-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIsioGZCcSl6e7wZZINxRlSbRbaSE7hoEOkLvzdhNQ+tYGDtDsAYVBiAC/Cu904B qF8TqMa1cdBIUfGH28vFHQ== 0000950148-97-000791.txt : 19970401 0000950148-97-000791.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950148-97-000791 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELTRON INTERNATIONAL INC CENTRAL INDEX KEY: 0000915910 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 954302537 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23342 FILM NUMBER: 97570901 BUSINESS ADDRESS: STREET 1: 41 MORELAND RD CITY: SIMI VALLEY STATE: CA ZIP: 93065 BUSINESS PHONE: 8055791800 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ ----------- COMMISSION FILE NUMBER: 0-23342 ELTRON INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4302537 (State or jurisdiction of (I.R.S. Employer incorporation or Identification No.) organization) 41 MORELAND ROAD 93065-1692 SIMI VALLEY, CA (Address of principal (Zip Code) executive office) (805) 579-1800 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports 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 common stock held by non-affiliates of the registrant as of March 14, 1997 was $149,739,000. The number of shares outstanding of the registrant's common stock as of March 14, 1997 was 7,370,198. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be filed no later than 120 days after December 31,1996 are incorporated by reference into Part III. ================================================================================ 2 ELTRON INTERNATIONAL, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 INDEX
Page ---- PART I Item 1. Business......................................................................... 2 Item 2. Properties....................................................................... 12 Item 3. Legal Proceedings................................................................ 12 Item 4. Submission of Matters to a Vote of Security Holders.............................. 12 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............. 13 Item 6. Selected Financial Data.......................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 15 Item 8. Financial Statements............................................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...................................................................... 21 PART III Item 10. Directors and Executive Officers of the Registrant............................... 21 Item 11. Executive Compensation........................................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 21 Item 13. Certain Relationships and Related Transactions................................... 21 PART IV Item 14. Exhibits, Financial Statement and Reports on Form 8-K............................ 21 SIGNATURES Signatures................................................................................ 21 CONSOLIDATED FINANCIAL STATEMENTS Index to Consolidated Financial Statements................................................ 23 EXHIBITS Index to Exhibits......................................................................... E-1
3 PART I Except as otherwise noted, all share and per share data in this Form 10-K have been adjusted to reflect a 1.5-for-1 forward stock split of the Company's Common Stock effected in October 1993, a 1-for-.9640288 reverse stock split effected in January 1994 and a 2-for-1 forward stock split effected on May 1, 1995. Unless the context otherwise requires, the term "Company" or "Eltron" refers to Eltron International, Inc. and its subsidiaries. Unless the context otherwise requires, the terms "Russet," "Donner," "Privilege" and "RJS" refer to the Company's subsidiaries Russet Limited, Donner Media, Inc., Privilege, S.A. and RJS, Inc., respectively. This report may contain forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Factors associated with the forward looking statements which could cause actual results to differ materially from those stated include, among others, dependence on a significant customer, ability to sustain growth rate, management of rapidly changing business and acquisitions, management of inventory, competition, risks associated with international operations, development of markets and acceptance of products, growth of the bar code market, and reliance on certain suppliers. For a fuller discussion of these risk factors, see pages 19, 20 and 21. ITEM 1. BUSINESS COMPANY OVERVIEW Eltron International, Inc. (the "Company" or "Eltron") designs, manufactures and markets a full range of direct thermal and thermal transfer bar code printers, plastic card printers, related accessories, software and specialized print engines. Eltron also manufactures and distributes a full range of supplies designed for use with its printers. The Company believes that its success to date has resulted from Eltron's ability to offer printers and related products with features comparable to or exceeding those of available competing products at a lower cost and higher quality. Eltron has developed an expertise in the design and manufacture of low cost thermal printers. The Company believes that by virtue of its design simplicity, reliability, low cost and low user maintenance requirements, thermal print technology is particularly well suited for applications which require the on-demand printing of labels, tags, tickets, receipts, variable length forms and plastic cards. From its inception, Eltron has focused on bringing to market printers that satisfy a unique customer demand not well served by cut-sheet laser printers or other mass market printer products. The Company initially focused its efforts on developing low cost bar code printers and has since expanded its range of products to include high speed, industrial bar code printers; integrated verified printing systems; portable printers used to print bar code labels, tags and receipts; plastic card printers; airline boarding pass printers and receipt printers. These printers are used in a wide range of applications including product identification, carton identification, package identification, warehouse management and logistics, medical specimen identification and tracking, patient tracking, airline ticketing, baggage identification and tracking, point of sale receipt printing, clothing tags, financial transaction receipt printing, state issued driver's licenses and identification cards, security and access cards, membership cards, employee and school identification cards and tags, serial number identification and asset management. Eltron is currently working to expand its broad line of quality printers and related accessories to meet the needs of additional markets, and to position itself as a price and quality leader. The Company's products are sold through multiple distribution channels that include value added resellers, systems integrators, original equipment manufacturers, and independent distributors located in more than 70 countries. Industries for which the Company believes its printers are particularly well-suited include shipping and package delivery, retail distribution and point of sale, healthcare, manufacturing, financial services and governmental identification. The Company currently focuses its sales efforts in these markets, although it continues to explore the potential for new markets in which it can apply its expertise in the design and manufacture of low-cost thermal printers. Eltron's objective is to establish itself as a leading supplier of thermal printers and related accessories designed for use in on-demand print applications. The Company believes it is able to maintain a competitive advantage through (i) its understanding of its markets and the positioning of its products as value leaders, as measured by their low cost and high quality; (ii) its concentration on the timely introduction of new products, as demonstrated by the more than 36 products Eltron has brought to market since its inception in January 1991; (iii) the design of its products, which are precision-tooled, contain few parts, are easy to assemble and use little direct labor, resulting in efficient production at low cost, and (iv) its use of high quality components to produce reliable products. 2 4 INDUSTRY OVERVIEW Eltron's products are designed to meet a wide range of customer needs, with the majority of its printers and related products sold into the automatic identification data collection and the custom plastic card printer industries. These industries are discussed as follows: Automatic Identification Data Collection Industry. Automatic identification data collection refers to the automatic recognition and processing of data without the need for manual input. Currently, this is accomplished through the computerized reading and writing of information encrypted in bar codes, magnetic stripes and smart chips, with bar coding the predominant technology. A bar code consists of a series of bars and spaces of specified widths, groupings of which represent specific numeric or alphanumeric characters. A unique bar code can be affixed to permit rapid and accurate identification of any number of variables relating to any item to be tracked or managed. With bar code data collection systems, workers are able, with limited training, to collect data by scanning bar codes and to input this information into computer databases in real time. Bar coding is highly reliable compared to conventional input methods. This technology eliminates human error that occurs during manual input of information and results in the reduction of labor and process costs. Initially, automatic identification data collection technology was applied to the transportation and retail industries. Over time, automatic identification data collection technology has gained wider acceptance and is now regularly used in industries ranging from manufacturing to medical research. Bar code label printers use a number of printing technologies commonly used in the conventional computer printer industry. These technologies are direct thermal, thermal transfer, impact and laser. As the cost of automatic identification data collection technology has decreased and customer acceptance increased, the applications of this technology have diversified and created a number of new markets. According to an industry study, the bar code label printer market is projected to grow from an estimated $1.3 billion in 1996 to $2.9 billion in 2000. Moreover, as information technology has increasingly come into use, retailers, manufacturers, and distributors in a large number of industries have issued compliance standards requiring that suppliers provide products with bar coded information affixed. While a number of automatic identification data collection applications allow for preprinted bar coded information to be included in package design, a significant number of applications require the encoding of variable data in unique bar code labels on demand, thus making the use of preprinted bar code information impractical. Generally, bar coded labels or tickets may either be preprinted off-site by a third party or on-site by the user where the bar code label will be used. On-demand printing is required when there is a need for variable data that is not known until shortly before a label must be printed and used. Situations requiring on-demand printing include labels that must indicate addresses, dates of manufacture, unique serial or purchase order numbers, product ingredients or nutritional information, accurate weights, expiration dates, and other similar information that cannot be effectively produced off-site. The Custom Plastic Card Industry. A new thermal print process, thermal dye sublimation, has recently become commercially viable for applications that call for color printing on PVC plastic. This capability has given rise to an industry focused on the on-site creation of full color, photographic quality plastic cards. These cards can typically be created in less than one minute for under one dollar, while the user waits. Traditional photographic processes are both more expensive and take more time. Personalized card applications such as state driver's licenses, school and work identification cards, security access cards and financial transaction cards are, in the opinion of the Company, well suited to benefit from this technology. Bar codes, smart chip and magnetic stripe encoding can be used to record such personal data as health records, financial transactions, security access codes, and vital statistics. While the use of this technology is relatively new, the Company believes that the increased security and utility of personalized cards is creating an industry capable of high growth. Eltron's sales of card printers increased more than 200% to $10 million in 1996. Additional Market Opportunities. The Company believes that there is a growing number of printing applications being developed in various industries which require multiple-site, on-demand printing. The Company believes that, by virtue of its ability to manufacture compact printers at low cost, it is well positioned to benefit from this trend. The Company believes that it can build on its core design competencies to address these new markets for on-demand printing. 3 5 BUSINESS STRATEGY As a result of its combination of low price, high quality and service, the Company believes that it is a leading supplier of thermal printers and related accessories. Utilizing management's experience in the automatic identification data collection and computer peripheral industries, the Company is expanding its line of quality printers and related accessories to meet the needs of additional markets and to position itself as a price and quality leader. The Company's objectives are to enhance its position in the automatic identification data collection industry; to establish itself as a leading supplier of on-demand printers designed for use in additional industries, such as plastic card printing; and to distribute related supplies. The Company seeks to: o Capitalize on Market Understanding To Establish Value Leadership in Profitable Niches. The Company believes that the success of its current products is the result of its understanding of customer needs and competitive market forces. Eltron plans to continue to assess its position relative to market needs and intends to sustain its competitive advantage through intelligent product positioning and market understanding. The Company also intends to broaden its opportunities by taking Eltron's products to new markets and industries which provide opportunities for on-demand printers, allowing it to take advantage of its engineering and technology competencies. Eltron concentrates on providing high quality at the lowest price, rather than competing solely on product features. o Maintain Aggressive Product Design Cycle. Eltron has demonstrated its commitment to aggressive product design cycles by bringing to market more than 36 products since January 1991. The Company's objective is to achieve product design cycles that are shorter than those of its competitors. The Company believes that a key factor in developing and maintaining a competitive advantage is this ability to rapidly transform a product concept into a manufactured product. The Company believes that reduced design cycles allow it to better react to ever changing market needs. o Pursue Simplified Product Design. As part of its low-cost, high-quality strategy, Eltron has developed products which, by virtue of their design, can be produced at a low cost using little direct labor. Eltron's products are precision-tooled, designed to be easily assembled and contain few parts. This design philosophy has guided the Company from its inception. For example, Eltron's Companion printer requires no manufacturing adjustments, contains four moving parts and takes approximately 10 minutes to assemble. As a result, the Company is able to produce reliable, high-quality printers at low cost. This design philosophy will continue to be a priority for new product development. o Ensure Quality and Product Reliability. Although the Company has sought to establish itself as a price leader, the Company believes that it must provide reliable, high-quality products and service to develop and sustain a competitive advantage. As a result of the cost advantages it has achieved through its product designs, Eltron has been able to incorporate high-quality components into its products at comparatively low cost. Eltron's commitment to quality and reliability is also evidenced by the Company's ISO 9002 certification in November 1995. The majority of Eltron's products are warranted for a full year. The Company believes that it has not experienced significant warranty claims to date because of the simplicity of its product design strategy, the relatively small number of moving parts in its printers and the high-quality components it uses. The Company believes that the strategy summarized above will enable it to compete in its existing markets and to develop new markets. To take advantage of the benefits that the Company believes will flow from pursuing the strategy, the Company plans to implement it in the following areas: o Expand Presence and Products in Automatic Identification Data Collection Markets. While the Company believes that penetration of the retail market with automatic identification data collection products is significant, Eltron also believes that the majority of enterprises in the healthcare and industrial markets are not yet employing automatic identification data collection technology and that markets outside of the United States are less saturated than its domestic markets. The Company's strategy is to expand the potential applications of automatic identification data collection technology in these sectors by continuing to reduce the price of its products through design and manufacturing efficiencies, thereby increasing the affordability of automatic identification data collection equipment for those who may not have used it previously due to cost. The Company also believes that its wide range of product offerings provides an advantage in emerging markets in Latin America and Asia where automatic identification data collection has only recently been introduced. o Penetrate Plastic Card Markets. The Company targeted the plastic card market through the acquisition of Privilege S.A. in the first quarter of 1996. The Company believes that, by applying Eltron's design philosophy 4 6 and manufacturing techniques to Privilege's products, the cost of these products can be substantially reduced, improving its price leadership position in the custom plastic card market. The Company also believes that providing user friendly plastic card printers at a lower price point may increase demand within the custom plastic card market. o Identify and Enter New Markets. The Company believes that there is a growing number of printing applications being developed in various industries which require multiple-site, on-demand printing. The Company believes that, by virtue of its ability to manufacture relatively compact printers at low cost, it is well positioned to benefit from this trend. The Company believes that it can build on its design competencies to address these new markets for on-demand printing. o Leverage Distribution Channels. As the Company's installed base of bar code printers grows, the Company believes that it has the opportunity to expand its sales of supplies to serve those printers, as well as sales of new upgrade and replacement printers. Over the life of a printer, the cost of supplies can exceed by several times the initial cost of the printer. The Company distributes its products through multiple sales channels, which include value added resellers, systems integrators, original equipment manufacturers and independent distributors, and the Company's own sales force. The Company continually seeks to strengthen its relationships with the resellers of its products and to build awareness and demand for its products among end users. Moreover, the Company believes it can capitalize on strong relationships in its channels to offer more products and new products to end users at lower incremental selling and administrative costs. o Expand International Sales. From its inception Eltron has emphasized a global sales strategy. In the years ended December 31, 1994, 1995 and 1996, the Company's sales outside of the United States totaled approximately $8 million, $12 million and $30 million, respectively. As of December 31, 1995, the Company distributed its products in 32 countries, and as of December 31, 1996 that number had increased to more than 70 countries. The Company's objective is to be a worldwide supplier of a wide range of competitively priced on-demand printers. THE COMPANY'S KEY MARKETS Bar codes are currently used to increase productivity and efficiency in an increasing number of industries. The Company's key markets include the package delivery, retail, healthcare, manufacturing, financial services and security industries. Package Delivery. The package delivery industry is increasing its use of automatic identification data collection technology to track packages from pickup to delivery. Examples of companies that have implemented this technology in their operations include United Parcel Service, Federal Express, Roadway Express and the U.S. Postal Service, some of which provide their customers with shipping systems consisting of computers, weighing scales and bar code label printers. Bar code labels are printed at the shipping location and encoded with tracking information. The label is scanned by the package pickup driver with the data then stored in a portable data collection terminal. The data is either transmitted or later downloaded to the main computer system. The package is then delivered to the local distribution center for sorting by destination. Information encoded on the package label facilitates its continued tracking. The encoded information is used again to sort and track the package when it arrives at its destination. Portable penpad computer terminals are used to record the recipient's name and time of delivery, and this information is then available to the sender for delivery verification. Retail. The retail industry was one of the first to utilize automatic identification data collection technology. An individual stock-keeping unit ("SKU") is encoded with product identification information. This information is printed on the product container or onto a label or tag. The encoded product information is then scanned at the check-out terminal, expediting the check-out process and reducing the errors incurred in entering the information manually. 