursuant to this authorization.
(f ) Structured Equity Line Flexible Financing Agreement
On December 30, 1999, the Company entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line") with Cripple Creek Securities LLC
("Cripple Creek"). Under the terms of the agreement, the Company may sell up to
$50 million of its common stock to Cripple Creek over an 18 month period.
The agreement provides that the Company, at its option, may sell up to $10
million of common stock during each monthly investment period. Cripple Creek may
require the Company to sell additional shares of common stock to it, up to an
amount equal to the amount the Company decided to sell during such investment
period at a price equal to 100% of the lowest volume-weighted average sale price
during, but no less than $1 million the five days immediately preceding the
notice of purchase delivered to the Company by Cripple Creek. The agreement
allows the Company to set a minimum price that the common stock sold under the
Equity Line must be purchased at, during any particular investment period. The
Company also will issue to Cripple Creek, warrants to purchase 15,000 shares of
common stock for each $1 million of common stock sold by the Company, provided
that warrants to acquire at least a minimum total of 150,000 (100,000 under
certain circumstances) will be issuable upon termination of the Equity Line. The
exercise price of the warrants will equal 120% of the average price paid by
F-16
<PAGE>
Cripple Creek for the common stock purchased under the Equity Line. The Company
is not obligated to sell any minimum amount of common stock under the Equity
Line.
On January 14, 2000, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission for the registration of 2,853,418
shares of Common Stock, which consists of 2,500,000 shares of Common Stock
issuable under the Equity Line and 353,418 shares of Common Stock issuable upon
exercise of warrants held by Wit Capital, the Company's financial advisor.
The Equity Line will be in effect for a period of 18 months, beginning on a
date shortly after the Registration Statement is declared effective. The Company
may, at its option, terminate this agreement at any time.
(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 $2,710,000 and $2,342,000 and related accumulated amortization of
$1,262,000 and $1,657,000 as of December 31, 1998 and 1999, 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 25 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, 1999, are as follows:
Capital Operating
Year Ending December 31, (in thousands) Leases Leases
--------------------------------------- ------- ---------
2000............................... $ 347 $ 2,916
2001............................... 160 1,784
2002............................... 120 996
2003............................... -- 930
2004............................... -- 917
Thereafter......................... -- 6,042
------- ---------
Total minimum lease payments....... $ 627 $13,585
======= =========
Less - Amounts representing interest 56
-------
Present value of net minimum lease payments $ 571
Current portion.................. 311
-------
Long term portion.................. $ 260
=======
Rent expense for operating leases for each of the three years ended
December 31, 1997, 1998 and 1999 amounted to approximately $4.0 million, $4.3
million and $3.6 million, respectively.
(b) Employment Contracts
The Company has employment contracts with certain key executives which
provide for annual salary, incentive payments, and severance arrangements.
(c) Contingencies
The Company is party to various litigation as both plaintiff and defendant
in cases related to contractual issues, employment matters and issues arising
out of the conduct of its business. The Company believes that, based
F-17
<PAGE>
on discussions with its counsel, the estimable range of loss, if any, is not
material in relation to the financial statements.
(7) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER RELATED CHARGES
On July 31, 1999, the Company completed the sale of the substantial
majority of its United Kingdom remarketer group operations which included its
United Kingdom field-based sales operation, its professional services
organization, its distribution business, and specified inventory and fixed
assets. The disposed businesses accounted for approximately 75% of the Company's
United Kingdom revenues and 67% of its United Kingdom operating income in 1998
and the seven month period ended July 31, 1999 (excluding the asset impairment
charge described below). The Company recorded total revenues related to its
United Kingdom operations of $193 million in 1999, and $314 million in 1998. The
Company has retained its United Kingdom telemarketing group, which it intends to
evolve towards a B2B Internet-based storefront business, similar to elcom.com,
Starbuyer.com, the Company's wholly-owned eBusiness subsidiary in the United
States. The Company also plans to use the retained business as the platform from
which it will market PECOS Internet Procurement Manager, elcom.com's
Internet-based and remotely-hosted automated procurement system. The acquirer
has assumed the lease of the Company's Langley facility and the lease of the
Company's Glasgow facility; however, the Company retained substantially all
other balance sheet assets and liabilities of the disposed businesses.
Accordingly, the Company is responsible for the current costs of severance
liabilities, and subleasing excess facilities, as well as realizing inventory
and excess fixed assets no longer required to operate the retained portion of
the business.
Based on the sale price of approximately $12 million (excluding
inventory sold of approximately $6.8 million) and the Company's estimates of
incremental liabilities associated with the sale transaction, the Company has
recorded an asset impairment charge of $19.5 million in the second quarter of
1999 which includes a reduction of the carrying value of its United Kingdom
assets to estimated net realizable value and the accrual of approximately $3.3
million primarily related to lease termination costs, severance and accounts
receivable. Additionally, expenses of $3.1 million were recorded against gross
profit to reflect inventory valuation and returns estimates. The Company had
$25.7 million of goodwill reflected on its balance sheet associated with the
acquisitions of these United Kingdom which was impaired and incorporated in the
$19.5 million charge. In the third and fourth quarters of 1999, $2.2 million of
costs primarily related to lease termination, severance and accounts receivable
were incurred and charged against the $3.3 million accrual. At December 31, 1999
approximately $1.1 million of this accrual remained on the balance sheet to be
utilized in 2000.
In the 1998 period, the Company recorded a charge of $12.9 million
related to a restructuring of certain of its U.S. operations. In August 1998,
the Company restructured Elcom Services Group's education sales operations and
in September, consolidated certain of its customer support personnel in the
United States. The total charge related to the Elcom Services Group
restructuring is approximately $8.1 million, consisting of approximately $.1
million of severance costs, a write-down of $7.0 million to estimated net
realizable value relating to the impairment of certain intangible assets and
approximately $1.0 million in other related expenses and asset write-downs. The
impaired intangible assets generally consist of the unamortized goodwill
associated with the February 1995 acquisition of Computerware, because the
Company has determined that there are no longer any identifiable or significant
cash flows specifically associated with this acquisition, including the
non-renewal of the Apple Educational Sales Agent contract.
In September 1998, the Company restructured Elcom Systems, its electronic
commerce technology subsidiary, to serve as an electronic commerce-oriented
systems integration arm of Elcom Services Group. In connection with the Elcom
Systems restructuring, the Company recorded a total charge of approximately $3.7
million, consisting of $0.9 million of severance costs, a write-down of $2.1
million to estimated net realizable value relating to the impairment of certain
intangible assets, and approximately $0.7 million in other estimated expenses
and asset write-downs. The impaired intangible assets generally consist of the
value assigned to the original client server coding and architecture of various
PECOS technologies, including Commerce Manager, which is no longer competitive
with alternatives now available. The Company has developed, and continues to
develop, PECOS.pm in current, state-of-the-art code, especially for use on the
Internet.