5 7 An added benefit of bar coding product information is that data contained on the SKU is transmitted to the main computer system for automatic inventory analysis. In addition, in-store inventory can easily be determined through the use of portable terminals and scanning devices. Portable label printers can also be used to create substitute labels or tags with incomplete or missing SKU information, and for creating shelf tags. Healthcare. The use of automatic identification data collection technology in the healthcare industry is growing rapidly. Examples of applications in healthcare include patient admission, laboratory specimen identification, pharmacy labels and dispensing of medication. Once patients have been admitted to a treatment facility, their records, procedures, medications, and charges can be captured by entering cost data and patient information into a computer. Bar coded wristbands and file labels are created by a label printer. Using automatic identification data collection, hospitals and healthcare systems can streamline accounting functions and improve bottom line results. Through the use of the integrated automatic identification data collection system, patient billing information can be captured at the point of delivery and continuously entered in a central computer, thereby reducing billing delays and errors. At a nurse's station, bar coded labels can be printed for the encoding of each specimen at the time it is collected from the patient, thereby eliminating potential input errors. Prescribed medication with the patient's identification encoded on a label can be scanned prior to being administered to ensure accuracy. Patient medication requirements can be entered into a central computer and transmitted to the pharmacy, where bar coded prescription labels are created and patient information automatically cross checked at the time the prescription is filled. This allows for accurate tracking of patient medication, reducing the possibility of costly and potentially fatal errors. Bar coded specimen and tracking sheets can then be sent to the laboratory for analysis. Additional bar coded labels are printed, if required, for the various test locations within the laboratory. The specimens are scanned as they enter and leave each test station. Analyses are sent to the central computer for transmission to the patient's doctor. The use of automatic identification data collection within the laboratory has greatly reduced the number of errors in tracking and reporting test analyses and increased speed and accuracy in the billing process. The Company believes that, because of the large number of samples and the significant liability associated with labeling errors in certain healthcare applications, an incentive exists for the increased use of automatic identification data collection technology in the healthcare sector. The Company believes that the adoption of bar code technology is a means of reducing keystroke or handwriting error in the medical labeling process. In the doctor's office, automatic identification data collection can be used to verify insurance eligibility, track patient history files, and encode laboratory specimens. The benefits to the doctor are improved timeliness of test results, fewer errors and more accurate billing. Manufacturing. The increased efficiencies associated with bar coded information are especially apparent in the industrial sector. Information encoded on components can be tracked for a variety of purposes, including assembly of components, tracking of product, work in progress, inventory control and warranty information. The Company believes that the industrial market has not been significantly penetrated, as many small and mid-sized firms have not yet employed automatic identification data collection technology. Financial Services. Management believes that new technologies exist which can potentially increase the utility of plastic cards. These technologies include memory chip or "smart cards", high density magnetic strip encoding and high density bar codes; all of which enable plastic cards to provide more than an account number. This increased storage capacity is creating new applications for plastic cards such as electronic purse or debit cards. The Company believes that this increased transaction capability will create an increased need for security. Eltron's plastic card printers provide the ability to print bar codes, color photographs and graphics; encode magnetic stripes; and read and write to smart chips, all in the same process at a relatively low cost. Security and Access Control. A growing number of firms are implementing access control systems that feature encoded identification badges. These badges may be used to unlock a door in a card access control system or as a form of identification with corporate name, logo, and individual name and photograph. The plastic card printer and software application are the two main components that allow for complete personalization of cards on demand. Access control is often required in educational environments, primarily universities, for access to dormitories, cafeterias, libraries and other facilities. Healthcare institutions control access to certain areas where, for example, prescription drugs are stored. 6 8 PRODUCTS Since its inception, the Company has sought to develop and introduce a full line of affordable printers and related accessories. At December 31, 1996, the Company's printer product offerings were as follows:
Suggested Retail Prices From Companion Series: Companion........................... $249 Companion Plus...................... $295 Eclipse Series: LP 2344............................. $1,395 TLP 2344............................ $1,495 LP Series: LP 2022............................. $495 LP 2042............................. $595 LP+ Series: LP 2122............................. $595 LP 2142............................. $695 LP 2622............................. $595 LP 2242............................. $695 LP 2642............................. $695 LP 3642............................. $1,095 TLP Series: TLP 2046............................ $1,795 TLP 2242............................ $895 TLP 2642............................ $895 TLP 3642............................ $1,195 QualaBar Series: QB440............................... $1,995 QB450............................... $3,495 QB485............................... $6,495 ThermaBar Series: TB260............................... $5,995 TB285............................... $8,995 TB440............................... $3,495 TB450............................... $4,995 Portable Printers: P 2242.............................. $895 Plastic Card Printers: P300................................ $2,995 P400................................ $5,395 Solution Series: BarCode Professional................ $595 TigerWriter 2....................... $395 TigerWriter 4....................... $495
7 9 o The Companion Series. Eltron's first printer to address set-top printing applications, Companion printers are ideal for point of sale, home and office applications for either receipt or label printing. With the smallest foot print of any Eltron printer, Companion printers provide the same reliability and high quality as Eltron's other desk and table top printers. o The Eclipse Series. Rugged, low cost direct thermal and thermal transfer printers with all metal enclosures designed for industrial and commercial applications. o The LP Series. The LP 2022 and LP 2042 were the industry's first sub-$1,000 printers, and continue to be price leaders today. These rugged direct thermal desktop printers were designed to be produced in high volume at very low cost. o The LP+ Series. The LP 2122 and LP 2142 utilize the same high quality, low-cost printer mechanism and enclosure that were developed for the initial LP Series. LP+ Series printers provide increased memory capability, thereby allowing for the storage of forms and the addition of other features. o The LP 2622, LP 2242, LP 2642, and LP 3642 are Eltron's latest generation desktop direct thermal printers and provide additional user friendly capabilities. o The TLP Series. Eltron entered the thermal transfer market with the TLP 2044. The subsequent introduction of the TLP 2046 improved the full-featured performance of the TLP 2044 by providing an increase in print speed. The TLP 2242, a new design and feature set, is targeted to lower-volume applications that still require the durability of thermal transfer printing. The TLP 2242 was the first thermal transfer bar code printer to have a manufacturer's suggested retail price below $1,000. Additional capabilities are featured in the TLP 2642 and TLP 3642. o The QualaBar Series. Addressing the high performance industrial thermal transfer printer market segment, printers in the QualaBar Series were designed to meet the high volume printing requirements of such industries as automotive, electronics, paper, steel and textile. o The ThermaBar Series. Offering integrated bar code verification in addition to many of the features of QualaBar printers, ThermaBar systems provide 100% verification of every label printed, a critical feature for applications in the automotive, consumer goods manufacturing, electronic, pharmaceutical, chemical, and healthcare industries where there is rigid compliance liability. o The Portable Printer. The P 2242 was developed to provide a rugged, full featured portable bar code printer for under $900, a price previously unmatched in the automatic identification data collection industry. Offering direct thermal printing, the P 2242 is ideal for applications such as warehousing, package delivery, retail and receipt printing. o The Plastic Card Printer. The low cost P300 prints custom cards on demand for applications such as personalized transaction cards and identification cards. The P300 is sold with a proprietary WindowsTM based card design software package and prints in monochrome and full color. The P400 offers the same features as the P300, with the addition of duplex printing capability. o The Bar Code Solution. The BarCode Professional offers an integrated bar code system consisting of a printer, wand bar code reader, bar code labeling and tracking software designed for use with an IBMTM compatible computer and WindowsTM software. The low cost TigerWriter 2 and TigerWriter 4 are direct thermal printers with easy to use design software. 8 10 RESEARCH AND PRODUCT DEVELOPMENT The Company devotes significant resources to new product development and has established an aggressive product development schedule. Since its inception, Eltron has sought to shorten the time required to take a product concept and turn it into a manufactured product. Eltron refers to this period as the product design cycle. By focusing on reducing the product design cycle, Eltron has been able to introduce more than 36 products since its inception in 1991. At December 31, 1996, the Company employed 53 individuals in new product design, engineering and development. Eltron provides its engineering department with computer-aided design tools to improve design efficiency and allow the department to compress product development cycles. Eltron engineers design all firmware, software, mechanisms, mechanical parts and enclosures used in its printers and other products. SALES AND MARKETING Sales. The Company targets specific markets by identifying channels of distribution that enhance its exposure to potential customers. Because the Company's products are frequently combined with products from other manufacturers to form an integrated system, the Company believes that it is more effective to sell principally through multiple distributors and resellers with defined market niche expertise and presence, as well as to end users. The Company believes that by forming relationships with value added resellers, distributors, systems integrators and original equipment manufacturers who supply various submarkets and types of end users, serve customers or have in-place sales and distribution channels that identify new customers and sales opportunities, the Company is able to reach end users throughout the world in a variety of industries. The Company may, however, designate a customer as a key account when purchases of Company products reach certain levels. Key accounts are directly managed by Company sales personnel rather than through the Company's other distribution channels. In the United States, the Company sells primarily through over 350 value added resellers and systems integrators. These value added resellers and systems integrators tend to specialize in specific industries and sell in relatively small geographic areas. The Company does not grant specific territories to its domestic resellers. The Company works to ensure the expertise of its resellers and has made an effort to ensure that they are knowledgeable regarding the Company's products. At December 31, 1996, the Company employed 70 individuals in sales, marketing and customer service. Eltron's internal sales force is responsible for expanding and improving the sales volume generated by its sales channels. The sales force is also responsible for communicating the Company's capabilities to existing and potential customers, coordinating orders, and solving application and implementation challenges for resellers and end users. The sales group also includes a customer service department that coordinates and processes orders and seeks to ensure customer satisfaction through the timely communication of product information. Outside the United States, the Company sells through more than 150 distributors located in 70 countries who purchase, warehouse and sell printers, accessories, supplies and other integrated system components. Eltron's international distributors cover specific countries throughout the world. These distributors have been qualified by the Company and are encouraged to attend annual training seminars at the Company's headquarters. The Company enters into written distribution agreements with most of its distributors, which typically may be canceled by either party upon 60 days' notice. The Company currently employs 21 individuals outside of the United States in sales and marketing functions. These individuals are located at regional sales offices in Reading, England; Varades, France; Billancourt, France; Floersheim, Germany; and Singapore. The Company performs periodic credit evaluations of its customers and generally does not require collateral for its customers' payment obligations. The Company maintains reserves for potential credit losses; to date such losses have been within its expectations. The Company extends credit to its domestic customers for a term of 30 days and, in accordance with local business practices, may extend credit to its international customers for a term of up to 60 days. Marketing. The Company's marketing operations include product management, market research, product development, and marketing services. The product management group initiates the development of new products and product enhancements to meet customer needs, and manages product introductions and positioning. The Company's market research and product development group focuses on strategic planning and market definition and analyzes the Company's competitive strengths and weaknesses. This group identifies and evaluates market opportunities for current, planned and potential products, and gathers and analyzes competitive and market intelligence. 9 11 The marketing services group is responsible for advertising and public relations activity. This group creates advertising, brochures and product documentation, manages trade show exhibits, and places articles highlighting applications of Eltron's products in trade and industry publications. The group also includes a product support team that provides, among other things, a hotline staffed by technical personnel. BACKLOG The Company strives to ship customer orders within 14 days of receipt of an order, and typically orders are shipped within that period, except in cases where the customer requests that orders be sent at a particular time to meet customer needs. Aside from long term orders received from UPS which totaled slightly greater than $3 million at December 31, 1996, backlog is not meaningful to the Company's business. For information concerning orders from UPS, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION Competition in the bar code industry is intense. Many companies are engaged in the design, manufacture and marketing of automatic identification data collection equipment. The Company considers its direct competition to be the providers of direct thermal and thermal transfer printing systems and supplies designed for the on-demand printing environment. To a lesser extent the Company also competes with companies engaged in the design, manufacture and marketing of standard computer and label printers. There are a number of factors involved in the manufacture, marketing and sale of on-demand thermal and thermal transfer printers, such as price, product quality, product reliability, market position, sales channels, product innovation, time to market, service and technical support. The Company believes that it competes favorably with respect to these factors. The Company competes against several companies across its product line, as no one competitor offers the breadth of products that the Company offers. In the low cost, lower performance products, Eltron's principal competitors are Cognitive Solutions, a subsidiary of DH Technology, Inc.; Tokyo Electric Company; and Microcom. Datamax and Zebra Technologies have also recently announced products to compete in the low cost, lower performance markets. In the higher performance printer markets, Eltron's principal competitors are Datamax Corporation; Intermec Corporation, a subsidiary of Western Atlas; Monarch Marking Systems, a subsidiary of Paxar, Inc.; Sato; Tokyo Electric Company; and Zebra Technologies. Each of these companies manufactures a series of printers that competes with one or more of the Company's products in the higher performance printer category. Several of these companies, and others against which the Company competes, have substantially greater financial, technical and other resources than the Company. Various other methods of bar code printing exist. The Company continually assesses these technologies to determine if they are suitable for low-cost bar code printing. Currently, the Company believes that direct thermal and thermal transfer print technology provide the best low-cost solutions for its target markets. If other technologies were to evolve or become available to the Company, it is possible that those technologies would be incorporated into its products if management believed they were suitable for low-cost bar code printing. Alternatively, if such technologies were to evolve or become available to the Company's competitors, the Company's products may become obsolete, which would have a material adverse affect on the Company's results of operations. The Company's principal competitors in the plastic card market include Datacard, Inc, a privately held manufacturer of transaction card production systems and plastic cards, and Fargo, Inc., a private manufacturer of color card systems. 10 12 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company regards portions of the hardware designs and operating software incorporated into its products as proprietary and attempts to protect them with a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and similar means. The Company has 1 patent and 2 pending patents pertaining to its products. However, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or otherwise obtain and use, to the Company's detriment, information that the Company regards as proprietary. Moreover, the laws of some foreign countries do not afford the same protection to the Company's proprietary rights as do United States laws. There can be no assurance that legal protections relied upon by the Company to protect its proprietary position will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. The Company currently holds United States trademarks on the Company's "Eii", "Eltron," "RJS," "Privilege" and "Russet" logos and the name "Eltron." The Company actively protects these trademarks, which it believes have significant goodwill value. Eltron relies on a combination of trade secrets, copyright laws and contractual rights to establish and protect its proprietary rights in its products. The Company does not believe that legal protections afforded to its intellectual property rights are critical to its success. EMPLOYEES Since its inception, the Company has sought to obtain the trust and respect of its employees by providing open communications, a clean and safe workplace and competitive benefits. The Company believes that the continued dedication of the Company's employees is important to its long-term growth and success. As of December 31, 1996, the Company employed 409 persons, of which 405 were full-time and 4 were part-time. Of these employees, 70 were employed in sales and marketing functions, 294 were employed in engineering and manufacturing functions, while the remaining 46 employees performed general and administrative functions. None of the Company's employees are covered by collective bargaining agreements. The Company considers its relationship with its employees to be excellent. 11 13 ITEM 2. PROPERTIES The Company's corporate headquarters are located in Simi Valley, California. The company's facilities are listed as follows:
Approximate Square Footage ----------------------------------------------------------------- Manufacturing, Production & Administrative, Location Warehouse Research & Sales Total Lease Expires - -------- --------------------- --------------------- --------------------- ------------------- Simi Valley, California USA 37,000 30,000 67,000 January 1999 Reading, Berkshire, UK 7,000 8,400 15,400 March 1999 Singapore 1,800 1,800 Monthly renewal Greenville, Wisconsin USA 10,000 2,000 12,000 November 2000 Varades, France 8,000 4,000 12,000 August 2000 Billancourt, France 800 800 Monthly renewal Floersheim, Germany 1,500 1,500 Monthly renewal Monrovia, California USA 15,000 10,000 25,000 Monthly renewal --------------------- --------------------- --------------------- Total 77,000 58,500 135,500
See Footnote 10 to the Company's Consolidated Financial Statements for further discussion of lease commitments. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock began trading on The Nasdaq National Market on February 9, 1994 under the symbol "ELTN." The following table sets forth for the periods indicated the high and low last sale prices of the Common Stock on The Nasdaq National Market as adjusted to reflect the 2-for-1 forward stock split effected May 1, 1995:
HIGH LOW ---- --- 1995 First Quarter......................................... 14 1/4 9 3/8 Second Quarter........................................ 24 1/4 13 3/8 Third Quarter......................................... 29 1/2 19 1/4 Fourth Quarter........................................ 38 3/4 25 1996 First Quarter......................................... 37 3/4 29 1/4 Second Quarter........................................ 33 3/4 23 3/4 Third Quarter......................................... 33 3/8 21 3/4 Fourth Quarter........................................ 38 1/2 18 1/4
The last sale price of the Common Stock on March 14, 1997 on The Nasdaq National Market was $22.75 per share. As of March 14, 1997, there were 71 holders of record of the Common Stock, which management believes held beneficially for over 400 holders. For information concerning the issuance of Common Stock by the Company, pursuant to rule 506 of Regulation D under the Securities Act of 1933, in connection with the merger with RJS, see Footnote 6 to the Company's Consolidated Financial Statements. The Company has never paid cash dividends on its Common Stock and does not currently anticipate that it will do so in the foreseeable future. The Company plans to retain earnings to finance the Company's operations. 13 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain selected consolidated financial information, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere herein. The selected consolidated financial data for each of the five years in the period ended December 31, 1996 have been derived from the Company's audited consolidated financial statements.
Year Ended December 31, ----------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------- ------------ ------------ CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Sales.............................. $ 11,906,824 $ 17,989,005 $ 29,276,490 $ 54,971,064 $ 88,509,582 Cost of sales...................... 7,531,211 10,961,012 16,253,100 30,123,477 50,171,082 ------------ ------------ ------------- ------------ ------------ Gross profit....................... 4,375,613 7,027,993 13,023,390 24,847,587 38,338,500 Selling, general and administrative expense 3,473,355 3,983,624 5,803,352 11,270,292 16,398,967 Research and product development expense 765,173 1,592,022 1,885,320 2,932,003 5,308,736 Write off of acquired in process technology and other costs associated with acquisition............... -- -- -- -- 3,528,555 ------------ ------------ ------------- ------------ ------------ Income from operations............. 137,085 1,452,347 5,334,718 10,645,292 13,102,242 Other (income) expense, net........ 101,796 379,490 115,800 (115,171) (211,486) ------------ ------------ ------------- ------------ ------------ Income before provision for income taxes 35,289 1,072,857 5,218,918 10,760,463 13,313,729 Provision for income taxes......... 142,800 72,473 1,595,714 3,640,762 6,215,173 ------------ ------------ ------------- ------------ ------------ Income (loss) before cumulative effect of accounting change................ (107,511) 1,000,384 3,623,204 7,119,701 7,098,556 Cumulative effect of accounting change.............. 1,151,000 -- -- -- -- ------------ ------------ ------------- ------------ ------------ Net income ........................ $ 1,043,489 $ 1,000,384 $ 3,623,204 $ 7,119,701 $ 7,098,556 ============ ============ ============= ============ ============ Net income per common share........ $ 0.06 $ 0.28 $ 0.58 $ 0.97 $ 0.91 ============ ============ ============= ============ ============ Weighted average number of shares outstanding...................... 3,441,604 3,542,344 6,211,796 7,348,966 7,821,379 ============ ============ ============= ============ ============
December 31, ----------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------- ------------ ------------ CONSOLIDATED BALANCE SHEET DATA: Working capital..................... $ 2,275,284 $ 2,553,277 $ 10,462,799 $ 31,535,828 $ 34,624,655 Total assets........................ 6,260,677 7,655,197 19,494,002 45,624,225 54,245,059 Shareholders' equity................ 968,885 1,969,269 11,779,835 36,185,179 43,551,234
14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Eltron International, Inc. and subsidiaries (the "Company" or "Eltron") design, manufacture and market a full range of direct thermal and thermal transfer bar code printers, plastic card printers, related accessories, software and custom print engines for applications such as airline ticketing. Eltron also manufactures and distributes a full range of supplies designed for use with its printers. The Company believes that its success to date has resulted from its ability to offer high-quality printers and related products with features comparable to or exceeding those of available competing products at a lower cost. The Company's products are sold through multiple distribution channels that include value added resellers, systems integrators, original equipment manufacturers and independent distributors located in more than 70 countries. Industries for which the Company believes its printers are particularly well-suited include shipping and package delivery, retail distribution and point-of-sale, healthcare, manufacturing, financial services security and access control, and governmental licensing. The Company currently focuses its sales efforts in these markets, although it continues to explore the potential for new markets in which it can apply its expertise in the design and manufacture of high quality, low cost thermal printers. Eltron is currently seeking to expand its line of quality printers and related accessories to meet the needs of a broad range of end users and to be positioned as a price and value leader. Management is engaged in efforts to accomplish this expansion through both internal development efforts and strategic acquisitions and alliances. In the first quarter of 1996, the Company enhanced its market position through the acquisition of Privilege, S.A. ("Privilege") and a merger with RJS, Incorporated ("RJS"). Privilege, located in Varades, France, is a manufacturer of plastic card printers. RJS, located in Monrovia, California, is a manufacturer of high speed thermal bar code printers, bar code verifiers and verified printing systems. The acquisition of RJS has been accounted for as a pooling of interests for financial reporting purposes. The accompanying financial statements are based on the assumption that the two companies were combined at the beginning of the year, and all financial statements for prior periods presented have been restated to give effect to the combination. In connection with the acquisition, RJS changed its fiscal year end from September 30 to December 31, which conforms to Eltron's year end. The consolidated financial statements for all years prior to 1996 have not been restated to reflect RJS's change in fiscal year. The 1994 and 1995 financial statements include RJS's results of operations on a September 30 fiscal year end basis and Eltron's results of operations on a December 31 calendar year basis. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain information derived from the Company's Consolidated Statements of Income expressed as percentages of sales and expressed as a percentage increase or decrease relative to the results of the previous period.
PERCENTAGE INCREASE (DECREASE) OVER RESULTS PERCENTAGE OF SALES FOR PRIOR PERIOD ------------------------------- ------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------- -------------------- 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- Sales 100% 100% 100% 88% 61% Cost of Sales 56 55 57 85 67 -------- -------- -------- -------- -------- Gross profit 44 45 43 91 54 Operating Expenses: Selling, general and administrative 20 21 19 94 46 Research and product development 6 5 6 56 81 Write off of acquired in process technology and other costs associated with acquisitions -- -- 4 -- NM -------- -------- -------- -------- -------- Other (income) expense, net NM NM NM NM NM -------- -------- -------- -------- -------- Income before provision for income taxes 18 20 15 106 24 Provision for income taxes 6 7 7 128 71 -------- -------- -------- -------- -------- Net income 12% 13% 8% 96% --% ======== ======== ======== ======== ========
NM = not meaningful 15 17 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 Sales for 1996 totaled $88.5 million, an increase of $33.5 million or 61% over sales for 1995 which totaled $55 million. This increase in sales can be attributed to an increase in the number of printers sold resulting from wider market acceptance of the Company's established lines of bar code printers, increased acceptance of its recently introduced plastic card printers, as well as higher than anticipated demand from the Company's largest customer, United Parcel Service and its designated marketing partners ("UPS"). 1996 sales were also bolstered by the inclusion of a full year's operations for Donner, as compared to four months in 1995, which accounted for $3 million of the 1996 sales increase. Sales were also aided by the acquisition of Privilege, effective January 1, 1996, which accounted for $10 million of the 1996 sales increase. Throughout 1996, sales were enhanced by increased sales to either UPS or its designated sub-contractors, which contributed approximately $27 million and $20.8 million to sales in 1996 and 1995, respectively. Although the Company had outstanding orders from UPS in excess of $3 million as of December 31, 1996, there is no obligation on the part of UPS to place any further orders with Eltron. The Company has derived a significant portion of its revenues from UPS and may in the future be dependent on UPS, or other significant customers, the loss of any one of which could materially adversely affect the Company's financial position, results of operations and cash flows. No customer other than UPS contributed greater than 10% of the Company's net sales during 1996. Gross profit for 1996 totaled $38.3 million, an increase of $13.5 million or 54% over gross profit for 1995. As a percentage of revenues, gross profit decreased 2% to 43% in 1996 from 45% in 1995. This decrease can be attributed primarily to an increase in sales to high volume customers and OEMs which are typically transacted at a price which yields a lower gross margin, although the incremental selling costs associated with these transactions are generally less than those associated with a non-OEM sale. Management currently believes that sales to high volume and OEM customers may increase in the future and that, as a result, the 43% gross margin exhibited in 1996 may not necessarily be maintained in the future. Selling, general and administrative expenses as a percentage of sales were 19% and 21% for 1996 and 1995, respectively. In 1996, Selling, general and administrative expenses increased 46% in absolute dollars to $16.4 million up from $11.3 million in 1995. These increases primarily reflect sales and marketing efforts focused on the Company's domestic and European sales channels. The Company currently anticipates that selling, general and administrative expense will increase in future quarters but may decrease as a percentage of sales. The actual amount spent will depend on a variety of factors, including the Company's level of operations, and the number of new markets the Company attempts to enter. Research and development expenses increased 81% in 1996 to $5.3 million, up from $2.9 million in 1995. This increase related primarily to increased efforts to develop new products. As a percentage of sales, these expenses increased to 6% in 1996, from 5% in the previous year. The Company currently anticipates that research and product development expense will increase in future quarters and may increase as a percentage of sales. The actual amount spent will depend on a variety of factors, including the Company's level of operations, and the number of product development projects that it embarks upon. Operating results were also impacted by legal and other costs associated with business combinations, either attempted or completed, in 1996 which totaled approximately $1 million and the expensing of in-process technology valued at $2.5 million in connection with the purchase of Privilege S.A. These costs are related to specific transactions and therefore are non-recurring. Net interest income totaled $200,000 in 1996, a decrease of $178,000 over net interest income of $378,000 for the previous year. This decrease in interest income was primarily due to a decrease in invested capital. See "Liquidity and Capital Resources." The provision for income taxes for 1996 was $6.2 million, or approximately 46% of pretax income, which includes the tax effect of $3.5 million of expenses related to the write off of acquired in-process technology and acquisition costs which are not deductible for income tax purposes, the utilization of certain tax credits and the reduction of deferred tax asset reserves. The Company's provision for income taxes for 1995 was $3.6 million or 34% of pretax income. The Company's provision for income taxes was higher as a percentage of pretax income in 1996 as a result of non-recurring costs associated with the acquisition of Privilege and RJS which were not deductible for tax purposes. If these costs had not been incurred in 1996, the Company's tax rate would have been 37%. 16 18 COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994 Sales for 1995 totaled $55 million, an increase of $25.7 million or 88% over sales for 1994 which totaled $29.3 million. This was primarily due to a 92% or $22.7 million increase in printer sales. The increase in printer sales can be attributed to wider market acceptance of the Company's established lines of bar code printers, increased acceptance of the recently introduced TLP-2242, which management believes is the industry's first sub-$1,000 thermal transfer printer, as well as higher than anticipated demand from the Company's largest customer UPS. 1995 sales were also bolstered by the inclusion of a full year's operations for Russet, as compared to two months in 1994, which accounted for $3 million of the 1995 sales increase. Sales of supplies, increased 65% or $2.2 million over the previous year, partially due to the acquisition of Donner Media, effective September 1, 1995. Throughout 1995 sales were enhanced by increased sales to UPS, which contributed approximately $20.8 million and $7.9 million to sales in 1995 and 1994, respectively. No customer other than UPS contributed greater than 10% of the Company's net sales during 1995. Gross profit for 1995 totaled $24.8 million, an increase of $11.8 million or 91% over gross profit for 1994. As a percentage of revenues, gross profit increased 1% to 45% in 1995 from 44% in 1994. Gross profit margins remained relatively consistent from 1994 to 1995. Selling, general and administrative expenses as a percentage of sales were 21% and 20% for 1995 and 1994, respectively. In 1995, Selling, general and administrative expenses increased in absolute dollars 94% to $11.3 million up from $5.8 million in 1994. These increases primarily reflect sales and marketing efforts focused on the Company's domestic and European bar code sales channels. Research and product development expenses increased 56% in 1995 to $2.9 million, up from $1.9 million in 1994. This increase related primarily to additional effort to develop new products. As a percentage of sales, these expenses decreased to 5% in 1995, from 6% in the previous year. Net interest income totaled $378,000 in 1995, an increase of $408,000 over net interest expense of $30,000 for the previous year. This increase in interest income was primarily due to an increase in interest earned on the approximately $16.7 million generated in a follow-on public offering of Common Stock by the Company which were invested in May of 1995. See "Liquidity and Capital Resources." The provision for income taxes for 1995 was $3.6 million, or approximately 34% of pretax income, which reflects the utilization of certain tax credits and current benefit of deferred tax assets under SFAS 109. The Company's provision for income taxes for 1994 was $1.6 million or 31% of pretax income. The Company's provision for income taxes was slightly higher as a percentage of pretax income in 1995 primarily as a result of the amortization of certain tax credits over a larger pretax contribution. LIQUIDITY AND CAPITAL RESOURCES In 1996, operating activities provided cash totaling $2.5 million as compared to $2.4 million of cash used during 1995 and $2.1 million of cash provided in 1994. Significant changes in 1996 included cash used as a result of increases in accounts receivable and inventories of $6.1 million and $5.1 million, respectively, which were offset by cash provided by increases in trade accounts payable to vendors, as well as accrued liabilities and compensation which totaled $2.3 million. In 1996, the Company incurred non-cash expenses of approximately 2.5 million in connection with the write off of in-process technology acquired in connection with the acquisition of Privilege. In 1996, investing activities used cash totaling $870,000 as compared to $14.4 million and $5.7 million used in 1995 and 1994, respectively. The Company's liquidity was affected by the acquisition of Privilege and RJS which used approximately $3.2 million and $776,000 of cash, respectively. Cash was also used to purchase approximately $5.3 million in equipment. These acquisitions were funded primarily by the sale of some of the Company's short term investments. In 1996, financing activities used cash totaling $1.1 million. Cash from financing activities was provided by the sale of 169,000 shares of the Company's Common Stock through the exercise of stock options which generated net proceeds of $447,000. These proceeds were offset by debt repayments totaling $768,000 and the repurchase of $776,000 of the Company's common stock in connection with the acquisition of RJS. 17 19 In January 1997, Eltron entered into a letter of understanding with respect to a revolving credit facility with a bank. As defined in the letter of understanding, the revolving credit facility would allow Eltron to borrow up to $8 million on an unsecured basis. Borrowings under the revolving credit facility would bear interest at the Bank's prime rate. Under the terms of the revolving credit facility, Eltron would not be able to enter into certain transactions or declare dividends without receiving prior written consent from the Bank and would be required to comply with certain covenants as well as maintain certain debt to net worth ratios, current ratios and minimum net worth requirements. The letter of understanding is subject to the completion of a definitive line of credit agreement on terms which are mutually acceptable and does not constitute a legally binding commitment on the part of either party. The Company believes that cash provided by operating activities, existing cash and short-term investments will be sufficient to fund the Company's capital needs for the foreseeable future. The Company did not have any significant capital commitments as of December 31, 1996. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This statement requires dual presentation of newly defined basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for fiscal years ending after December 15, 1997, including interim periods; the Company has not yet determined the impact of SFAS No. 128. CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this document contain forward looking statements that involve risks and uncertainties. Factors associated with the forward looking statements which could cause actual results to differ materially from those stated appear below. In addition to the other information contained in this document, readers should carefully consider the following cautionary statements and risk factors. Dependence on Significant Customer For the years ended December 31, 1994, 1995 and 1996, UPS or its designated marketing partners, accounted for approximately $7.9 million, $20.8 million and $27 million, respectively, of the Company's sales. There is no obligation on the part of UPS to place any further orders with the Company. The Company's financial position, results of operations and cash flows are substantially dependent on sales to UPS, the loss or reduction of which would have a material adverse effect on the Company's results of operations and adversely affect the market price of the Company's common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." Ability to Sustain Growth Rate In 1994, 1995 and 1996, the Company achieved annual sales growth of 63%, 88% and 61%, respectively. In the opinion of management, these growth percentages can primarily be attributed to initial market penetration by the Company. Management believes that as the Company further penetrates its target markets and matures, it may not be able to sustain its historic growth rate. Shareholders and investors should not rely on the continuation of the Company's historic growth rate in making their investment decisions. 18 20 Management of Rapidly Changing Business, Acquisitions The Company has experienced recent rapid growth and is subject to the risks inherent in the rapid expansion and growth of a business enterprise. This significant growth has placed and, if sustained, will continue to place, a substantial strain on the operational, administrative and financial resources of the Company and has resulted in an increase in the level of responsibility for the Company's existing and new management personnel. To manage its growth effectively, the Company will be required to continue to implement and improve its operating and financial systems and to expand, train and manage its employee base. There can be no assurance that the management skills and systems currently in place will be adequate if Eltron continues to grow. During 1995 and 1996, the Company completed two acquisitions and a merger. Eltron's management has only limited experience with acquisitions or mergers, which involve numerous risks, including difficulties in the assimilation of acquired operations and products, the diversion of management's attention from other business concerns and the potential loss of key employees, suppliers, and customers of the acquired companies. Management of Inventory The Company's market requires that its products be shipped very quickly after an order is received. Since purchased component and manufacturing lead times are typically much longer than the short order fulfillment time for the Company's products, the Company is required to keep adequate inventories of both components and finished goods, and must accurately forecast demand for its many products. Inaccurate forecasts of customer demand, restricted availability of purchased components, supplier quality control problems, production equipment problems, cargo carrier strikes or damage to products during manufacture could result in a buildup of excess components or finished goods on the one hand and an inability to deliver product on a timely basis on the other hand, either of which could have a material adverse effect on the Company's financial position, results of operations and cash flows. Competition Competition in the bar code printer market is intense and is expected by the Company to increase. The Company competes with a number of companies, many of which have greater financial, technical and marketing resources than the Company. The Company believes its ability to compete successfully depends on a number of factors both within and outside its control, including product pricing, quality and performance; success in developing new products; adequate manufacturing capacity and supply of components and materials; efficiency of manufacturing operations; effectiveness of sales and marketing resources and strategies; strategic relationships with other suppliers; timing of new product introductions by the Company and its competitors; general market and economic conditions; and government actions worldwide. Risks Associated with International Operations The Company's sales outside of the United States totaled approximately $8 million, $12 million and $30 million in 1994, 1995 and 1996, respectively. The Company expects that international sales will continue to represent a significant portion of its revenues. International sales are subject to inherent risks, including fluctuations in local economies, difficulties in staffing and managing foreign operations, fluctuating exchange rates, increased difficulty of inventory management, greater difficulty in accounts receivable collection, costs and risks associated with localizing products for foreign countries, unexpected changes in regulatory requirements, tariffs and other trade barriers, and burdens of complying with a variety of foreign laws. There can be no assurance that these factors will not have a material adverse impact on the Company's ability to increase or maintain its international sales or on its financial position, results of operations, and cash flows. A substantial portion of the value of the components used in the manufacture of the Company's products is represented by components purchased from entities based in Japan. Fluctuations in the exchange rate between the U.S. dollar and Japanese yen could result in an increase in the cost of these components. The Company has not entered into any currency hedging transactions to date, however, in the future, the Company may seek to hedge certain transactions. 