F-18
<PAGE>
In December 1998, the Company streamlined its business model, focusing
primarily on reengineering its sales force and operating infrastructure in a
manner intended to better align the Company's costs with revenues and margin
expected to be generated by the Company. This rightsizing affected 133 positions
worldwide, and the Company recorded a total charge of $1.1 million, primarily
associated with personnel severance and estimated costs related to closing six
United States field support and sales offices.
Components of the restructuring charges recorded in 1998, amounts
incurred through December 31, 1999, and adjustments to the charge are as follows
(in thousands):
Elcom Services Group
Amount Amount
1998 Incurred Balance Incurred Adjustments Balance
Charge 1998 12/31/98 1999 to Charge 12/31/99
-------- -------- ------- ------- -------- --------
Severance $ 813 $ 93 $ 720 $ 557 $ 163 $ --
Goodwill . 6,970 6,970 -- -- -- --
Other .... 1,302 825 477 456 21 --
------- ------- ------- ------- ------- -------
Total $ 9,085 $ 7,888 $ 1,197 $ 1,013 $ 184 $ --
elcom.com
Severance $ 976 $ 212 $ 764 $ 764 $ -- $ --
Intangible
Assets . 2,139 2,139 -- -- -- --
Other .... 692 126 566 518 48
------- ------- ------- ------- ------- -------
Total .. $ 3,807 $ 2,477 $ 1,330 $ 1,282 $ 48 $ --
Total .. $12,892 $10,365 $ 2,527 $ 2,295 $ 232 $ --
======= ======= ======= ======= ======= =======
The excess accrual was reversed to the restructuring and other related
charges line on the statement of operations in 1999.
(8) BUSINESS SEGMENT INFORMATION
The Company's operations are classified into two reportable business
segments: elcom.com, the Company's eBusiness technology subsidiary, and Elcom
Services Group, which markets and sells business-related products to commercial
customers. The accounting policies for the segments are consistent with those
described in the summary of significant accounting policies. The Company's
management evaluates segment performance based on net sales and gross profit.
All intercompany transactions between segments have been eliminated except for
transactions relating to the intercompany services agreements (see Note 10).
F-19
<PAGE>
On October 1, 1999, the ownership of the UK operations were transferred
from Elcom Services Group to elcom.com. In accordance with SFAS No. 131, the
Company has restated the segment information for earlier periods. Segment
results for 1997, 1998 and 1999 are as follows (in thousands):
1997 1998 1999
---------- ---------- ----------
Net Sales
Elcom Services Group $755,914 $761,305 $412,262
elcom.com 4,222 2,295 73,566
elcom.com intercompany sales 619 314 14
Elimination (619) (314) (14)
---------- ---------- ----------
Total $760,136 $763,600 $485,828
========== ========== ==========
Gross Profit
Elcom Services Group $ 86,876 $ 75,135 $36,488
elcom.com 3,518 1,807 6,913
elcom.com intercompany sales 267 146 10
Elimination (267) (146) (10)
---------- ---------- ----------
Total $ 90,394 $ 76,942 $43,401
Identifiable Assets
Elcom Services Group $297,000 $245,133 $ 21,858
Corporate 30,815 14,872 31,027
---------- ---------- ----------
Total $332,068 $261,851 $ 98,039
========== ========== ==========
Substantially all revenues, net income and identifiable assets related
to the remarketing of personal computer products and related services.
The Company operates both in the US and UK and geographic information
is as follows (in thousands):
1997 1998 1999
---------- ---------- ----------
Net Sales
U.S. $ 473,806 $ 449,844 $ 292,507
U.K. 286,330 313,756 193,321
---------- ---------- ----------
Total $ 760,136 $ 763,600 $ 485,828
========== ========== ==========
Gross Profit (loss)
U.S. $ 52,529 $ 40,537 $ 25,496
U.K. 37,865 36,405 17,905
---------- ---------- ----------
Total $ 90,394 $ 76,942 $ 43,401
========== ========== ==========
Identifiable Assets
U.S. $ 224,718 $ 151,648 $ 89,767
U.K. 107,350 110,203 8,272
---------- ---------- ----------
Total $ 332,068 $ 261,851 $ 98,039
========== ========== ==========
(9) INCOME TAXES
Income (loss) before provision for income taxes consisted of:
1997 1998 1999
---------- ----------- ----------
U.S. $ 6,977 $(25,780) $(18,760)
Foreign 7,800 703 (24,101)
---------- ----------- ----------
$ 14,777 $(25,077) $(42,861)
========== =========== ==========
F-20
<PAGE>
The provision (benefit) for income taxes consisted of (in thousands):
1997 1998 1999
-------- -------- --------
Current tax provision
U.S. federal............................. $ 250 $ 190 $ 25
State.................................... 375 701 742
Foreign.................................. 2,400 276 (1,090)
-------- -------- --------
Total current tax provision(benefit).... $ 3,025 $ 1,167 $ (323)
-------- -------- ---------
Deferred tax provision(benefit)
U.S. federal............................. 468 (743) 0
State.................................... 257 (400) 0
Foreign.................................. 739 460 0
-------- -------- --------
Total deferred tax provision(benefit). $ 1,464 $ (683) $ 0
-------- -------- --------
Provision(benefit) for income taxes......... $ 4,489 $ 484 $ (323)
======== ======== ========
The following table summarizes the significant differences between the
U.S. federal statutory tax rate and the Company's effective tax rate for
financial statement purposes:
1997 1998 1999
------- ------- -------
Statutory tax rate................................... 34.0% (34.0%) (34.0%)
State taxes, net of U.S. federal tax benefit......... 2.8 (0.8) 1.7
Foreign taxes........................................ (1.6) 0.1 (1.9)
Valuation reserve provided against utilization of
net operating loss carryforwards................... (21.0) 24.3 20.7
Non deductible goodwill and other.................... 16.2 8.5 12.7
======= ======= =======
30.4% (1.9%) (0.8%)
======= ======= =======
Deferred tax assets (liabilities) consisted of the following as of December 31
(in thousands):
1998 1999
-------- ---------
Deferred tax assets:
Nondeductible reserves............................. $ 1,776 $ -
Capitalized inventory costs........................ 178 24
State income taxes................................. 578 352
Accrued expenses................................... 801 297
Other temporary differences........................ 667 45
Depreciation....................................... - 2,362
Foreign net operating loss carryforwards........... - 1,871
Net federal and state operating loss carryforwards. 6,095 20,399
======== =========
10,095 25,350
======== =========
Deferred tax liabilities:
Depreciation..................................... (372) -
Other intangible assets.......................... - (791)
Catalog costs.................................... (1,065) (184)
Other temporary differences...................... (556) (337)
-------- ---------
(1,993) (1,312)
-------- ---------
Valuation allowance................................. (8,102) (24,038)
-------- ---------
Net deferred tax liabilities........................ $ - $ -
======== =========
F-21
<PAGE>
At December 31, 1999, the Company has U.S. net operating loss carryforwards
of approximately $49.3 million, which are available to offset future Federal
taxable income. These losses expire during the years 2010 through 2019.