19 21 Development of Markets and Acceptance of Products; Growth of Bar Code Market The Company's continued growth will depend on the Company's ability to improve and market its existing products and to develop and successfully market new products. However, the Company's near-term financial results will depend in part upon increasing market acceptance of, and the Company's ability to expand the market share for, its products. There can be no assurance that any new products the Company may introduce will gain market acceptance. The markets for the Company's products are characterized by a high degree of competition, rapidly changing technology, frequent new product introductions and price erosion. Accordingly, the Company believes its future prospects depend on its ability not only to enhance and successfully market its existing products, but also to develop and introduce new products in a timely fashion that achieve market acceptance. There can be no assurance that the Company will be able to identify, design, develop, market or support such products successfully or that the Company will be able to respond effectively to technological changes or product announcements by competitors. Delays in new product introductions or product enhancements, or the introduction of unsuccessful products, could have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company's current products are primarily used in the bar code market, which began in the 1960s and since then has experienced substantial growth, particularly since 1989. To the extent the bar code market does not continue to grow or experiences a significant economic downturn, the Company's ability to generate revenues could be materially adversely affected. Moreover, even if the size of the bar code market does increase, there can be no assurance that the demand for the Company's products will also increase. Reliance on Certain Suppliers The Company purchases numerous parts, supplies and other components from various suppliers, which the Company assembles into its products. Although there are at least two sources for many of such parts, supplies and components, the Company currently relies on a single source of supply, Mitsubishi Electronics, for the main microprocessor used to control its printers, and is heavily dependent on Rohm Co., Ltd. and Kyocera Industrial Ceramics CP, its primary supply sources for print heads, and NMB Technologies, Inc., its primary supply source for motors. As such, the Company is vulnerable to limits in supply and pricing and product changes by these suppliers. Although management believes that such changes could be accommodated by the Company, they may necessitate changes in the Company's product design or manufacturing methods, and the Company could experience temporary delays or interruptions in supply while such changes are incorporated. Further, because the order time for microprocessors, print heads and motors averages four months, the Company could also experience delays or interruptions in supply in the event the Company is required to find a new supplier for any of these components. Any future disruptions in supply of suitable parts and components from the Company's principal suppliers could have a material adverse effect on the Company's financial position, results of operations and cash flows. No back-up tooling exists for many of the Company's molded plastic components. Should a mold break or become unusable, repair or replacement could take several months. The Company does not always maintain sufficient inventory to allow it to fill customer orders without interruption during the time that would be required to obtain an adequate supply of molded plastic products. Accordingly, an extended interruption in the supply of any such components could adversely affect the Company's financial position, results of operations and cash flows. 20 22 ITEM 8. FINANCIAL STATEMENTS The financial statements of the Company are annexed to this Report as pages 24 through 41. An index to such material appears on page 23. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to the directors of the Company is incorporated by reference from the Company's definitive proxy statement, expected to be filed with the Commission April 4, 1997. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement, expected to be filed with the Commission April 4, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement, expected to be filed with the Commission April 4, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement, expected to be filed with the Commission April 4, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules - None (b) Exhibits are annexed to this Report beginning on page E-1 (c) Form 8-K, filed during the last quarter of the year ended December 31, 1996 1. Form 8-K dated October 16, 1996 regarding a potential transaction with Zebra Technologies Corp. 21 23 SIGNATURES In accordance with 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. ELTRON INTERNATIONAL, INC. By: /s/ Donald K. Skinner ---------------------------------------- Donald K. Skinner Chairman of the Board Chief Executive Officer In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Donald K. Skinner Chairman of the Board and Chief March 31, 1997 - ---------------------------- Executive Officer (Principal Donald K. Skinner Executive Officer) /s/ Hugh K. Gagnier President, Chief Operating Officer March 31, 1997 - ---------------------------- and Director Hugh K. Gagnier /s/ Daniel C. Toomey, Jr. Vice President Finance and Chief March 31, 1997 - ---------------------------- Financial Officer and Secretary Daniel C. Toomey, Jr. (Principal Financial and Accounting Officer) /s/ William R. Hoover Director March 31, 1997 - ---------------------------- William R. Hoover /s/ Robert G. Bartizal Director March 31, 1997 - ---------------------------- Robert G. Bartizal /s/ George L. Bragg Director March 31, 1997 - ---------------------------- George L. Bragg
22 24 ELTRON INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS Reports of Independent Public Accountants................................................................ 24 Consolidated Balance Sheets as of December 31, 1995 and 1996............................................ 26 Consolidated Statements of Income for the Years Ended December 31, 1994,1995 and 1996................... 27 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996..................................................................................... 28 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996.............. 29 Notes to Consolidated Financial Statements.............................................................. 30
23 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Eltron International, Inc.: We have audited the consolidated balance sheet of Eltron International, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We previously audited and reported on the consolidated balance sheet of Eltron International, Inc. as of December 31, 1995 and the related statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1995 prior to their restatement for the 1996 pooling of interests with RJS, Inc. and subsidiary ("RJS"). The contribution of RJS to the combined revenues and net income represented approximately 40% and 20%; 23% and 11% of the respective restated totals for the years ended December 31, 1994 and 1995. The total assets of RJS represented 13% of the restated totals as of December 31, 1995. Separate financial statements of RJS included in the related restated consolidated balance sheet, statements of income, shareholders' equity and cash flows were audited and reported on separately by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for RJS, is based solely on the report of the other auditors. We also audited the combination of the accompanying consolidated balance sheet as of December 31, 1995 and the consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1995, after restatement for the pooling of interests in 1996; in our opinion, such consolidated statements have been properly combined on the basis described in Note 1 of the notes to consolidated financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eltron International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Sherman Oaks, California February 24, 1997 24 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of RJS, Incorporated: We have audited the consolidated balance sheet of RJS, Incorporated and subsidiary (the "Company") as of September 30, 1995, and the related consolidated statements of income and retained earnings and cash flows for each of the two years in the period ended September 30, 1995 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 1995, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE L.L.P. Los Angeles, California November 22, 1995 25 27 ELTRON INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS ASSETS
December 31, ---------------------------- 1995 1996 ------------ ------------ CURRENT ASSETS: Cash ................................................... $ 729,055 $ 1,291,396 Short term investments ................................. 15,552,076 7,945,254 Accounts receivable, net of allowance for doubtful accounts of $368,468 and $452,234, respectively ....... 9,397,603 16,331,124 Inventories ............................................ 11,506,936 16,947,780 Prepaid expenses and other current assets .............. 1,146,493 700,145 Deferred tax asset ..................................... 1,891,398 1,291,468 ------------ ------------ Total current assets ................................ 40,223,561 44,507,167 PROPERTY AND EQUIPMENT, net ................................ 3,769,436 7,724,700 DIFFERENCE BETWEEN COST AND FAIR VALUE OF NET ASSETS ACQUIRED ............................................... 962,305 1,125,164 OTHER ASSETS ............................................... 668,923 888,028 ------------ ------------ $ 45,624,225 $ 54,245,059 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under line of credit ........................ $ 768,000 $ -- Accounts payable ....................................... 4,091,008 6,881,637 Accounts payable to shareholder ........................ 1,816,909 160,082 Accrued liabilities .................................... 976,599 1,179,415 Accrued compensation ................................... 820,217 1,311,862 Deferred service contract revenue ...................... 215,000 349,516 ------------ ------------ Total current liabilities ........................... 8,687,733 9,882,512 LONG TERM OBLIGATION ....................................... 751,313 811,313 COMMITMENTS ................................................ -- -- SHAREHOLDERS' EQUITY: Preferred stock, 10,000,000 shares authorized of which none are outstanding ............................ -- -- Common stock, no par value: Authorized -- 30,000,000 shares Issued and outstanding - 7,155,818 and 7,302,294 shares, respectively ............................... 23,990,634 24,238,345 Cumulative translation adjustment ...................... (13,733) 25,400 Retained earnings ...................................... 12,208,278 19,287,489 ------------ ------------ Total shareholders' equity .......................... 36,185,179 43,551,234 ------------ ------------ $ 45,624,225 $ 54,245,059 ============ ============
The accompanying notes are an integral part of these consolidated financial statements 26 28 ELTRON INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ SALES ............................................ $ 29,276,490 $ 54,971,064 $ 88,509,582 COST OF SALES .................................... 16,253,100 30,123,477 50,171,082 ------------ ------------ ------------ Gross profit .................................... 13,023,390 24,847,587 38,338,500 OPERATING EXPENSES: Selling, general and administrative ............. 5,803,352 11,270,292 16,398,967 Research and product development ................ 1,885,320 2,932,003 5,308,736 Write off of acquired in process technology and other costs associated with acquisitions .............................. -- -- 3,528,555 ------------ ------------ ------------ INCOME FROM OPERATIONS ........................... 5,334,718 10,645,292 13,102,242 OTHER (INCOME) EXPENSE: Interest, net ................................... 29,800 (378,458) (199,505) Other, net ...................................... 86,000 263,287 (11,982) ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES ......... 5,218,918 10,760,463 13,313,729 PROVISION FOR INCOME TAXES ....................... 1,595,714 3,640,762 6,215,173 ------------ ------------ ------------ NET INCOME ....................................... $ 3,623,204 $ 7,119,701 $ 7,098,556 ============ ============ ============ NET INCOME PER COMMON SHARE ...................... $ 0.58 $ 0.97 $ 0.91 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..................................... 6,211,796 7,348,966 7,821,379 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements 27 29 ELTRON INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Cumulative ---------------------------- Note Translation Retained Shares Amount Receivable Adjustment Earnings Total ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1993 ......... 3,345,852 $ 569,184 $ (65,288) $ -- $ 1,465,373 $ 1,969,269 Issuance of common stock, net of offering costs of $1,436,368 ................. 2,500,000 6,063,632 -- -- -- 6,063,632 Repayment of note receivable .... -- -- 65,288 -- -- 65,288 Exercise of stock options ....... 215,472 69,492 -- -- -- 69,492 Translation adjustment .......... -- -- -- (11,050) -- (11,050) Net income ...................... -- -- -- -- 3,623,204 3,623,204 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1994 ......... 6,061,324 6,702,308 -- (11,050) 5,088,577 11,779,835 Issuance of common stock, net of offering costs of $1,198,575 ................. 850,000 16,651,425 -- -- -- 16,651,425 Retirement of warrants .......... -- (274,527) -- -- -- (274,527) Exercise of stock options ....... 244,494 266,428 -- -- -- 266,428 Tax benefit resulting from exercise of options ........... -- 645,000 -- -- -- 645,000 Translation adjustment .......... -- -- -- (2,683) -- (2,683) Net income ...................... -- -- -- -- 7,119,701 7,119,701 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1995 ......... 7,155,818 23,990,634 -- (13,733) 12,208,278 36,185,179 Adjustment to retained earnings as a result of business combination .......... -- -- -- -- (19,345) (19,345) Exercise of stock options ....... 169,337 447,215 -- -- -- 447,215 Repurchase of shares in connection with RJS merger .................... (22,861) (775,581) -- -- -- (775,581) Tax benefit resulting from exercise of options ........... -- 576,077 -- -- -- 576,077 Translation adjustment .......... -- -- -- 39,133 -- 39,133 Net income ...................... -- -- -- -- 7,098,556 7,098,556 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1996 ......... 7,302,294 $ 24,238,345 $ -- $ 25,400 $ 19,287,489 $ 43,551,234 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements 28 30 ELTRON INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 3,623,204 $ 7,119,701 $ 7,098,556 Adjustments to reconcile net income to cash provided by (used in) operating activities: Write off of purchased in process technology ................................. -- -- 2,500,000 Depreciation and amortization .................. 189,645 580,306 1,441,350 Amortization of the difference between cost and fair value of net assets acquired..... (116,000) 56,000 235,041 Provision for doubtful accounts ................ 121,595 31,163 124,775 Deferred income taxes .......................... (323,000) (517,398) 586,852 Changes in assets and liabilities, net of businesses acquired: Accounts receivable ........................... (2,373,830) (3,150,979) (6,094,240) Inventories ................................... (2,156,196) (6,404,535) (5,069,894) Prepaid expenses and other assets ............. (222,754) (797,490) 922,117 Deferred offering costs ....................... 158,000 -- -- Accounts payable .............................. 564,095 958,786 1,735,829 Accounts payable to shareholder ............... 443,837 898,562 (1,656,827) Accrued liabilities and compensation .......... 386,593 618,966 551,296 Accrued taxes payable ......................... 1,756,017 (1,775,239) -- Deferred service contract revenue ............. 23,000 16,000 134,516 ------------ ------------ ------------ Net cash provided by (used in) operating activities..................................... 2,074,206 (2,366,157) 2,509,371 CASH FROM INVESTING ACTIVITIES: Purchases of property and equipment .............. (927,745) (2,955,760) (5,280,209) Cash paid in connection with acquisition of Russet, Ltd. ................................ (682,333) -- -- Cash paid in connection with acquisition of Privilege S.A. ............................... -- -- (3,196,373) Purchase of short term investments ............... (5,856,147) (20,852,247) (14,930,428) Sale of short term investments ................... 1,746,736 9,409,582 22,537,250 ------------ ------------ ------------ Net cash used in investing activities ............ (5,719,489) (14,398,425) (869,760) CASH FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit ......................................... (333,447) (887,911) (768,000) Cash proceeds from stock sales, net .............. 6,128,920 16,651,425 -- Common stock purchased in connection with RJS merger ..................................... -- -- (775,581) ------------ ------------ ------------ Payments to retire warrants ...................... -- (274,527) -- Proceeds from exercise of stock options .......... 69,492 266,428 447,215 Payments on notes payable to shareholder ......... (799,856) -- -- Net borrowings (repayments) of long term debt ........................................... (100,000) -- (20,037) ------------ ------------ ------------ Net cash provided by (used in) financing activities ..................................... 4,965,109 15,755,415 (1,116,403) EFFECT OF EXCHANGE RATE CHANGES ON CASH ............ (11,050) (2,683) 39,133 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH .................... 1,308,776 (1,011,850) 562,341 CASH BALANCE, beginning of year .................... 432,129 1,740,905 729,055 ------------ ------------ ------------ CASH BALANCE, end of year .......................... $ 1,740,905 $ 729,055 $ 1,291,396 ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Interest and taxes paid: Interest paid ................................... $ 178,876 $ 119,767 $ 29,311 Taxes paid ...................................... 78,707 6,374,000 5,089,531 Non-cash transactions: Assumption of liabilities in connection with acquisition of Russet, Ltd. .............. 622,000 -- -- Tax benefit resulting from exercise of options ....................................... -- 645,000 576,077 Assumption of liabilities and obligations in connection with acquisition of Donner Media, Inc. ............................ -- 1,009,606 -- Assumption of liabilities and obligations in connection with acquisition of Privilege S.A. ................................ -- -- 1,323,000
The accompanying notes are an integral part of these consolidated financial statements 29 31 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Eltron International, Inc. and subsidiaries (the "Company" or "Eltron") design, manufacture and market a full range of direct thermal and thermal transfer bar code printers, card printers, related accessories, software and custom print engines for applications such as airline ticketing. Eltron also manufactures and distributes a full range of supplies designed for use with its printers. These products are sold by the Company through multiple distribution channels that include value added resellers, systems integrators, original equipment manufacturers, independent distributors and its own direct sales force located throughout the world. Industries for which the Company believes its printers are particularly well-suited include shipping and package delivery, retail distribution and point of sale, health-care, manufacturing, financial services and local, state and Federal identification cards including driver's licenses. The Company currently focuses its sales efforts in these markets, although it continues to explore the potential for new markets. Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS") in a business combination accounted for as a pooling of interests. The accompanying financial statements are based on the assumption that the two companies were combined at the beginning of the year, and all financial statements for prior periods presented have been restated to give effect to the combination. The consolidated financial statements for all years prior to 1996 have not been restated to reflect RJS' change in fiscal year. The 1995 and 1994 financial statements include RJS' results of operations on a September 30 fiscal year end basis and Eltron's results of operations on a December 31 calendar year basis. Earnings per share data reflects the shares issued in the merger for all periods presented. Prior to February 1996, Eltron and RJS, in the normal course of business, entered into certain transactions for the purchase and sale of merchandise. These intercompany transactions have been eliminated in the accompanying financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The consolidated financial statements include the accounts of Eltron International, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. b. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. c. Short Term Investments The Company has classified its short term investments, including those with an original maturity of 90 days or less, as "available for sale" and accordingly, carries such securities at aggregate fair value. At December 31, 1996, the Company's short term investments consisted primarily of municipal bonds and selected bond funds. The aggregate fair value of the Company's short term investments approximated their amortized cost basis. At December 31, 1996, all of the Company's short term investments had maturities of less than one year. d. Revenue Recognition Revenue is recognized upon shipment. Currently, the Company generally does not provide its customers with the right of return. The Company sells extended service contracts for some of its products. Revenue for such contracts is recognized on a straight line basis over the life of the contract. e. Warranty The Company provides a warranty of up to one year on certain components of its printers. A provision for warranty expense is recorded at the time of shipment. To date, the Company has not experienced any significant warranty claims. f. Research and Product Development Research and product development costs are expensed as incurred. 30 32 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS g. Difference Between Cost and Fair Value of Net Assets Acquired Difference between cost and fair value of net assets acquired represents the difference between the purchase price and the fair value of assets acquired in business combinations accounted for as a purchase. The Company amortizes the difference between cost and fair value of net assets acquired on a straight-line basis over the period for which such additional value is expected to be realized, typically three to five years. The Company continually evaluates whether changes have occurred that would suggest that such additional value may not be realized over the remaining amortization period. If this review indicates that the remaining estimated useful life of the difference between cost and fair value of net assets acquired requires revision or is not recoverable, the carrying amount is reduced by the estimated shortfall. To date, the Company has not revised the carrying amount of the difference between cost and fair value of net assets acquired. Accumulated amortization of the difference between cost and fair value of net assets acquired is as follows:
DECEMBER 31, -------------------------- 1995 1996 ------------ ----------- Accumulated amortization of excess cost $ (225,000) $ (404,000) over fair value of net assets acquired Accumulated amortization of excess fair 1,194,000 1,608,000 value over cost of net assets acquired ------------ ----------- $ 969,000 $ 1,204,000 ============ ===========
h. Translation of Foreign Currencies All assets and liabilities of the Company's foreign subsidiaries are translated at current exchange rates while revenues and expenses are translated at average rates in effect for the period; the resulting gains and losses are included in a separate component of shareholders' equity. Transaction gains (losses) are included in the accompanying income statements and were not significant in 1994, 1995 or 1996. Until the acquisition of Russet, Ltd. and Privilege S.A. in November of 1994 and January of 1996, respectively, the Company conducted its international business transactions exclusively in U.S. Dollars. The Company has not entered into any currency hedging transactions to date, however, in the future, the Company may seek to hedge certain transactions. i. Sales and Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, short term investments and trade accounts receivable. The Company places its cash and short term investments in a variety of financial instruments such as market rate accounts, municipal bonds, selected bond funds and U.S. Government agency debt securities. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. The Company's largest customer, United Parcel Service, either directly or through certain of its marketing partners ("UPS") accounted for approximately $7.9 million, $20.8 million and $27 million of the Company's sales for the years ended December 31, 1994, 1995 and 1996, respectively. At December 31, 1995 and 1996, accounts receivable from United Parcel Service totaled approximately $3.1 million and $2.4 million, respectively. The Company extends credit based on an ongoing evaluation of each customer's financial condition and generally does not require collateral. The Company maintains reserves for potential credit losses which to date have been within management's expectations. j. Advertising Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 1994, 1995 and 1996 totaled $543,000, $797,000 and $1,624,000, respectively. k. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 31 33 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l. Net Income Per Common Share Net income per common share is computed using the weighted average number of shares outstanding and dilutive equivalents (options and warrants). m. Accounting for Stock Based Compensation The Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock Based Compensation," as of December 31, 1996. This standard establishes a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company adopted this standard by disclosing the pro forma net income and earnings per share amounts assuming the fair value method was adopted on January 1, 1996 and continues to account for stock based compensation awards in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued to Employees." n. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the current period's presentation. o. Long Term Assets The carrying value of long term assets is periodically reviewed by management, and impairment losses, if any, are recognized when the expected non-discounted future operating cash flows derived from such assets are less than their carrying value. p. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This statement requires dual presentation of newly defined basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for fiscal years ending after December 15, 1997, including interim periods; the Company has not yet determined the impact of SFAS No. 128. 3. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following:
December 31, ---------------------------- 1995 1996 ----------- ----------- Subassemblies and raw materials......... $ 8,569,233 $10,958,660 Work in process......................... 386,519 1,924,981 Finished goods.......................... 2,551,184 4,064,139 ----------- ----------- $11,506,936 $16,947,780 =========== ===========
4. PROPERTY AND EQUIPMENT Property and equipment stated at cost consists of the following:
December 31, ---------------------------- 1995 1996 ----------- ----------- Tooling and machinery.................. $ 3,803,238 $ 6,386,954 Office equipment....................... 915,996 3,720,350 Leasehold improvements................. 40,034 80,261 ----------- ----------- 4,759,268 10,187,565 Less, accumulated depreciation and amortization........................ (989,832) (2,462,865) ----------- ----------- Net property and equipment............. $ 3,769,436 $ 7,724,700 =========== ===========
32 34 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Machinery and manufacturing equipment................. 3 to 10 years Furniture and office equipment........................ 3 to 7 years The Company capitalizes tooling costs once a product design has been finalized. Tooling costs are amortized to cost of sales on a straight-line basis over the greater of estimated product life, generally three years, or the ratio of current revenue to the total of current and anticipated future revenue. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset life or lease term. Depreciation and amortization expense totaled $208,356, $530,972 and $1,473,033 for the years ended December 31, 1994, 1995 and 1996, respectively. Major replacements or betterments of property and equipment are capitalized. Costs of normal repairs and maintenance are charged to expense as incurred. 5. PUBLIC OFFERINGS, CHANGES IN CAPITALIZATION AND WARRANTS On February 9, 1994, the Company completed an initial public offering (the "IPO") of 2,500,000 shares of its Common Stock at $3.00 per share, raising approximately $6.1 million. In connection with the IPO the following transactions occurred: (i) notes payable to Shareholders totaling $799,856 were repaid in full -- see Note 7; (ii) borrowings under the Company's line of credit in the amount of $483,447 were repaid; (iii) the Company received payment in full for a note receivable from a shareholder in the amount of $65,288. In connection with the IPO the Company sold, for $110, to Cruttenden Roth Incorporated ("Cruttenden"), the underwriter, warrants to purchase up to 220,000 shares of the Company's Common Stock, at an exercise price of $3.60 per share. The Cruttenden warrants are exercisable for a period of up to four years beginning February 9, 1995 and are not transferable, except to officers of Cruttenden. In addition, the Company has granted certain rights to the holders of the Cruttenden warrants to register the Common Stock underlying Cruttenden warrants under the Securities Act of 1933, as amended. None of the Cruttenden warrants had been exercised as of December 31, 1996. On May 31, 1995, the Company completed a follow on public offering (the "Offering") of 850,000 shares of its common stock at $21.00 per share, raising approximately $16.7 million. Approximately, $274,000 of the proceeds from the Offering were used to retire warrants to purchase up to 15,832 shares of the Company's common stock issued to Silicon Valley Bank in connection with its 1993 line of credit agreement. In October 1993, the Company's Board of Directors declared a 1.5-for-1 split of the Company's common stock, which also became effective in October 1993. In November 1993, the Company's Board of Directors declared a .9640288-for-1 reverse split of the Company's common stock, which became effective in January 1994. On April 18, 1995, the Company's Board of Directors declared a 2-for-1 forward stock split of the Company's common stock, which was effective on May 1, 1995. All common share data and per share data included in the accompanying financial statements and notes thereto have been adjusted to reflect these stock splits. 6. BUSINESS COMBINATIONS Russet Limited At October 31, 1994, the Company expanded its operations in Europe and the United Kingdom by purchasing certain assets and the distribution business of Russet, Limited ("Russet") in a transaction accounted for as a purchase for financial reporting purposes. The purchase price paid by Eltron was approximately $682,000 in cash and the assumption of approximately $622,000 in trade liabilities and debt. The assets acquired by Eltron consisted of trade receivables, inventories, equipment, technology and agency rights used in Russet's business as a distributor of bar code equipment, ticket printing equipment and related products. The estimated fair values of the assets of Russet acquired are summarized as follows: Trade receivables ................... $ 412,000 Inventories ......................... 352,000 Equipment and other tangible assets . 119,000 Cost in excess of net assets acquired 421,000 ========== Total ................... $1,304,000 ==========
33 35 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The results of operations relating to Russet are included with those of the Company from November 1, 1994. Net revenues generated from Russet operations totaled approximately $454,000 for the period from November 1, 1994 to December 31, 1994. The unaudited consolidated statement of income which follows was prepared as if the acquisition of Russet had occurred as of January 1, 1994. For the purposes of the pro forma information presented, the Statement of Income for the year ended March 31, 1995 has been included for Russet. In the opinion of the Company's management, all adjustments necessary to present fairly such pro forma financial statement have been made based on the terms and structure of the transaction. However, the preparation of pro forma financial information requires many assumptions which may differ from actual operations. This unaudited pro forma financial statement is not necessarily indicative of the actual results which the Company would have reported had the acquisition occurred as of January 1, 1994, nor does it purport to indicate the results of future operations. Pro Forma Condensed Statement of Income for Eltron International, Inc. and Russet, Ltd. (Unaudited)
Year Ended December 31, 1994 ----------- Sales .................................. $31,245,671 Income before provision for income taxes 5,379,378 ----------- Net income ............................. $ 3,676,097 =========== Net income per common share ............ $ 0.59 ===========
Donner Media, Inc. Effective September 1, 1995, the Company purchased 80% of the outstanding capital stock of Donner Media, Inc. ("Donner"), a manufacturer of pressure sensitive labels located in Appleton, Wisconsin for $250,000 in cash. The Company also entered into an agreement (the "Agreement") to acquire the remaining 20% of Donner's outstanding capital stock. Under the terms of the Agreement the Company has committed to purchase Donner's remaining capital stock on September 1, 1998 for the greater of (i) the incremental value of such shares as determined in accordance with the valuation methodology set forth in the Agreement or (ii) $1 million in cash. The amount recorded in the accompanying financial statements related to this payment is based upon management's judgments regarding such factors as future competitive conditions and product costs, which can be difficult to predict. Actual results could differ from those estimates. The net present value of this estimated payment, calculated at an effective interest rate of 9% per annum, has been included in "Long Term Obligation" on the accompanying Consolidated Balance Sheet. The acquisition has been accounted for as a purchase for financial reporting purposes and, accordingly, the results of operations for Donner are included with those of the Company from September 1, 1995. Revenues for the period from September 1, 1996 to December 31, 1996, totaled $1.1 million. A portion of the purchase price has been allocated to the assets and liabilities of Donner based on their estimated respective fair values. The purchase price and expenses associated with the acquisition exceeded the fair value of Donner's net assets by $1 million which has been included in "Difference between cost and fair value of net assets acquired" on the accompanying Consolidated Balance Sheets. Privilege S.A. At January 1, 1996, the Company purchased all of the outstanding capital stock of Privilege S.A. ("Privilege"), a French company primarily engaged in the design, manufacture and distribution of custom plastic card printers. This transaction has been accounted for as a purchase for financial reporting purposes. Acquired in-process technology valued at $2.5 million was expensed immediately. The purchase price paid by Eltron was approximately $3.2 million in cash and the assumption of approximately $1.3 million in trade liabilities and debt. The assets acquired by Eltron consisted of trade receivables, inventories, equipment and technology. 34 36 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of the assets of Privilege acquired are summarized as follows:
Trade receivables .......................... $ 964,000 Inventories ................................ 370,000 Equipment and other tangible assets ........ 328,000 In process research and development projects 2,500,000 Cost in excess of net assets acquired ...... 397,000 ---------- Total .......................... $4,559,000 ==========
The results of operations relating to Privilege are included with those of the Company from January 1, 1996. Net revenues generated from Privilege operations totaled approximately $7.8 million for the period from January 1, 1996 to December 31, 1996. RJS, Incorporated Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS") in a business combination accounted for as a pooling of interests. RJS is a manufacturer of bar code label printers, bar code verifiers and verified printing systems located in Monrovia, California. In accordance with the terms of the merger, Eltron paid $776,000 in cash (in lieu of 22,861 shares of Eltron Common Stock) and issued 322,991 shares of its Common Stock to the shareholders of RJS as consideration for all of the outstanding capital stock of RJS. The accompanying financial statements are based on the assumption that the two companies were combined at the beginning of the year, and all financial statements for prior periods presented have been restated to give effect to the combination. Earnings per share data reflects the shares issued in the merger for all periods presented. Prior to February 1996, Eltron and RJS, in the normal course of business, entered into certain transactions for the purchase and sale of merchandise. These intercompany transactions have been eliminated in the accompanying financial statements. In connection with the merger, RJS changed its fiscal year end from September 30 to December 31, which conforms to Eltron's year end. During the three months ended December 31, 1995, RJS reported sales of $3 million and a net loss of $19,000. In order to reflect this change in fiscal year-end, retained earnings has been decreased by RJS's net loss for the three months ended December 31, 1995. The consolidated financial statements for all periods prior to 1996 have not been restated to reflect RJS's change in fiscal year and include RJS's results of operations on a September 30 fiscal year end basis and Eltron on a December 31 calendar year basis. Prior to the merger, RJS had a $2 million line of credit facility with a bank. The credit facility was collateralized by accounts receivable, inventories and property and equipment. Immediately upon the merger of Eltron and RJS, the RJS line of credit was paid in full, and the line terminated. The weighted average borrowing rates for 1994, 1995 and 1996, on the above credit facility, was 9.2%, 9.3% and 9.3%, respectively. A reconciliation of net sales and net income previously reported to net sales and net income as adjusted to reflect the merger is as follows:
Year Ended December 31, ------------------------- 1994 1995 ----------- ----------- Sales: As previously reported: By Eltron $17,530,490 $42,361,064 By RJS 11,746,000 12,610,000 ----------- ----------- As restated $29,276,490 $54,971,064 Net Income: As previously reported: By Eltron $ 2,913,204 $ 6,369,701 By RJS 710,000 750,000 ----------- ----------- As restated $ 3,623,204 $ 7,119,701
35 37 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. RELATED PARTY TRANSACTIONS The Company was party to a manufacturing and marketing agreement with a shareholder, Taiwan Semiconductor Co. Ltd. ("TSC"), from January of 1991 until June of 1996. The agreement provided TSC with the non-exclusive right to manufacture printers and printer components for the Company as well as the exclusive right to market and distribute certain Eltron products in the continent of Asia. Under the terms of the agreement, TSC was required to pay the Company a royalty equal to 3.5% of gross revenues derived from sales of Eltron products and could either: (i) manufacture the Eltron products which are sold in Asia or (ii) purchase the products from Eltron. For the years ended December 31, 1994, 1995 and 1996, the Company purchased subassemblies and components totaling $2,855,387, $7,899,775 and $3,717,825, respectively from TSC (of which $2,708,313, $5,153,426 and $2,899,148 are recorded in cost of goods sold) and received royalties of $8,088, $4,624 and $0 respectively. 8. EMPLOYEE BENEFIT PLAN The Company has a 401(k) savings and profit sharing plan that is available to substantially all of its employees. Under the plan, employees can make voluntary contributions not to exceed the lesser of an amount equal to 15% of their compensation or limits established by the Internal Revenue Code. The Company, at its discretion, matches a portion of the employees' annual contributions. Contributions made by either employees or the Company are deemed to be vested immediately. Company contributions during each of 1994 and 1995 were $18,000. No contributions were made in 1996. 9. INCOME TAXES The sources of income before provision for income taxes were as follows:
December 31, --------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Domestic ................................... $ 5,183,164 $10,682,567 $12,437,699 Foreign .................................... 35,754 77,896 876,030 ----------- ----------- ----------- Income before provision for income taxes $ 5,218,918 $10,760,463 $13,313,729 =========== =========== ===========
The provision (benefit) for income taxes is comprised of the following:
December 31, ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Current: Federal .............. $ 1,404,705 $ 3,151,148 $ 4,442,295 State ................ 459,708 884,204 817,077 Foreign .............. 54,301 72,808 355,871 Deferred: Federal .............. (323,000) (395,000) 428,430 State ................ -- (72,398) 171,500 ----------- ----------- ----------- Provision for income taxes $ 1,595,714 $ 3,640,762 $ 6,215,173 =========== =========== ===========
36 38 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the provision for income taxes to the amount computed at the Federal statutory rate is as follows:
December 31, ------------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Federal income tax provision at statutory rate of 34% ............................ $ 1,774,432 $ 3,658,557 $ 4,526,667 Effect of graduated tax rates ............ -- -- 133,138 Effect of tax rate difference for Foreign Sales Corporation ...................... (33,017) (69,372) (49,372) State taxes, net of Federal benefit ...... 303,460 535,876 798,000 Write off of acquired in process technology and other non-deductible expenses resulting from acquisitions ............ -- -- 1,088,000 Utilization of net operating loss carryforwards .......................... (245,674) (130,701) -- Tax credits .............................. (93,573) (287,413) (345,060) Interest income exempt from Federal tax .. (41,931) (161,131) (71,000) Change in valuation allowance for deferred tax assets ............................. (64,871) (78,820) -- Other, net ............................... (3,112) 173,766 134,800 ----------- ----------- ----------- Provision for income taxes ......... $ 1,595,714 $ 3,640,762 $ 6,215,173 =========== =========== =========== Effective tax rate ....................... 30.6% 33.8% 46.7% =========== =========== ===========
The components of the Company's deferred tax assets and liabilities are as follows:
December 31, -------------------------- 1995 1996 ----------- ----------- Deferred tax assets: Expenses deductible in future years ... $ 924,888 $ 694,423 Federal benefit of state tax liability 263,991 318,900 Net operating loss carryforwards ...... 1,325,000 1,325,000 Investment credit carryforwards ....... 335,000 -- ----------- ----------- Gross deferred tax asset ............ 2,848,879 2,338,323 Valuation allowance for deferred assets (851,000) (851,000) ----------- ----------- Net deferred tax asset .............. 1,997,879 1,487,323 ----------- ----------- Deferred tax liabilities: Depreciation and amortization ......... (106,481) (195,855) ----------- ----------- Net deferred tax liability .......... (106,481) (195,855) ----------- ----------- Net deferred tax asset .................. $ 1,891,398 $ 1,291,468 =========== ===========
As of December 31, 1996 the Company had net operating loss carryforwards available to offset future Federal taxable income which totaled approximately $1,397,000. These loss carryforwards expire through 2002. At December 31, 1996, the Company also had tax loss carryforwards totaling approximately $1,500,000 available to offset future taxable income in Germany. A valuation allowance has been recorded against the German tax loss carryforwards. Net operating loss carryforwards available to offset alternative minimum taxable income do not differ significantly from those available to offset regular taxable income. Evaluation allowance for deferred tax assets, other than German tax loss carryforwards, has not been recorded as a result of the Company's increased earnings capacity which, in the opinion of management, is sufficient to ensure utilization of recorded deferred tax assets in future periods. 37 39 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. COMMITMENTS The Company has entered into non-cancelable operating leases for its warehouse and office space as well as certain equipment. Lease terms generally range from one to four years; certain building leases contain options for renewal and are subject to escalation clauses tied to the Consumer Price Index. Rental expense under these agreements was $249,852, $580,311 and $645,347 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company's leases for its main warehouse and office facilities in Simi Valley, California expire in January of 1999. The Company's future minimum non-cancelable rental commitments on these leases at December 31, 1996 are as follows: Year ending December 31, - ------------------------ 1997................................................... $ 471,878 1998................................................... 448,651 1999................................................... 139,289 2000................................................... 77,308 2001................................................... -- ----------- $ 1,137,126 ===========
11. STOCK OPTION PLANS The Company adopted stock option plans in 1992, 1993 and 1996 (the 1992 Stock Option Plan, 1993 Stock Option Plan and the 1996 Stock Option Plan). Incentive and nonqualified options under these plans may be granted to employees, officers and consultants of the Company. There are 1,601,000 shares of common stock reserved for issuance under these plans of which 629,303 shares have been exercised. The exercise price of the options are determined by a committee of the board administering the plans, but in the case of an incentive stock option, the exercise price may not be less than 100% of the fair market value on the date of grant. Nonqualified options may be granted at an exercise price that is less than the fair market value of the common stock on the date of grant and require the recognition of a corresponding compensation expense by the Company. Outstanding options generally become exercisable over four years. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans. Had compensation costs for the Company's stock option and purchase plans been determined based upon the methodology prescribed under SFAS 123, the Company's net income and earnings per share would approximate the pro forma amounts below (in thousands except per share data):
As Reported Pro Forma -------- --------- Year Ended December 31, 1996: Net income ................ $ 7,098,556 $ 6,147,644 Net income per common share 0.91 0.79 Year Ended December 31, 1995: Net income ................ $ 7,119,701 $ 6,849,290 Net income per common share 0.97 0.93
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 38 40 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the Company's stock options as of December 31, 1994, 1995 and 1996, and the changes during the year ended on those dates is presented below:
1994 1995 1996 ---------------- ------------------ ------------------ Weighted Weighted Weighted Number Average Number Average Number Average of Price of Price of Price Shares Per Share Shares Per Share Shares Per Share ------ --------- ------- --------- ------ --------- Balance, beginning.......... 582,682 $0.40 592,960 $ 1.68 584,602 $ 6.92 Options granted............. 231,000 $3.67 245,896 $13.51 373,420 $22.21 Options canceled............ (5,250) $0.32 (9,760) $ 1.09 (3,500) $ 2.78 Options exercised........... (215,472) $2.50 (244,494) $ 0.61 (169,337) $23.71 -------- ----- -------- ------ -------- ------ Balance, end................ 592,960 $1.68 584,602 $6.92 785,185 $15.01 ======= ======= ======= Options exercisable at year end....................... 45,748 22,063 118,290 ======= ======= ======= Options available for grant. 529,278 626,024 953,187 ======= ======= ======= Weighted average fair value of options granted during the year.................. $1.82 $6.53 $10.65 ======= ======= ======
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Options Outstanding Exercisable -------------------------------------- ------------------------- Weighted Number Average Weighted of Shares Remaining Weighted Number Average Outstanding Contractual Average Outstanding Exercise Range of Exercise Price at 12/31/96 Life Exercise Price at 12/31/96 Price - ----------------------- ----------- ---- -------------- ----------- ----- $0.18 to $9.88 ........... 308,120 3.3 $ 5.30 78,040 $ 3.84 $10.50 to $19.00 ......... 94,065 7.9 $16.51 25,875 $15.21 $21.75 to $27.75 ......... 373,000 9.5 $22.14 14,375 $24.97 $33.75 to $34.75 ......... 10,000 9.1 $34.15 -- $ -- ------- --- ------ ------- $0.18 to $34.75 .......... 785,185 6.9 $15.01 118,290 $ 8.89 ======= =======
The fair value of options granted during 1995 and 1996 is estimated as $1.4 million and $3.5 million, respectively, on the dates of grants using the Black-Scholes option-pricing model with the following assumptions: (i) dividend yield of 0%, (ii) expected volatility of 55% for 1995 and 1996, (iii) weighted average risk-free interest rates of 6.9% and 6.3% for 1995 and 1996, respectively, (iv) weighted average expected life of 3.5 years for 1995 and 1996, and (v) assumed forfeiture rate of 6%. 39 41 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INTERNATIONAL SALES AND FOREIGN OPERATIONS The Company operates in one business segment. Transfers between geographic areas are made at prices reflecting market conditions. Geographic information including sales and transfers between geographic areas is presented below:
December 31, ------------------------------------------ 1994 1995 1996 ------------ ------------ ------------ Revenues from unaffiliated customers: - ------------------------------------------- United States ............................ 21,574,598 42,971,064 58,199,248 Europe ................................... 6,997,132 10,617,073 25,765,766 Other .................................... 704,760 1,382,927 4,544,568 ------------ ------------ ------------ Total .................................. $ 29,276,490 $ 54,971,064 $ 88,509,582 ============ ============ ============ Transfers between geographic regions: - ------------------------------------------- United States ............................ -- -- 1,696,682 Europe ................................... 96,799 1,168,854 3,651,203 Other .................................... -- -- -- ------------ ------------ ------------ Total .................................. $ 96,799 $ 1,168,854 $ 5,347,885 ============ ============ ============ Total revenues: - ------------------------------------------- United States ............................ 21,574,598 42,971,064 59,895,930 Europe ................................... 7,093,931 11,785,927 29,416,969 Other .................................... 704,760 1,382,927 4,544,568 Intersegment eliminations ................ (96,799) (1,168,854) (5,347,885) ------------ ------------ ------------ Total .................................. $ 29,276,490 $ 54,971,064 $ 88,509,582 ============ ============ ============ Net/Income (loss): - ------------------------------------------- United States ............................ 3,601,752 7,125,534 6,157,583 Europe ................................... 21,452 (5,833) 940,973 Other .................................... -- -- -- ------------ ------------ ------------ Total .................................. $ 3,623,204 $ 7,119,701 $ 7,098,556 ============ ============ ============ Identifiable assets: - ------------------------------------------- United States ............................ 17,904,509 43,818,089 49,097,711 Europe ................................... 1,589,493 1,806,136 5,133,348 Other .................................... -- -- 14,000 ------------ ------------ ------------ Total .................................. $ 19,494,002 $ 45,624,225 $ 54,245,059 ============ ============ ============ U.S. export sales to unaffiliated customers by destination of sale: - ------------------------------------------- Europe ................................... 6,997,132 7,181,631 13,299,596 Other .................................... 704,760 1,382,927 4,544,568 ------------ ------------ ------------ Total .................................. $ 7,701,892 $ 8,564,558 $ 17,844,164 ============ ============ ============
40 42 ELTRON INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial information for fiscal years 1995 and 1996 are as follows:
Quarter Ended ----------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Fiscal year 1995 Net revenues $ 11,774,000 $ 12,181,000 $ 14,292,000 $ 16,724,000 Gross profit 5,445,000 5,442,090 6,528,000 7,433,000 Net income (loss) 1,631,000 1,494,000 1,759,000 2,235,000 Net income (loss) per share 0.24 0.21 0.23 0.29 Fiscal year 1996 Net revenues $ 19,019,000 $ 22,730,000 $ 24,013,000 $ 22,748,000 Gross profit 8,768,000 9,940,000 9.958,000 9,672,000 Net income (loss) (743,000) 2,824,000 2,676,000 2,341,000 Net income (loss) per share (0.10) 0.36 0.34 0.30
41 43 INDEX TO EXHIBITS Exhibit Index
Sequential Page Number ------ Exhibit Number Description -------------- ----------- 2.1 Stock Purchase Agreement Among Eltron International, Inc. and Donner Media, Incorporated and All of the Shareholders of Donner Media, Incorporated dated September 29, 1995 (without exhibits and schedules). (6) 2.2 Contrat de Vente d'Actions Privilege S.A., registered January 30, 1996. (to be filed by amendment) 2.3 Agreement of Merger and Plan of Reorganization dated February 29, 1996 by and among Eltron International, Inc., Eltron Acquisition Corp., RJS Incorporated and the shareholders of RJS, Incorporated (without exhibits and schedules). (1) 2.4 Amendment dated March 1, 1996 to Agreement of Merger and Plan of Reorganization dated February 29, 1996 by and among Eltron International, Inc., Eltron Acquisition Corp., RJS, Incorporated and the shareholders of RJS, Incorporated. (7) 3.1 Amended and Restated Articles of Incorporation of the Company (2) 3.2 Bylaws of the Company as amended to date. (2) 3.3 Amendment to Amended and Restated Articles of Incorporation filed January 18, 1994. (4) 3.4 Amendment to Amended and Restated Articles of Incorporation filed May 9, 1995 relating to a 2-for-1 stock split. (3) 4.1 Form of common stock certificate (5)
E-1 44 10.1 Agreement and Plan of Merger dated as of April 10, 1995, among the Company, Eltron, Incorporated by Donald Skinner. (3). 10.2 Employment Agreement dated as of January 1, 1997 between Donald K. Skinner and the Company. (filed herewith) 44 10.3 Employment Agreement dated as of January 1, 1997 between Hugh Gagnier and the Company. (filed herewith) 52 10.4 Employment Agreement dated as of January 1, 1997 between Patrice Foliard and the Company. (filed herewith) 61 10.5 Employment Agreement dated as of January 1, 1997 between Daniel C. Toomey, Jr. and the Company. (filed herewith) 70 11.1 Computation of Earnings per Share. (filed herewith) 79 21.1 List of Subsidiaries. (filed herewith) 80 23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith) 81 27.1 Financial Data Schedule. (filed herewith) 82
(1) Previously filed as an exhibit to the Company's Form 8-K filed March 12, 1996 (2) Previously filed with the Securities and Exchange Commission on November 26, 1993 as exhibits to the Company's Registration Statement on Form SB-2 (33-72200-LA) (3) Previously filed with the Securities and Exchange Commission on May 9, 1995 as exhibits to the Company's Registration Statement on Form SB-2 (33-91480). (4) Previously filed with the Securities and Exchange Commission on January 21, 1994 as exhibits to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (33-72200-LA). (5) Previously filed with the Securities and Exchange Commission on February 8, 1994 as exhibits to Amendment No. 2 to the Company's Registration Statement on Form SB-2 (33-72200-LA). (6) Previously filed with the Securities and Exchange Commission on March 20, 1996 as exhibits to the Company's Registration Statement on Form S-3 (333-2530). (7) Previously filed with the Securities and Exchange Commission on May 14, 1996 as exhibits to Company's Form 8-K-A. E-2 EX-10.2 2 EXHIBIT 10.2 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT WITH DONALD K. SKINNER This EMPLOYMENT AGREEMENT ("Agreement") dated as of January 1, 1997 ("Effective Date"), between Donald K. Skinner, ("Skinner") an individual residing at 5566 Little Fawn Court, Westlake Village, California 91362, and Eltron International, Inc. ("Eltron"), a California corporation. WITNESSETH: WHEREAS, Eltron desires to retain Skinner as a senior executive of Eltron and Skinner desires to perform such duties, This agreement replaces all previous employment agreements between Eltron and Skinner. NOW, THEREFORE, it is mutually agreed by among the parties as follows: Section 1. Employment, Term and Duties 1.1 Employment Upon the terms and subject to the conditions and contained herein, during the Employment Term (as hereinafter defined), Eltron hereby employs Skinner as a senior executive officer of Eltron. Skinner shall report directly to the Board of Directors of Eltron. Skinner hereby accepts such employment and, during the Employment Term shall devote his fill business time, skill, energy and attention to the business of Eltron, and shall perform his duties in a diligent, trustworthy, loyal, businesslike and efficient manner, all for the purpose of advancing the business of Eltron. 1.2 Employment Term. The Employment Term shall commence on the Effective Date and, unless extended by mutual agreement of the parties hereto, or sooner terminated or canceled pursuant to Section 3.2 hereof, shall terminate and expire on the 3rd annual anniversary of the Effective Date, provided however, that for purposes of Section 4.3 hereof, the Employment Term shall be deemed to be 3 years. 1.3 Duties and Responsibilities Skinner shall serve Eltron as its President and shall have the duties and responsibilities of its Chief Executive Officer. Skinner agrees to observe and comply with the policies, procedures and rules of Eltron regarding performance of his specific duties and the duties of Eltron employees in general. Skinner specifically covenants, warrants and represents to Eltron that he has the full, complete and entire right and authority to enter into this Agreement, that he has no agreement, duty, commitment or responsibility of any kind or nature whatsoever with any other party, person or entity which would conflict in any manner whatsoever with any of his obligations to Eltron under this Agreement, and that he is fully ready, willing and able to perform each and all duties and responsibilities set forth in this Agreement. Section 2. Compensation 2.1 Base Salary During the first year of the Employment Term the Eltron shall pay, and Skinner shall be entitled to receive from the Eltron, a base salary for full-time employment referred to in Section 1 hereof, compensation at the rate of $210,000 per year ("Base Salary"), payable in equal bi-weekly 1 2 installments. Eltron shall make all deductions, withholdings and/or payments that are required by law from the gross sums payable to Skinner pursuant to the provisions of this Section. 2.2 Adjustment During the Employment Term, the base salary Skinner is entitled to receive will be reviewed each February by the Compensation Committee of the Board of Directors and adjusted effective January 1 of the coming year. The salary adjustment Skinner is entitled to receive will be determined at the sole discretion of the Compensation Committee. 2.3 Additional Compensation An incentive bonus based on the growth and performance of Eltron International, Inc. shall be payable to Skinner in the years 1997 to 1999, inclusive. The incentive bonus shall be an amount not exceeding 75% of Skinner's base salary for the year in respect of which the bonus is payable. The bonus Skinner shall be entitled to receive will (Additional Compensation") be based on the audited financial statements of the Company and will be calculated based on the criteria found in Appendix A. In the event that either the nature of the Company changes by virtue of a merger, acquisition or similar event or if Skinner is called upon to serve in a substantially different role by the Company, the Bonus criteria will be reviewed and revised to reflect such terms as are mutually acceptable to both Skinner and the Compensation Committee of the Company's Board of Directors. 2.4 Expenses Eltron shall reimburse Skinner for all ordinary and necessary expenses incurred and paid by him in the course of the performance of his duties pursuant to this Agreement and consistent with Eltron's policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to Eltron's requirements with respect to the manner of reporting such expenses. Eltron shall continue in effect (or substitute on a comparable basis) the major medical, hospitalization, life, travel, accident and disability insurance policies covering Skinner and/or his eligible dependents. In addition, Eltron shall reimburse Skinner for his and his wife's and dependent children's medical expenses not covered by Eltron's medical insurance. Section 3. Termination. 3.1 Termination. Eltron shall have the right to terminate the Employment Term for Cause (as hereinafter defined) or in the event Skinner suffers an illness or incapacity of such character as to substantially disable him from performing his duties hereunder or upon the death of Skinner. Notwithstanding anything to the contrary set forth in this Agreement, Skinner's obligations and covenants set forth in Sections 4 and 5 hereof shall survive the termination of this Agreement. 