Section 382 of the Internal Revenue Code of 1986 and the Treasury
Regulations promulgated thereunder subjects the prospective utilization of net
operating losses and certain other tax attributes, such as tax credits, to an
annual limitation in the event of an ownership change. An ownership change under
Section 382 generally occurs when the ownership percentages of 5-percent
shareholders, in aggregate, change by more than 50 percentage points over a
three-year period. Some of the Company's net operating losses and tax credits
are subject to limitation under Section 382 as a result of ownership changes
in earlier years. However, the size of the Section 382 limitations relative to
the losses subject to these limitation support current availability under
Section 382 of all of the Company's net operating loss and tax credits.
The Company's ability to utilize its net operating loss and general
business tax credit carryforwards may be limited in the future if the Company
experiences an ownership change as a result of future transactions.
At December 31, 1999, the Company has state net operating loss
carryforwards of approximately $60.4 million, which are available to offset
future state taxable income. These losses expire during the years 2000 through
2005.
At December 31, 1999, the Company has foreign net operating loss
carryforwards of approximately $6.0 million, which are available to offset
future foreign taxable income. These losses may generally be carried forward
indefinitely.
The valuation allowance increased by $8.1 million and $15.9 million during
the years ended December 31, 1998 and 1999, respectively. The Company believes
that it is more likely than not that the deferred tax assets at December 31,
1999 will not be realized in the future. The valuation allowance as of December
31, 1999, includes a tax effect of approximately $4.8 million attributable to
deductions associated with employee stock option plans, the benefit of which
will be recorded as an increase to paid-in-capital when realized or recognized.
(10) RELATED PARTY TRANSACTIONS
(a) Transactions with Affiliated Company
On September 30, 1997, the Company sold options to acquire an equity
ownership interest in ShopLink.com, inc. The Company received $418,000 in
payment for the options, which could have been exercised through March 31, 1999.
The Company has included the $418,000 received in payment for the options in
other deferred liabilities, in the accompanying consolidated balance sheet at
December 31, 1998. The option lapsed without being exercised on March 31, 1999.
The Company included the $ 418,000 in interest income and other on the 1999
Consolidated Statement of Operations and Other Comprehensive Income.
Commencing January 1, 1999, Elcom International, Inc., Elcom Services
Group, and elcom.com, inc. entered into certain agreements governing the
provision of intercompany services. Elcom International Inc. provides various
administrative services including accounting, credit and collection, human
resources, telecom, office leasing, and executive management to both Elcom
Services Group and elcom.com, inc. Elcom Services Group provides distribution
and product configuration services, customer service and support services and
purchasing and product management services to elcom.com. elcom.com provides
various information technology hardware and software services to Elcom
International Inc. and Elcom Services Group.
(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 $699,000 and $0
at December 31, 1998 and 1999, respectively.
F-22
<PAGE>
(11) EARNINGS(LOSS) PER SHARE (in thousands, except per share data)
Basic and diluted earnings(loss) per share were calculated as follows:
Basic 1997 1998 1999
- ----------------------------------------- -------- --------- ---------
Net income (loss)........................ $ 10,288 $(25,561) $(42,538)
========= ========= =========
Weighted average shares outstanding...... 26,937 27,322 27,846
========= ========= =========
Basic net income (loss) per share........ $ 0.38 $ (0.94) $ (1.53)
========= ========= =========
Diluted
- -----------------------------------------
Net income (loss)........................ $ 10,288 $(25,561) $(42,538)
========= ========= =========
Weighted average shares outstanding...... 26,937 27,322 27,846
Dilutive effect of stock options......... 2,524 - -
--------- --------- ---------
Weighted average shares as adjusted...... 29,461 27,322 27,846
========= ========= =========
Diluted net income (loss) per share...... $ 0.35 $ (0.94) $ (1.53)
========= ========= =========
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.
Diluted net loss per share in 1998 does not reflect the dilutive effect
of stock options and warrants, as the impact of including them is antidilutive.
Based on the average market price of the Company's common shares in 1998, a net
total of 917,000 shares covered by options would have been dilutive, and
6,963,000 shares covered by options and warrants with per share exercise prices
ranging from $3.72 to $8.80, would not have been dilutive.
Diluted net loss per share in 1999 does not reflect the dilutive effect
of stock options and warrants, as the impact of including them is antidilutive.
Based on the average market price of the Company's common shares in 1999, a net
total of 2,788,000 shares covered by options and warrants would have been
dilutive, and 1,780,000 shares covered by options and warrants with per share
exercise prices ranging from $5.56 to $31.13, would not have been dilutive.
F-23
<PAGE>
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain amounts from prior quarters have been reclassed (in thousands, except
per share data):
<TABLE>
First Second Third Fourth
Year Ended December 31, 1998 Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 190,048 $ 191,778 $194,993 $ 186,781 $ 763,600
Gross profit .............................. 22,154 22,586 19,463 12,739 76,942
Operating profit (loss) ................... 4,021 3,234 (15,186) (9,482) (17,413)
Net income (loss) ......................... 1,372 515 (15,036) (12,412) (25,561)
Basic net income (loss) per share ......... $ .05 $ .02 $ (.55) $ (.46) $ (.94)
Basic weighted average shares outstanding . 27,230 27,379 27,356 27,321 27,322
Diluted net income (loss) per share ....... $ .05 $ .02 $ (.55) $ (.46) $ (.94)
Diluted weighted average shares outstanding 28,802 28,254 27,356 27,321 27,322
</TABLE>
<TABLE>
First Second Third Fourth
Year Ended December 31, 1999 Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 174,353 $ 149,411 $ 91,326 $ 70,738 $ 485,828
Gross profit .............................. 17,174 13,519 7,720 4,988 43,401
Operating profit (loss) ................... (246) (21,579) (7,609) (11,206) (40,640)
Net income (loss) ......................... $ (1,455) $ (22,734) $ (7,485) $ (10,864) $ (42,538)
Basic net income (loss) per share ......... $ (0.05) $ (0.82) $ (0.27) $ (0.38) $ (1.53)
Basic weighted average shares outstanding . 27,412 27,709 27,944 28,307 27,846
Diluted net income (loss) per share ....... $ (0.05) $ (0.82) $ (0.27) $ (0.38) $ (1.53)
Diluted weighted average shares outstanding 27,412 27,709 27,944 28,307 27,846
</TABLE>
F-24
<PAGE>
Company Confidential
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
1999 ANNUAL REPORT ON FORM 10-K
INDEX TO SCHEDULE
Page
Reference
Reports of Independent Auditors on Supplementary Information S-2 to S-3
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1998 and 1999 S-4
S-1
<PAGE>
Independent Auditors' Report on Supplementary Information
The Board of Directors
Elcom International, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Elcom International, Inc. and subsidiaries as of and for the year
ended December 31, 1999.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements of Elcom International, Inc. taken as a whole.
The supplementary information included in Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
February 9, 2000
S-2
<PAGE>
Report of Other Independent Public Accountants Report
on Supplementary Information
To Elcom International, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations and other comprehensive income,
stockholders equity and cash flows for the years ended December 31, 1998 and
1997 of Elcom International, Inc. and subsidiaries included in this Form 10-K,
and have issued our report thereon dated March 23, 1999. Our audits were made
for the purpose of forming an opinion on the basic consolidated financial
statements referred to above taken as a whole. The schedule listed in the index
of this Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule had 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
March 23, 1999
S-3
<PAGE>
SCHEDULE II
ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1998 and 1999
(in thousands)
Balance, Balance,
Beginning Utilization/ End
Allowance for Doubtful Accounts of Period Additions Other (1) Of Period
- ------------------------------- --------- --------- ----------- ---------
Year ended December 31, 1997 $ 4,312 $ 3,058 $(1,896) $ 5,474
======= ======= ======== =======
Year ended December 31, 1998 $ 5,474 $ 4,975 $(3,653) $ 6,796
======= ======= ======== =======
Year ended December 31, 1999 $ 6,796 $ 4,626 $(8,345) $ 3,077
======= ======= ======== =======
(1) Includes allowances for doubtful accounts acquired through acquisition, net
of write-offs.
Balance, Balance,
Beginning End
Inventory Valuation Accounts of Period Additions Utilization Of Period
- ------------------------------- --------- --------- ----------- ---------
Year ended December 31, 1997 $ 1,358 $ 1,796 $(1,791) $ 1,363
======= ======= ======== =======
Year ended December 31, 1998 $ 1,363 $ 1,651 $(1,022) $ 1,992
======= ======= ======== =======
Year ended December 31, 1999 $ 1,992 $ 1,734 $(2,956) $ 770
======= ======= ======== =======
Balance, Balance,
Beginning End
Deferred Tax Valuation Accounts of Period Additions Utilization Of Period
- ------------------------------- --------- --------- ----------- ---------
Year ended December 31, 1997 $ 2,655 $ - $(2,655) $ -
======= ======= ======== =======
Year ended December 31, 1998 $ - $ 8,102 $ - $ 8,102
======= ======= ======== =======
Year ended December 31, 1999 $ 8,102 $15,936 $ - $24,038
======= ======= ======== =======
S-4
Exhibit 4.15
December 8, 1999
Elcom International, Inc.
10 Oceana Way
Norwood, Massachusetts 02062
Attention: Robert J. Crowell, Chairman and
Chief Executive Officer
Dear Bob:
Following Jim Rousou's retirement from the Board of Directors we have
considered whether, in light of our requirements to trade freely in the stock of
ELCO, we should appoint an alternative representative. We know that you will
understand our decision to renounce our right to appoint an Observer to the
Board of Directors of Elcom International as provided for under the Amended and
Restated Lantec Stockholders Agreement that we entered into effective as of
April 6, 1996. This letter will constitute a renouncement of that right
effective as of December 16, 1999, and may be signed in multiple counterparts,
each of which shall be deemed an original, but all of which together shall
constitute the same document. We trust that our relationship will continue to be
an amicable and mutually beneficial one.
Sincerely,
/s/ James Rousou
James Rousou
Control Investments Limited
By: /s/ David G. Goar
Its Director
Best Investments Limited
By: /s/ David G. Goar
Its Director
Champion Investments Limited
By: /s/ David G. Goar
Its Director
EXHIBIT 4.16
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED AND
QUALIFIED IN ACCORDANCE WITH THE SECURITIES ACT OR UNLESS IT IS OTHERWISE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH REGISTRATION AND
QUALIFICATION IS NOT REQUIRED AND IN ANY SUCH CASE, SUCH SALE, TRANSFER OR OTHER
DISPOSITION MUST BE ACCOMPLISHED IN ACCORDANCE WITH THE REQUIREMENTS OF
REGULATION S UNDER THE SECURITIES ACT OR ANOTHER APPLICABLE EXEMPTION.
WARRANT
To Purchase 400,500 Shares of Common Stock,
Par Value $.01 Per Share,
of
ELCOM INTERNATIONAL, INC.
A Corporation Incorporated Under the Laws of the State of Delaware
VOID AFTER 5:00 P.M., Boston, Massachusetts Time June 22, 2005
WHEREAS, Conqueror Investments Limited ("Conqueror") entered
into that certain Share Purchase Agreement (the "Purchase Agreement") dated June
12, 1995, among Elcom International, Inc. (f/k/a Catalink Direct, Inc.), a
Delaware corporation (the "Company"), Conqueror and the other persons and
entities set forth on Schedule 1 Parts A and B to the Purchase Agreement (with
capitalized terms not otherwise defined herein having the meaning ascribed to
them in the Purchase Agreement);
WHEREAS, the Company issued to Conqueror a warrant (the
"Warrant") to purchase shares of Common Stock, par value $.01 per share (the
"Common Shares"), of the Company, which Warrant was evidenced by a Warrant
Agreement dated June 22, 1995 (the "1995 Warrant Agreement");
WHEREAS, James Rousou ("Holder"), pursuant to a dividend
distribution from Conqueror to a trust of which he is the principal beneficiary
during his lifetime, and a distribution from said trust to him of the Warrant,
became the Holder of the Warrant, which was evidenced by a Warrant Agreement,
dated April 6, 1996 (the "1996 Warrant Agreement"), and, as of the date of the
1996 Warrant Agreement, the 1995 Warrant Agreement was canceled; and
WHEREAS, the Company and Holder desire to amend and restate
the Warrant to provide for "cashless" or net-issue exercise of the Warrant by
Holder, which amendment and restatement is evidenced by this Warrant Agreement,
and, as of the date hereof, the 1996 Warrant Agreement is canceled.