3.2 Termination of Employment for Cause Eltron may at time during the term of this Agreement, by written notice, terminate the employment of Skinner for cause. In such event, Skinner shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by Skinner to Eltron up to and including the date of termination of the employment of Skinner, but under no circumstances whatsoever shall Skinner be entitled to receive any other compensation of any kind or nature whatsoever, including, without limitation, for any period of time after the date of the termination of the employment of Skinner. The following shall be deemed to constitute the types of acts or conduct which shall 2 3 constitute grounds for termination of Skinner's employment for cause ("Cause") by written notice pursuant to this Agreement: (a) The commission by Skinner of any felony. (b) Any breach by Skinner of any material term, provision or covenant contained in this Agreement and the failure of Skinner to cure the same within a reasonable period of time not to exceed sixty (60) days of receipt of written notice of such failure (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) and the demand that the same be cured; (c) The persistent and willful failure, neglect, inability or refusal of Employee to perform his duties and responsibilities under this Agreement and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured; or (d) Any material breach by Employee of any of Company's material policies, practices, rules and/or regulations and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured. 3.3 Disability If, during the Employment Term, Employee becomes disabled due to illness, injury or similar cause in such a manner that he is unable fully to perform his duties pursuant to this Agreement, he shall be entitled upon certification of such disability by a physician of Company's choice to a leave of absence from Company for the duration of such disability as certified by such physician up to but not exceeding the expiration of a period of one (1) year or until the end of the Employment Term of this Agreement, whichever first occurs. In no event shall Employee receive disability income coverage beyond the period of one (1) year except to the extent provided in the Company's existing disability policy. Employee's salary as provided in this Agreement, including the Base Salary and the additional Compensation, shall continue to be paid by the Company during any such leave of absence not to exceed one (1) year, provided, however, that if Employee receives any payment or payments on account of such disability from any employer-provided, governmental, employee-provided or other program or programs of disability insurance attributable to the one (1) year leave of absence, or, when appropriate, such shorter time period, Company shall be obligated to pay to Employee only the difference, if any, between the salary provided to Employee by the Company pursuant to this Agreement for the applicable period and the total amount of disability insurance payments payable to Employee through or by any such program or programs of disability insurance attributable to the same applicable period. If Employee's absence because of disability continues for more than one (1) year and the term of this Agreement has not expired, Company shall have the full and unrestricted right, in its sole and exclusive discretion, immediately to terminate Employee's employment by Company. 3.4 Death of Employee In the event of the death of Employee during the term of this Agreement, this Agreement shall immediately terminate, and Employee's estate shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by Employee to Company up to 3 4 and including the date of Employee's death and an additional payment equal to the aggregate of Employee's Base Salary and Additional Compensation during his last full year of employment by Company, but under no circumstances whatsoever shall Employee's estate be entitled to receive any other compensation of any kind or nature whatsoever for any period of time after the date of Employee's death. 3.5 Duties of Employee After Termination of Employment Following any termination of Employee's employment with Company, Employee shall fully cooperate with Company in all matters relating to the winding up of his pending work on behalf of Company and the orderly transfer of any such pending work and of his duties and responsibilities for Company to such other employees of Company as may be designated by Company. Company shall be entitled to such full-time or part-time services of Employee as Company may reasonably require during all or any part of the thirty (30) day period, Saturdays, Sundays and federal holidays excepted, immediately following any termination of Employee's employment by Company. Employee shall receive reasonable compensation for any such services so rendered. Immediately upon any termination of Employee's employment with Company, Employee shall return to Company any and all property of Company of any kind or nature whatsoever in Employee's possession, custody or control. 3.6 Option to Terminate Upon Change in Control In the event of a merger or sale, or in the event a third party obtains majority control of, or in the event that Skinner ceases to function as the President or Chief Executive Officer of the Company, Skinner shall have the option to terminate his employment and shall be entitled to receive a severance payment equal to three times his annual base salary in effect at that time. Skinner shall have this option for up to 180 days after said change of control occurs and must notify the Company in writing 60 days prior his decision to terminate based upon said change of control. Section 4. Business Properties. 4.1 Business Properties. Other than as required to perform his duties in accordance with this Agreement and for purposes of furthering the business of Eltron, Skinner shall not use or cause to be used any customer lists, trade secrets or any other confidential business information by him as a result of his employment or relationship to Eltron or any affiliate of Eltron. 4.2 Revealing of Trade Secrets, etc. Skinner acknowledges the interest of Eltron in maintaining the confidentiality of information related to its business an shall not at any time during the Employment Term or thereafter, directly or indirectly, reveal or cause to be revealed to any person or entity the production processes, inventions, formulae, trade secrets, customer lists or other confidential business information obtained by him as a result of his employment or relationship with Eltron or any affiliate of Eltron, except when authorized in writing to do so by the Board of Directors of Eltron; provided, however, that the parties acknowledge that it is not the intent of this Section 4.2 to include within its subject matter (i) information not proprietary to Eltron, or (ii) information which is in the public domain. 4.3 Non-Competition. During the Employment Term and for a period of one (1) year thereafter. Skinner shall not (a) (i) compete with Eltron, in the Territory (as hereinafter defined) in the conduct of its business as a manufacturer of bar code printers and related accessories or in the conduct of any other 4 5 business carried on by Eltron, or (ii) engage or participate, directly or indirectly, in any business or businesses substantially similar to the business as conducted by Eltron as of the date of this agreement or as may thereafter be conducted by Eltron at any time during the Employment Term, (b) solicit or cause to be solicited within or without the Territory any customers of Eltron, or (c) recruit or cause any other person to recruit any employee of Eltron to any of said business or businesses. Section 5. Invention. 5.1 Assignment. Without further consideration Skinner shall fully and promptly report to Eltron all ideas, concepts, inventions, discoveries, formulae and designs conceived or produced by Skinner at any time during the Employment Term, whether alone or with others and whether patentable or unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to the business of Eltron as conducted at any time or at any time during the employment Term, and shall assign and hereby does assign to Eltron or its nominee Skinner's entire right, title and interest in and to all such Inventions. 5.2 Cooperation. Skinner shall take all reasonable action requested by Eltron to protect or obtain title to any and all United States and/or foreign patents on any such Inventions, including execution and delivery of all applications, assignments and other document deemed necessary or desirable by Eltron, provided Skinner is reimbursed for reasonable expenses incurred by Skinner in connection with such execution and delivery. Section 6. Miscellaneous. 6.1 Remedies. The parties acknowledge that any breach, violation or evasion by Skinner of the terms of this Agreement will result in immediate and irreparable injury and harm to Eltron, and will cause damage to Eltron in amounts difficult to ascertain. Accordingly, Eltron shall be entitled to the remedies of injunction and specific performance, or either of such remedies, as well as to all other legal or equitable remedies to which Eltron may be entitled, including, without limitation, termination of the Employment Term and this Agreement. Any breach, violation or evasion by Eltron of the terms of this Agreement will result in immediate and irreparable injury and harm to Skinner, and shall entitle him to all legal or equitable remedies to which Skinner may be entitled. 6.2 Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a) "Engage or participate in any business" referred to in Section 4.3 hereof shall by deemed to mean engaging or participating in any business or businesses; directly or indirectly, whether for his own account or for that of any other person, firm or corporation, and whether as a stockholder (except as a stockholder in a publicly-hold corporation of which Skinner owns less that 1% of the outstanding securities of any class), principal, agent proprietor, partner, officer, director, employee or consultant, or in any other capacity; (b) "Territory" shall mean any domestic or foreign jurisdiction in which Eltron or any affiliate or subsidiary of Eltron, as of the date of the Agreement or any time during the Employment Term, has conducted any part of its business, whether design, development, 5 6 engineering, manufacturing, sale, distribution or servicing of its products or other marketing operations. 6.3 Notices. Any notice or other communications required or permitted to be given to the parties hereto shall be deemed to have been given when received, addressed as follows (or at such other address as the party addressed may have substituted by notice pursuant to this Section 6.3): (a) If to Eltron: Eltron International, Inc. 41 Moreland Road Simi Valley, California 93065 Attention: Board of Directors (b) If to Skinner: Donald K. Skinner 5566 Little Fawn Court Westlake Village, California 91362 6.4 Heading. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement or as in any way limiting or amplifying the terms and provisions hereof. 6.5 Governing Law. The Agreement shall in all respect be interpreted, construed and governed by and in accordance with the law of the State of California. 6.6 Severability. In case this Agreement, or any one or more of the provision hereof, shall be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions shall not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforecability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein and there shall be deemed substituted such other provision as will most nearly accomplish the intent of the parties to the extent permitted by applicable law. 6.7 Whole Agreement. This Agreement embodies all the representations, warranties, covenants and agreement of the parties in relation to the subject matter hereof, and no representations, warranties, covenants, understandings or agreement, or otherwise, in relation thereto exist between the parties, or in an instrument in writing signed by the party to be bound thereby which makes reference to this Agreement. 6.8 No Rights in Third Parties. 6 7 Nothing herein expressed or implied is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their respective successors and assigns or personal representatives, any rights or remedies under or by reason of this Agreement. 6.9 Assignment. Except as provided by section 3.3 to this Agreement, Eltron may assign its rights and delegate its responsibilities under this Agreement to any affiliated company or to any corporation which acquires all or substantially all of the operating assets of Eltron by merger, consolidation, dissolution, liquidation, combination, sale or transfer or assets or otherwise. Except as herein before provided neither of the parties hereto may assign any rights or obligations under this Agreement. 6.10 Amendment. The Agreement may not be amended orally but only by an instrument in writing duly executed by the parties hereto. 6.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. \s\Donald K. Skinner By \s\George L. Bragg - ----------------------------- -------------------------------- Donald K. Skinner George L. Bragg Compensation Committee By \s\Robert G. Bartizal -------------------------------- Robert G. Bartizal Compensation Committee By \s\William R. Hoover -------------------------------- William R. Hoover Compensation Committee 7 8 APPENDIX 'A' During the Employment Term, the additional compensation Skinner is entitled to receive will be reviewed each December by the Compensation Committee of the Board of Directors and fixed effective January 1 of the coming year. The following defines the criteria to be used for allocating the 1997 bonus ("Additional Compensation") to Skinner: 1. MOST IMPORTANT TASKS: (MIT) Skinner shall be entitled to receive and shall be paid a maximum quarterly bonus equal to 75% of his quarterly salary. MIT's will be created, by Skinner and approved by the Compensation Committee of the Board of Directors, prior to the beginning of each quarter. Each task will be assigned a numerical weighting for bonus allotment. At the end of each quarter, MIT's will be reviewed by Skinner and the Compensation Committee Board of Directors to assess task completion and to complete the amount of bonus to be awarded for the prior. quarter. 8 EX-10.3 3 EXHIBIT 10.3 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT WITH HUGH GAGNIER This EMPLOYMENT AGREEMENT ("Agreement") dated as of January 1, 1997 ("Effective Date"), between Hugh Gagnier ("Gagnier") an individual residing at 4703 Vesper Ave., Sherman Oaks California 91403, and Eltron International, Inc. ("Eltron"), a California corporation. WITNESSETH: WHEREAS, Eltron desires to retain Gagnier as a Senior Executive of Eltron and Gagnier desires to perform such duties, This agreement replaces all previous employment agreements between Eltron and Gagnier. NOW, THEREFORE, it is mutually agreed by among the parties as follows: Section 1. Employment, Term and Duties 1.1 Employment Upon the terms and subject to the conditions and contained herein, during the Employment Term (as hereinafter defined), Eltron hereby employs Gagnier as a Senior Executive Officer of Eltron. Gagnier shall report directly to Chairman/CEO of Eltron. Gagnier hereby accepts such employment, and during the Employment Term shall devote his full business time, skill, energy and attention to the business of Eltron, and shall perform his duties in a diligent, trustworthy, loyal, businesslike and efficient manner all for the purpose of advancing the business of Eltron. 1.2 Employment Term. The Employment Term shall commence on the Effective Date, and, unless extended by mutual agreement of the parties hereto or sooner terminated or canceled pursuant to Section 3.2 hereof, shall terminate and expire on the 1st annual anniversary of the Effective Date provided; however, that for purposes of Section 4.3 hereof the Employment Term shall be deemed to be 1 year. 1.3 Duties and Responsibilities Gagnier shall serve Eltron initially as its President, Printer Operations and shall have the duties and responsibilities of the Chief Operating Officer. Gagnier agrees to observe and comply with the policies, procedures and rules of Eltron regarding performance of his specific duties and the duties of Eltron employees in general. Gagnier specifically covenants, warrants and represents to Eltron that he has the full, complete and entire right and authority to enter into this Agreement that he has no agreement, duty, commitment or responsibility of any kind or nature whatsoever with any other party, person or entity which would conflict in any manner whatsoever with any of his obligations to Eltron under this Agreement, and that he is fully ready, willing and able to perform each and all duties and responsibilities set forth in this Agreement. Section 2. Compensation 2.1 Base Salary During the first year of the Employment Term Eltron shall pay, and Gagnier shall be entitled to receive from Eltron, a base salary for full-time employment referred to in Section 1 hereof, compensation at the rate of $170,000 per year, payable in equal bi-weekly installments. Eltron shall make all deductions, withholdings and/or payments that are required by law from the gross sums payable to Gagnier pursuant to the provisions of this Section. 1 2 2.2 Adjustment During the Employment Term, the base salary and bonus Gagnier is entitled to receive will be reviewed each December by the Compensation Committee of the Board of Directors and adjusted effective January 1 of the coming year. The salary and incentive bonus adjustment Gagnier is entitled to receive will be determined at the sole discretion of the Compensation Committee. 2.3 Additional Compensation An incentive bonus shall be payable to Gagnier. The incentive bonus shall be an amount not exceeding 75% of Gagnier's base salary for FY 97. The bonus Gagnier shall be entitled to receive will be based on the audited financial statements of the Company, and will be calculated based on the criteria found in Appendix A. In the event that either the nature of the Company changes by virtue of a merger, acquisition or similar event or if Gagnier is called upon to serve in a substantially different role by the Company, the Bonus criteria will be reviewed and revised to reflect such terms as are mutually acceptable to both Gagnier and the Compensation Committee of the Company's Board of Directors. 2.4 Incentive Stock Option Plan Gagnier shall be eligible to participate in Eltron's Incentive Stock Option Plans. 2.5 Expenses Eltron shall reimburse Gagnier for all ordinary and necessary expenses incurred and paid by him in the course of the performance of his duties pursuant to this Agreement and consistent with Eltron's policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to Eltron's requirements with respect to the manner of reporting such expenses. Eltron shall continue in effect (or substitute on a comparable basis) the major medical, hospitalization, life, travel, accident and disability insurance policies covering Gagnier and/or his eligible dependents. Section 3. Termination. 3.1 Termination. Eltron shall have the right to terminate the Employment Term for Reasonable Cause (as hereinafter defined) or in the event Gagnier suffers an illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more than (90) consecutive days in any one year or upon the death of Gagnier. Notwithstanding anything to the contrary set forth in this Agreement, Gagnier's obligations and covenants set forth in Sections 4 and 5 hereof shall survive the termination of this Agreement. 3.2 Termination of Employment for Cause Eltron may at time during the term of this Agreement, by written notice, terminate the employment of Gagnier for cause. In such event, Gagnier shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by Gagnier to Eltron up to and including the date of termination of the employment of Gagnier, but under no circumstances whatsoever shall Gagnier be entitled to receive any other compensation of any kind or nature whatsoever, including without limitation, for any period of time after the date of the termination of the employment of Gagnier. The following shall be deemed to constitute the 2 3 types of acts or conduct which shall constitute grounds for termination of Gagnier's employment for cause by written notice pursuant to this Agreement: (a) The commission by Gagnier of any serious felony. (b) Any breach by Gagnier of any material term, provision or covenant contained in this Agreement and the failure of Gagnier to cure the same within a reasonable period of time not to exceed sixty (60) days of receipt of written notice of such failure (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) and the demand that the same be cured; (c) The persistent and willful failure, neglect, inability or refusal of Employee to perform his duties and responsibilities under this Agreement and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured; or (d) Any material breach by Employee of any of Company's material policies, practices, rules and/or regulations and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured. 3.3 Disability If, during the Employment Term, Employee becomes disabled due to illness, injury or similar cause in such a manner that he is unable fully to perform his duties pursuant to this Agreement, he shall be entitled upon certification of such disability by a physician of Company's choice to a leave of absence from Company for the duration of such disability as certified by such physician up to but not exceeding the expiration of a period of one (1) year or until the end of the Employment Term of this Agreement, whichever first occurs. Such period not to exceed one (1) year shall be integrated with the existing Company disability policy provided; however, in no event shall Employee receive disability income coverage beyond the period of one (1) year except to the extent provided in the Company's existing disability policy. Employee's salary as provided in this Agreement, including the Base Salary and the additional Compensation, shall continue to be paid by the Company during any such leave of absence not to exceed one (1) year provided, however, that if Employee receives any payment or payments on account of such disability from any employer-provided, governmental, employee-provided or other program or programs of disability insurance attributable to the one (1) year leave of absence, or when appropriate, such shorter time period Company shall be obligated to pay to Employee only the difference, if any, between the salary provided to Employee by the Company pursuant to this Agreement for the applicable period and the total amount of disability insurance payments payable to Employee through or by any such program or programs of disability insurance attributable to the same applicable period. If Employee's absence because of disability continues for more than one (1) year and the term of this Agreement has not expired, Company shall have the full and unrestricted right, in its sole and exclusive discretion, immediately to terminate Employee's employment by Company. 