NOW, THEREFORE, THIS CERTIFIES that, for value received, the
undersigned Holder hereof, is entitled to purchase, on the terms and conditions
stated herein, between 5:00 p.m. Boston, Massachusetts time on June 22, 1996 and
5:00 p.m. Boston, Massachusetts time on June 22, 2005 both inclusive (the period
between and including said times, the "Exercise Period"), an aggregate of up to
400,500 Common Shares of the Company, subject to adjustment as set forth in
Section 5 hereof.
1. Purchase Price. The purchase price upon any exercise of
this Warrant shall be Four Dollars and Seventy-Five Cents ($4.75) for each
Common Share purchased (the "Purchase Price"), subject to adjustment as
hereinafter provided. The term "Warrant," as used herein, shall include this
Warrant and each succeeding warrant issued in accordance with Section 2 or
Section 5 hereof.
2. Exercise and Issuance. This Warrant may be exercised in
whole or in part at any time or times during the Exercise Period, upon written
notice in the form of the Purchase Form attached hereto (to which this original
Warrant shall be annexed) executed by the Holder and sent to the Company at the
principal office of the Company, 10 Oceana Way, Norwood, Massachusetts 02062,
Attention: Chairman (or such other address as the Company may designate by
written notice), by certified or registered mail or by Federal Express or a
similar express delivery service. Any such Purchase Form shall specify the
number of Common Shares with respect to which this Warrant is being exercised
and shall be accompanied by the aggregate Purchase Price for such shares, which
shall be tendered by the Holder to the Company in cash, by wire transfer, by
bank or certified check or by delivery of Common Shares having a fair market
value on the date of exercise equal to the aggregate Purchase Price and which
Common Shares shall have been owned by Holder for a period of at least six
months prior to the exercise of the Warrant.
The Holder also may exercise this Warrant, in whole or in
part, in a "cashless" or "net-issue" exercise by delivering to the
above-referenced offices of the Company this Warrant, together with a Purchase
Form specifying the number of Warrant Shares (as such term is defined below) to
be delivered to the Holder ("Deliverable Shares") and the number of Warrant
Shares otherwise acquirable under this Warrant that are being surrendered in
payment of the aggregate Purchase Price for the Deliverable Shares ("Surrendered
Shares"); provided that the Purchase Price multiplied by the number of
Deliverable Shares shall not exceed the value of the Surrendered Shares. For
purposes of this provision, each of the Surrendered Shares will be attributed a
value equal to the fair market value of the Warrant Share, determined by
reference to the average of the high and low sales prices on the Nasdaq National
Market (or other principal market on which the Common Shares are then listed)
for the last trading day immediately preceding the date of exercise of this
Warrant, minus the Purchase Price. For avoidance of doubt and solely to
illustrate the operation of this "cashless" or net-issue provision (as example
only), the calculation set forth on Exhibit A is incorporated herein.
If such Purchase Form and payment are received by the Company
in proper form during the Exercise Period, the Company shall as promptly as
practicable, and in any event, within ten business days thereafter, issue and
deliver to the Holder a share certificate or certificates, in the denominations
and registered in the appropriate names, for all of the fully paid and
non-assessable Common Shares for which this Warrant has been exercised
(hereinafter, "Warrant Shares"); provided, however, that the Company may, as a
condition precedent to any such issuance and in the exercise of its reasonable
discretion, request an opinion of counsel to the Holder (which counsel and form
of opinion shall be reasonably acceptable to the Company and its counsel) to the
effect that the issuance of the Warrant Shares upon such exercise is allowable
under all applicable securities laws. Any issuance and documentary taxes or
other charges to be paid in connection with such issuance of Warrant Shares
shall be borne by the Company, provided that the Company shall not be
responsible for any taxes or other governmental charges attributable to any
transfer by the Holder of any Warrant Shares or attributable to the issue of any
certificate(s) for Warrant Shares in any name other than that of the registered
Holder of this Warrant, and in such case, the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's reasonable satisfaction that no
such tax or other charge is due. Upon receipt by the Company of all of the
foregoing deliveries called for upon exercise of this Warrant, Holder shall, for
all purposes, be deemed to have become the holder of record of such Warrant
Shares on the date on which the last of such deliveries was made, irrespective
of the date of delivery by the Company of the stock certificate(s) therefor;
except that if such date is a date when the stock transfer books of the Company
are closed, Holder shall be deemed to have become the holder of such Shares at
the beginning of business on the next date on which the stock transfer books are
open. If this Warrant is exercised only in part, the Company, at the time of
delivery of said share certificate or certificates, shall deliver to the Holder
a new Warrant, at the sole cost and expense of the Company, in substantially the
form hereof evidencing the right of the Holder to purchase the balance of the
Warrant Shares covered by this Warrant.
Unless, at the time of exercise, the Warrant Shares are
registered under the Securities Act of 1933, as amended (the "Securities Act"),
each certificate for such Common Shares shall bear on its face or on the reverse
side thereof the following legend (and any additional legend(s) required by
applicable law):
"The securities represented by this certificate have
not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and may not be sold,
transferred or otherwise disposed of unless such securities
are registered and qualified in accordance with the Securities
Act or unless it is otherwise established to the satisfaction
of the Company that such registration and qualification is not
required and, in any such case, such sale, transfer or other
disposition must be accomplished in accordance with the
requirements of Regulation S under the Securities Act or
another applicable exemption."
Any certificate issued at the time in exchange or substitution for any
certificate bearing the foregoing legend with respect to the Securities Act
(except a new certificate issued in connection with a public distribution
registered under the Securities Act or Regulation A promulgated thereunder)
shall bear said legend unless the Company otherwise directs or unless, in the
written opinion of the applicable Holder's counsel, reasonably satisfactory to
the Company's counsel, such legend no longer applies.
3. [INTENTIONALLY OMITTED.]
4. Transferability; Limitation on Rights. Holder and the
Company agree that this Warrant and the Warrant Shares shall be subject to all
of the applicable terms, conditions and covenants contained in the Amended and
Restated Stockholders' Agreement, dated April 6, 1996, to which the Company,
Holder, Conqueror and certain other persons and entities are parties (the
"Stockholders Agreement"), which is incorporated herein by reference and made a
part hereof, and that this Warrant and the Warrant Shares issuable upon the
proper exercise thereof, shall be entitled to all of the benefits, and shall be
subject to all of the restrictions, contained in said Stockholders Agreement,
until the expiration or termination of the Stockholders Agreement by its terms.
This Warrant shall be transferable only upon compliance with all of the
following: (a) delivery of a written notice executed by any such proper
transferee (to which this Warrant shall be annexed) in form and substance
satisfactory to the Company and the Company's counsel, providing the Company
with such investment representations of such transferee as the Company may
reasonably request and providing that such transferee shall be subject to all of
the terms and conditions hereof; and (b) the Holder and any such transferee
establishing to the satisfaction of the Company and the Company's counsel that
such transfer may be effected (i) in accordance with the requirements of
Regulation S under the Securities Act or any other applicable exemption from the
registration or qualification requirements under the Securities Act, including
the issuance of an opinion of Holder's counsel to that effect, if requested by
the Company. The Company is entitled to refuse to register any transfer of this
Warrant or the Warrant Shares not made in accordance with this Section 4. No
stockholder rights, as such, shall accrue to a Holder by virtue of its holding
of this Warrant. The rights of a Holder hereunder are limited to those expressed
or incorporated herein and Holder, by its execution hereof, consents to and
agrees to be bound by all of the terms hereof.
5. Stock Dividend, Split, Reorganization, Etc. If at any time
or from time to time (i) the Common Shares of the Company shall be split or
consolidated, or if there shall be a dividend on the Common Shares of the
Company payable in shares of common stock or other securities of the Company,
(ii) there shall be any consolidation or merger of the Company with or into
another corporation, or (ii) the Common Shares shall be converted, exchanged,
reclassified or in any way substituted for, then:
(a) this Warrant, to the extent that it shall then be
unexercised and in effect, shall thereafter apply to such number and
kind of securities or other property to which any owner of the number
of Common Shares subject to this Warrant at the time such event
occurred would have been entitled upon the occurrence of such event;
and
(b) as a condition precedent to the occurrence of
such event, the Company shall have made lawful provisions (including,
without limitation, the execution and delivery of other and further
documents) so that (i) this Warrant shall apply to the number and kind
of securities and other property provided for in clause (a) above; (ii)
the Purchase Price shall be commensurately adjusted and stated; and
(iii) this Warrant shall have been expressly assumed by any resulting
transferee or successor corporation or entity (in the case of any
merger or consolidation in which the Company is not the surviving
corporation) such that all provisions of this Warrant shall continue to
apply thereafter, including the provisions for further adjustment, and
such assumption shall have been effected by written instrument
delivered to the Holder; and
(c) within twenty-eight (28) days after the
occurrence of any such event, the Company shall send a notification to
the Holder specifying the particulars of any such adjustment (including
the adjusted Purchase Price) and offering to issue a new Warrant
Agreement if such adjustments significantly alter the terms hereof.
5A. Spin-Off. Notwithstanding any other provision herein, if
at any time after the date hereof, the Company shall make a distribution on its
Common Shares in the form of assets of the Company (including the capital stock
of any subsidiary of the Company), the Purchase Price set forth in Section 1
hereof shall be adjusted to a number determined by multiplying the Purchase
Price in effect immediately prior to such distribution by a fraction, the
numerator of which shall be the volume-weighted average of the fair market value
of the Common Shares for the five trading days following the distribution and
the denominator shall be the volume-weighted average of the fair market value of
the Common Shares for the five trading days immediately preceding the
distribution.
6. Dissolution, Liquidation, Winding-Up. If the Company at any
time during the Exercise Period shall sell or transfer all or substantially all
of its assets or dissolve, liquidate or wind-up its affairs, a Holder may
thereafter receive upon the proper exercise hereof in accordance with Section 2
on or prior to the record date for any such action, in lieu of each Common Share
or fraction thereof that it would have been entitled to receive, the same kind
and amount of any securities or assets as may be issuable, distributable or
payable with respect to such Common Share or fraction thereof upon any such
sale, dissolution, liquidation or winding-up. Upon notice delivered by the
Holder to the Company at any time prior to the record date for any liquidation
or winding-up of the Company, and notwithstanding that the Warrants evidenced by
this Warrant Agreement have not yet been exercised, the Holder shall be entitled
to be treated as if this Warrant Agreement had been exercised to the fullest
extent that it is exercisable as of such record date and shall be entitled to
receive out of the assets distributed in such liquidation or winding-up (on a
pari passu basis with the holders of common stock) such assets as the Holder
would have received as a holder of common stock upon the exercise to the fullest
extent that it is exercisable hereunder as of such record date, less the sum
total that would have been payable by the Holder as the Purchase Price upon such
exercise. Subject to this Section 6, the Warrants shall lapse, and this Warrant
Agreement shall terminate and be of no further force and effect, upon any
liquidation or winding-up of the Company.
7. Notice. Upon (a) any taking by the Company of a record of
the holders of any class of securities for which this Warrant may be exercised
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend payable out of surplus of the Company)
or other distribution, (b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
merger of the Company, or (c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company or sale or transfer of all or
substantially all of the assets of the Company, then and in each such event the
Company shall mail or cause to be mailed to Holder a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend or
distribution, and stating the amount and character of such dividend or
distribution, or (ii) the date on which any such reorganization,
reclassification, recapitalization, merger, dissolution, liquidation, winding-up
or sale or transfer of assets is to take place, and the date, if any, as of
which the holders of record of Common Shares shall be entitled to vote thereon
or to exchange their Common Shares for securities or other property deliverable
upon such dissolution, liquidation or winding-up. Such notice shall be mailed at
least twenty (20) days prior to the earliest date therein specified.
8. Representations, Warranties and Covenants.
(a) Representations and Warranties of the Company. The Company hereby
represents and warrants to the Holder as follows:
(1) The Company has full legal right, power and authority to
enter into and perform this Warrant Agreement and the
Stockholders Agreement and the execution, delivery and
performance by the Company of this Warrant Agreement and the
Stockholders Agreement are within the Company's corporate powers,
have been duly authorized by all necessary corporate action, and
do not and will not contravene (a) the Company's Restated
Certificate of Incorporation, as amended, or By-laws, (b) any
applicable law, rule, regulation or the requirement of any
jurisdiction to which the Company is subject or (c) result in a
breach of or default under any material agreement or arrangement
to which the Company may be a party.
(2) This Warrant Agreement and the Stockholders Agreement are
duly executed and delivered (and in the case of the Warrants
represented hereby are validly issued, and fully paid and
non-assessable and without violation of any pre-emptive rights),
and constitute the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their
terms. The Warrant Shares issuable upon exercise of the Warrant
have been duly authorized and reserved for issuance and, when
issued in accordance with the terms of the Warrant, will be
validly issued, fully paid and non-assessable, and without
violation of any preemptive rights.
(b) Representations and Warranties of the Holder. The Holder hereby
represents and warrants to the Company as follows:
(1) the Holder is not a "U.S. person" as that term is defined in
Regulation S of the Securities Act; no offer of the securities
represented hereby were made to any person in the United States
and the Holder was outside of the United States at the time of
the Transfer of the Warrant from Conqueror (as contemplated under
Regulation S of the Securities Act);
(2) the Warrant is being acquired for the Holder's own investment
and not with a present view to or for sale in connection with any
distribution thereof to others, including for the account or
benefit of a U.S. person.
(3) the Holder has full legal right, power and authority to enter
into and perform this Warrant Agreement and the Stockholders
Agreement.
(4) the execution and delivery of this Warrant Agreement and the
Stockholders Agreement by it and the consummation of the
transactions and performance of other covenants contemplated
hereby and thereby do not and will not contravene (a) any
applicable law, rule, regulation or the requirement of any
jurisdiction to which the Holder is subject or (b) result in a
breach of or default under any material agreement or arrangement
to which the Holder may be a party.
(5) each of this Warrant Agreement and the Stockholders Agreement
constitutes the legal, valid and binding obligation of the
Holder, enforceable against it in accordance with its terms.
9. Reservation of Shares. The Company shall at all times reserve and keep
available, free from preemptive rights, for issuance and/or delivery upon
exercise of this Warrant Agreement, such number of its duly authorized and
unissued Common Shares, or Common Shares held in its treasury, as shall be
required for issuance and delivery of Warrant Shares upon exercise in full of
all outstanding Warrants.
10. Listing on Securities Exchange. The Company will, to the
extent permissible under the rules of the Nasdaq National Market (or other
principal market on which the Common Shares are then listed), at its expense,
list thereon, maintain and increase when necessary such listing of, all Common
Shares issued when and to the extent the Warrant Shares are issued or issuable
upon the exercise of this Warrant so long as any Common Shares shall be so
listed.
11. No Fractional Shares. Notwithstanding any other provision
to the contrary contained herein, no fractional Common Shares will be issued in
connection with any exercise hereof. In lieu of any fractional Common Shares
which would otherwise be issuable, the Company shall pay cash equal to the
product of such fraction multiplied by the fair market value per Common Share on
the date of exercise, determined by reference to the last closing sale price if
the Shares are then publicly quoted or else in good faith by the Company's Board
of Directors.
12. No Stockholder Rights. Except as to terms expressly
provided herein, this Warrant shall not entitle its Holder to any of the rights
of a stockholder of the Company.
13. Warrant Register. The Company shall maintain a register
for the Company's registration of the Warrant represented hereby and of its
transfer from time to time (the "Warrant Register") at its principal office.
14. Survival of Agreements; Representations and Warranties;
Etc. All warranties, representations and covenants made by the Company or by
Holder herein (or incorporated herein) or in any certificate or other instrument
delivered by or on behalf thereof in connection with these Warrants shall be
considered to have been relied upon by the other party and shall survive the
issuance and delivery of these Warrants and the exercise thereof, and shall
continue in full force and effect. All statements in any such certificate or
other instrument shall constitute representations and warranties hereunder.
15. Governing Law; Consent to Venue and Jurisdiction;
Arbitration. This Warrant Agreement shall be governed by and construed under
Delaware law, without regard to the conflict of laws principles thereof. Each of
the parties hereto agrees that all disputes arising in connection with this
Warrant Agreement shall be governed by and finally settled under the rules of
binding arbitration of the American Arbitration Association ("AAA") by a panel
of three arbitrators familiar with Delaware corporate law (at least one of whom
shall be an attorney) appointed by the AAA. Any such claim or controversy
hereunder shall first be promptly submitted to AAA under its minitrial
procedures. All arbitration proceedings shall take place in Boston,
Massachusetts.
16. Notices. All notices shall be in writing delivered as
follows: If to Company, to:
(a) Elcom International, Inc.
10 Oceana Way
Norwood, MA 02602
Attn: Chairman
Telecopier: (781) 551-0409
With a copy to:
Calfee, Halter & Griswold LLP
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114-2688
Attn: Douglas A. Neary
Telecopier: (216) 241-0816
(b) If to the Holder, to:
James Rousou
LE Douit
La Rue Fevresse
St. Saviour
Guernsey GY7 9FX
Channel Islands
With a copy to:
Gouldens
22 Tudor Street
London EC4Y OJJ, England
Attn: Adam C. Greaves
Telecopier: 011-44-171-583-3051
or to such other address as may have been designated in a prior notice. Notices
may be sent by (a) overnight courier (DHL or Federal Express priority), (b)
facsimile transmission, or (c) registered or certified mail, postage prepaid,
return receipt requested; and shall be deemed to have been given (a) in the case
of overnight courier, the second business day after the date sent, (b) in the
case of facsimile transmission, on the date of such transmission, and (c) in the
case of mailing, five business days after being mailed, and otherwise notices
shall be deemed to have been given when received.
17. Notice of Certain Corporate Actions. The registered Holder
of this Warrant shall be entitled to the same rights to receive notices of
corporate actions and any other communications as any holder of Common Shares.
18. Binding Effect. Except as may be otherwise provided
herein, this Warrant Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns.
19. Waivers. Compliance with the provisions of this Warrant
Agreement may be waived only by a written instrument specifically referring to
this Warrant Agreement and signed by the party waiving compliance. No course of
dealing, nor any failure or delay in exercising any right, shall be construed as
a waiver, and no single or partial exercise of a right shall preclude any other
or further exercise of that or any other right.
20. Amendment or Modification. No supplement, modification or
amendment of this Warrant Agreement shall be binding unless made in a written
instrument which is signed by all of the parties and which specifically refers
to this Warrant Agreement.
IN WITNESS WHEREOF, the Company and Holder have caused this
Warrant Agreement to be executed as of this 7th day of January, 2000.
ELCOM INTERNATIONAL, INC.
(the "Company")
By: /s/ Peter Rendall
Peter Rendall
Its: Chief Financial Officer
/s/ JAMES ROUSOU
James Rousou
("Holder")
Exhibit 10.22
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of the 8th day of
December, 1999 by and between Elcom International, Inc. ("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, as amended by the First Amendment dated as of
November 5, 1997 (collectively, the "Existing Agreement"), which the parties
desire to amend and supersede, except as otherwise provided herein, based on a
change in circumstances;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company and the Executive agree as follows:
1. Duties. The Company hereby employs Executive to be Advisor to
Michael Templeman, the Managing Director (acting) of the United Kingdom
operations of the Company. During the course of his employment, Executive shall
have responsibilities to perform such duties, consistent with such position, as
may be assigned to him by Mr. Templeman. It is currently contemplated that
Executive will devote his full business time and best efforts to the business
activities and welfare of the Company for approximately one (1) day per week or
as otherwise mutually agreed.
2. Term. This Agreement is effective as of the date hereof and
Executive's employment and this Agreement expires effective as of March 28,
2000, unless extended for up to a 90-day period by the mutual written consent of
the parties hereto.
3. Salary. During the course of employment, the Company will pay
Executive for his performance of the duties specified herein a salary of $1,200
(twelve hundred dollars)
per day, maximum of two days per week, payable in the manner that the Company
normally pays its employees, plus reasonable business expenses subject to
receipts and normal company policy, and shall continue providing all existing
benefits for such time period.
4. Effect on Other Agreements. The Company and Executive hereby
acknowledge and agree that all of the terms and provisions of the Existing
Agreement are hereby terminated and of no further force and effect except for
the provisions of Sections 9 (regarding the ownership of inventions), 10
(noncompetition), 11 (nondisclosure), 12 (nonsolicitation/ noninterference), 13
(severability), 14 - from the First Amendment (clarification of noncompetition
and nonsolicitation periods), 15 (acknowledgment), 16 (governing law), 17
(assignment), 18 (entire agreement; amendment; waivers), 19 (headings) and 20
(counterparts), which shall remain in full force and effect, and are
incorporated herein. In addition, the Executive hereby waives and relinquishes,
whether under the Existing Agreement or the Executive Profit Performance Bonus
Plan (the "Plan") or otherwise, any and all rights,
<PAGE>
entitlements or benefits under or with respect to such Plan for the Company's
fiscal year commencing January 1, 2000.
IN WITNESS WHEREOF, the undersigned have hereunto subscribed their
names effective as of the date first written above.
Executive
/s/ James Rousou
James Rousou
Elcom International, Inc.
By: /s/ Robert J. Crowell
Robert J. Crowell
Chairman and Chief Executive Officer
Exhibit 10.37
Amendment and Waiver under Employment Agreement
and Executive Profit Performance Bonus Plan
for Laurence F. Mulhern
This Amendment and Waiver is made and effective as of the 1st day of
October, 1999 by and between Elcom International, Inc., a Delaware corporation
("Elcom" or the "Company"), and Laurence F. Mulhern, currently residing at 16
Warren Street, Upton, Massachusetts (the "Executive").
W I T N E S S E T H:
WHEREAS, under the currently effective Employment Agreement between the
Company and the Executive (the "Agreement"), the Executive is entitled to
certain participation rights in the Executive Profit Performance Bonus Plan (the
"Plan"); and
WHEREAS, the Executive has tendered his resignation from the employment
of the Company which the parties have agreed shall be effective as of March 31,
2000; and
WHEREAS, the Company has promised to pay to Executive a severance
benefit equal to $100,000 in April 2001, in addition to any other amounts to
which the Executive may be entitled; and
WHEREAS, in consideration for such promise to pay additional severance
benefits, Executive has agreed to waive his rights to participate in the Plan
for any fiscal year beginning on or after January 1, 2000 on the terms set forth
herein;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Company and the Executive mutually
agree as follows:
1. Waiver. The Executive hereby waives and relinquishes any and all
rights and entitlements, whether under the Agreement, the Plan or
otherwise to receive any payments amounts under or in respect of the
Plan with respect to any period commencing on or after January 1,
2000. Notwithstanding the foregoing, if, but only if, the Compensation
Committee of the Board of Directors of the Company determines to make
a discretionary bonus payment to Robert J. Crowell and James Rousou
under the Plan or otherwise with respect to substantially similar
criteria as established for the Plan with respect to the Company's
fiscal year 2000, then the Company shall make a payment to the
Executive that is equal to the amount Executive otherwise would have
received under the Plan were it not for
<PAGE>
this Waiver and Amendment (i.e. 17.5% of the applicable bonus
pool), minus $100,000 (reflecting the severance benefit hereinabove
referenced).
2. This Amendment and Waiver shall constitute an amendment of the
Agreement and the Plan and shall be binding on the parties hereto.
IN WITNESS WHEREOF, the undersigned have hereunto subscribed their
names as of the date first above written.
Elcom International, Inc.
By: /s/ Robert J. Crowell
Its: Chairman & CEO
/s/ Laurence F. Mulhern
Laurence F. Mulhern
Exhibit 21.1
ELCOM INTERNATIONAL, INC., AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT AND STATE OF INCORPORATION
AS OF MARCH 20, 2000
Place of
Name Incorporation
Elcom International, Inc. Delaware
Elcom Services Group, Inc. Delaware
elcom.com, inc. Delaware
Elcom International Limited United Kingdom
Elcom Systems Limited United Kingdom
Elcom Group 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
Portable Computers Limited United Kingdom
Elcom Services Group Limited United Kingdom
Elcom.Com Limited United Kingdom
Lantec Information Services Limited United Kingdom
Exhibit 23.1
The Board of Directors
Elcom International, Inc.:
We consent to incorporation by reference in the registration statement no.
333-94743 on Form S-3 and the registration statement nos. 333-00362, 333-24809,
333-34193, 333-67927 and 333-81795 on Forms S-8 of Elcom International, Inc. of
our report dated February 9, 2000 relating to the consolidated balance sheet of
Elcom International, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations and other comprehensive income,
stockholders' equity, and cash flows for the year then ended, and all related
schedules, which report appears in the December 31, 19999, annual report on Form
10-K of Elcom International, Inc.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
March 27, 2000
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Elcom International, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 23, 1999 relating to the consolidated
balance sheet of Elcom International, Inc. and subsidiaries as of December 31,
1998, and the related consolidated statements of operations and other
comprehensive income, stockholders' equity, and cash flows for the two-year
period ended December 31, 1998, and all related schedules, included in this Form
10-K of Elcom International, Inc. into Elcom International, Inc.'s previously
filed Registration statement no. 333-94743 on Form S-3 and the Registration
Statements No. 333-00362, 333-24809, 333-67927, 333-81795 and 333-34193 on Forms
S-8.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Boston, Massachusetts
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
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-24
</LEGEND>
<CIK> 0000900096
<NAME> Elcom International, Inc.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
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