3.4 Death of Employee 3 4 In the event of the death of Employee during the term of this Agreement, this Agreement shall immediately terminate, and Employee's estate shall be entitled to receive any unpaid amounts of base salary and additional compensation for services provided by Employee to Company up to and including the date of Employee's death and an additional payment equal to the aggregate of Employee's base salary and additional compensation during his last full year of employment by Company, but under no circumstances whatsoever shall Employee's estate be entitled to receive any other compensation of any kind or nature whatsoever for any period of time after the date of Employee's death. 3.5 Duties of Employee After Termination of Employment Following any termination of Employee's employment with Company, Employee shall fully cooperate with Company in all matters relating to the winding up of his pending work on behalf of Company and the orderly transfer of any such pending work and of his duties and responsibilities for Company to such other employees of Company as may be designated by Company. Company shall be entitled to such full-time or part-time services of Employee as Company may reasonably require during all or any part of the thirty (30) day period, Saturdays, Sundays and federal holidays excepted, immediately following any termination of Employee's employment by Company. Employee shall receive reasonable compensation for any such services so rendered. Immediately upon any termination of Employee's employment with Company, Employee shall return to Company any and all property of Company of any kind or nature whatsoever in Employee's possession, custody or control. 3.6 Option to Terminate Without Reasonable Cause If the Corporation terminates Employee's employment for any reason other than cause, Employee shall be entitled to receive the following severance benefits, which shall then cause, Employee shall be entitled to receive the following severance benefits, which shall satisfy all of the Corporation's liabilities to Employee for any claims related to such termination. (a) a continuation of his base compensation for a period of one (1) year after the date of termination; and (b) during any such period that he is receiving a continuation of his salary. Employee shall also receive medical coverage for himself and his dependents and life insurance for himself, all at a level equivalent (or as nearly equivalent as practicable) to the benefits he was receiving immediately prior to his termination. (Employee agrees to cooperate with the Corporation to facilitate its provision of such benefits to Employee at the lowest reasonable cost.) No vacation benefits shall accrue during any such period. In any such case, Employee's continued salary payments shall be made in accordance with the Corporation's then existing payroll policies. (c) During any period that his salary is continued in accordance with Section 3.6, Employee agrees to advise and consult with the Corporation's officers and directors with respect to the Corporation affairs if requested to do so. 3.7 Option to Terminate Upon Change in Control In the event of a merger or sale, or in the event a third party obtains majority control of the Company, Gagnier shall have the option to terminate his employment and shall be entitled to receive a severance payment equal to one time his annual base salary in effect at that time. 4 5 Gagnier shall have this option for up to 180 days after said change of control occurs and must notify the Company in writing 60 days prior to his decision to terminate based upon said change of control. 3.8 Option of Employee to Terminate Employment If Employee terminates his employment with the Corporation, or his employment is terminated by the Corporation for cause, the Corporation's obligation to provide Employee with compensation and employment benefits shall cease upon the effective date of such termination and employee shall not be entitled to receive any severance payments, or any other payments or reimbursements, in connection with such termination. Section 4. Business Properties. 4.1 Business Properties. Other than as required to perform his duties in accordance with this Agreement and for purposes of furthering the business of Eltron, Gagnier shall not use or cause to be used any customer lists, trade secrets or any other confidential business information by him as a result of his employment or relationship to Eltron or any affiliate of Eltron. 4.2 Revealing of Trade Secrets, etc. Gagnier acknowledges the interest of Eltron in maintaining the confidentiality of information related to its business and shall not at any time during the Employment Term or thereafter, directly or indirectly, reveal or cause to be revealed to any person or entity the production processes, inventions, formulae, trade secrets, customer lists or other confidential business information obtained by him as a result of his employment or relationship with Eltron or any affiliate of Eltron, except when authorized in writing to do so by the Board of Directors of Eltron provided, however, that the parties acknowledge that it is not the intent of this Section 4.2 to include within its subject matter (i) information not proprietary to Eltron, or (ii) information which is in the public domain. 4.3 Non-Competition. During the Employment Term and for a period of one (1) year thereafter. Gagnier shall not (a) (i) compete with Eltron in the Territory (as hereinafter defined) in the conduct of its business as a manufacturer of bar code printers and related accessories or in the conduct of any other business carried on by Eltron, or (ii) engage or participate, directly or indirectly, in any business or businesses substantially similar to the business as conducted by Eltron as of the date of this agreement or as may thereafter be conducted by Eltron at any time during the Employment Term, (b) solicit or cause to be solicited within or without the Territory any customers of Eltron, or (c) recruit or cause any other person to recruit any employee of Eltron to any of said business or businesses. Section 5. Invention. 5.1 Assignment. Without further consideration Gagnier shall fully and promptly report to Eltron all ideas, concepts, inventions, discoveries, formulae and designs conceived or produced by Gagnier at any time during the Employment Term, whether alone or with others and whether patentable or unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to the business of Eltron as conducted at any time or at any time during the employment Term, and shall assign and 5 6 hereby does assign to Eltron or its nominee Gagnier's entire right, title and interest in and to all such Inventions. 5.2 Cooperation. Gagnier shall take all reasonable action requested by Eltron to protect or obtain title to any and all United States and/or foreign patents on any such Inventions, including execution and delivery of all applications, assignments and other documents deemed necessary or desirable by Eltron, provided Gagnier is reimbursed for reasonable expenses incurred by Gagnier in connection with such execution and delivery. Section 6. Miscellaneous. 6.1 Remedies. The parties acknowledge that any breach, violation or evasion by Gagnier of the terms of this Agreement will result in immediate and irreparable injury and harm to Eltron, and will cause damage to Eltron in amounts difficult to ascertain. Accordingly, Eltron shall be entitled to the remedies of injunction and specific performance, or either of such remedies, as well as to all other legal or equitable remedies to which Eltron may be entitled, including, without limitation, termination of the Employment Term and this Agreement. Any breach, violation or evasion by Eltron of the terms of this Agreement will result in immediate and irreparable injury and harm to Gagnier, and shall entitle him to all legal or equitable remedies to which Gagnier may be entitled. 6.2 Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a) "Engage or participate in any business" referred to in Section 4.3 hereof shall by deemed to mean engaging or participating in any business or businesses; directly or indirectly, whether for his own account or for that of any other person, firm or corporation, and whether as a stockholder (except as a stockholder in a publicly-held corporation with more that 500 holders of common stock of which Gagnier owns less than 1% of the outstanding securities of any class), principal, agent proprietor, partner, officer, director, employee or consultant, or in any other capacity; (b) "Territory" shall mean any domestic or foreign jurisdiction in which Eltron or any affiliate or subsidiary of Eltron, as of the date of the Agreement or any time during the Employment Term, has conducted any part of its business, whether design, development, engineering, manufacturing, sale, distribution or servicing of its products or other marketing operations. 6.3 Notices Any notice or other communications required or permitted to be given to the parties hereto shall be deemed to have been given when received addressed as follows (or at such other address as the party addressed may have substituted by notice pursuant to this Section 6.3): (a) If to Eltron: Eltron International, Inc. 41 Moreland Road Simi Valley, CA 93065 6 7 Attention: Chairman/CEO (b) If to Gagnier: Hugh Gagnier 4703 Vesper Ave. Sherman Oaks, CA 91403 6.4 Heading The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement or as in any way limiting or amplifying the terms and provisions hereof. 6.5 Governing Law. The Agreement, shall in all respect, be interpreted, construed and governed by and in accordance with the law of the State of California. 6.6 Severability In case this Agreement or any one or more of the provision hereof shall be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions shall not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein and there shall be deemed substituted such other provision as will most nearly accomplish the intent of the parties to the extent permitted by applicable law. 6.7 Whole Agreement. This Agreement embodies all the representations, warranties, covenants and agreement of the parties in relation to the subject matter hereof, and no representations, warranties, covenants, understandings or agreement, or otherwise, in relation thereto exist between the parties, or in an instrument in writing signed by the party to be bound thereby which makes reference to this Agreement. 6.8 No Rights in Third Parties. Nothing herein expressed or implied is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their respective successors and assigns or personal representatives, any rights or remedies under or by reason of this Agreement. 6.9 Assignment. Except as provided by section 3.3 to this Agreement, Eltron may assign its rights and delegate its responsibilities under this Agreement to any affiliated company or to any corporation which acquires all or substantially all of the operating assets of Eltron by merger, consolidation, dissolution, liquidation, combination, sale or transfer or assets or otherwise. Except as herein before provided neither of the parties hereto may assign any rights or obligations under this Agreement. 6.10 Amendment. 7 8 The Agreement may not be amended orally but only by an instrument in writing duly executed by the parties hereto. 6.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. ELTRON INTERNATIONAL, INC. \s\Hugh Gagnier By \s\ Donald K. Skinner - -------------------------- --------------------------------- Hugh Gagnier Donald K. Skinner Chairman/CEO By \s\Robert G. Bartizal -------------------------------- Robert G. Bartizal Compensation Committee By \s\George L. Bragg -------------------------------- George L. Bragg Compensation Committee By \s\ William R. Hoover -------------------------------- William R. Hoover Compensation Committee 8 9 APPENDIX 'A' The following defines the criteria to be used for allocating the 1997 bonus program to Hugh Gagnier: 1. MOST IMPORTANT TASKS: (MIT) Gagnier shall be entitled to receive a maximum bonus equal to 75% of his quarterly salary. MIT's will be created, by Gagnier and approved by the Chairman/CEO and the Compensation Committee of the Board of Directors, prior to the beginning of each quarter. Each task will be assigned a numerical weighting for bonus allotment. At the end of each quarter, MIT's will be reviewed by Gagnier and the Chairman/CEO and the Compensation Committee of the Board of Directors to assess task completion and to complete the amount of bonus to be awarded. 9 EX-10.4 4 EXHIBIT 10.4 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT WITH PATRICE FOLIARD This EMPLOYMENT AGREEMENT ("Agreement") dated as of January 01, 1997 ("Effective Date"), between Patrice FOLIARD ("FOLIARD") an individual residing at 3091 Calvert Court, Camarillo, California 93012 and Eltron International, Inc. ("Eltron"), a California corporation. WITNESSETH: WHEREAS, Eltron desires to retain FOLIARD as a Senior Executive of Eltron and FOLIARD desires to perform such duties, This agreement replaces all previous employment agreements between Eltron and FOLIARD. NOW, THEREFORE, it is mutually agreed by among the parties as follows: Section 1. Employment, Term and Duties 1.1 Employment Upon the terms and subject to the conditions and contained herein, during the Employment Term (as hereinafter defined), Eltron hereby employs FOLIARD as a Senior Executive Officer of Eltron. FOLIARD shall report directly to the Chairman/CEO of Eltron. FOLIARD hereby accepts such employment, and during the Employment Term shall devote his full business time, skill, energy and attention to the business of Eltron, and shall perform his duties in a diligent, trustworthy, loyal, businesslike and efficient manner all for the purpose of advancing the business of Eltron. 1.2 Employment Term. The Employment Term shall commence on the Effective Date, and, unless extended by mutual agreement of the parties hereto or sooner terminated or canceled pursuant to Section 3.2 hereof, shall terminate and expire on the 1st annual anniversary of the Effective Date provided; however, that for purposes of Section 4.3 hereof the Employment Term shall be deemed to be 1 year. 1.3 Duties and Responsibilities FOLIARD shall serve Eltron initially as its Senior Vice President of Sales and Marketing. FOLIARD agrees to observe and comply with the policies, procedures and rules of Eltron regarding performance of his specific duties and the duties of Eltron employees in general. FOLIARD specifically covenants, warrants and represents to Eltron that he has the full, complete and entire right and authority to enter into this Agreement that he has no agreement, duty, commitment or responsibility of any kind or nature whatsoever with any other party, person or entity which would conflict in any manner whatsoever with any of his obligations to Eltron under this Agreement, and that he is fully ready, willing and able to perform each and all duties and responsibilities set forth in this Agreement. Section 2. Compensation 2.1 Base Salary During the first year of the Employment Term Eltron shall pay, and FOLIARD shall be entitled to receive from Eltron, a base salary for full-time employment referred to in Section 1 hereof, compensation at the rate of $115,000 per year, payable in equal bi-weekly installments. Eltron 1 2 shall make all deductions, withholdings and/or payments that are required by law from the gross sums payable to FOLIARD pursuant to the provisions of this Section. 2.2 Adjustment During the Employment Term, the base salary and bonus FOLIARD is entitled to receive will be reviewed each December by the Compensation Committee of the Board of Directors and adjusted effective January 1 of the coming year. The salary and incentive bonus adjustment FOLIARD is entitled to receive will be determined at the sole discretion of the Compensation Committee. 2.3 Additional Compensation An incentive bonus shall be payable to FOLIARD. The incentive bonus shall be an amount not exceeding 75% of FOLIARD's base salary for FY 97. The bonus FOLIARD shall be entitled to receive will be based on the audited financial statements of the Company, and will be calculated based on the criteria found in Appendix A. In the event that either the nature of the Company changes by virtue of a merger, acquisition or similar event or if FOLIARD is called upon to serve in a substantially different role by the Company, the Bonus criteria will be reviewed and revised to reflect such terms as are mutually acceptable to both FOLIARD and the Compensation Committee of the Company's Board of Directors. 2.4 Incentive Stock Option Plan FOLIARD shall be eligible to participate in Eltron's Incentive Stock Option Plans. 2.5 Expenses Eltron shall reimburse FOLIARD for all ordinary and necessary expenses incurred and paid by him in the course of the performance of his duties pursuant to this Agreement and consistent with Eltron's policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to Eltron's requirements with respect to the manner of reporting such expenses. Eltron shall continue in effect (or substitute on a comparable basis) the major medical, hospitalization, life, travel, accident and disability insurance policies covering FOLIARD and/or his eligible dependents. Section 3. Termination. 3.1 Termination. Eltron shall have the right to terminate the Employment Term for Reasonable Cause (as hereinafter defined) or in the event FOLIARD suffers an illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more than (90) consecutive days in any one year or upon the death of FOLIARD. Notwithstanding anything to the contrary set forth in this Agreement, FOLIARD's obligations and covenants set forth in Sections 4 and 5 hereof shall survive the termination of this Agreement. 3.2 Termination of Employment for Cause Eltron may at time during the term of this Agreement, by written notice, terminate the employment of FOLIARD for cause. In such event, FOLIARD shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by FOLIARD to Eltron up to and including the date of termination of the employment of FOLIARD, but under no circumstances whatsoever shall FOLIARD be entitled to receive any other compensation of any kind or nature whatsoever, including without limitation, for any 2 3 period of time after the date of the termination of the employment of FOLIARD. The following shall be deemed to constitute the types of acts or conduct which shall constitute grounds for termination of FOLIARD's employment for cause by written notice pursuant to this Agreement: (a) The commission by FOLIARD of any serious felony. (b) Any breach by FOLIARD of any material term, provision or covenant contained in this Agreement and the failure of FOLIARD to cure the same within a reasonable period of time not to exceed sixty (60) days of receipt of written notice of such failure (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) and the demand that the same be cured; (c) The persistent and willful failure, neglect, inability or refusal of Employee to perform his duties and responsibilities under this Agreement and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured; or (d) Any material breach by Employee of any of Company's material policies, practices, rules and/or regulations and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured. 3.3 Disability If, during the Employment Term, Employee becomes disabled due to illness, injury or similar cause in such a manner that he is unable fully to perform his duties pursuant to this Agreement, he shall be entitled upon certification of such disability by a physician of Company's choice to a leave of absence from Company for the duration of such disability as certified by such physician up to but not exceeding the expiration of a period of one (1) year or until the end of the Employment Term of this Agreement, whichever first occurs. Such period not to exceed one (1) year shall be integrated with the existing Company disability policy provided; however, in no event shall Employee receive disability income coverage beyond the period of one (1) year except to the extent provided in the Company's existing disability policy. Employee's salary as provided in this Agreement, including the Base Salary and the additional Compensation, shall continue to be paid by the Company during any such leave of absence not to exceed one (1) year provided, however, that if Employee receives any payment or payments on account of such disability from any employer-provided, governmental, employee-provided or other program or programs of disability insurance attributable to the one (1) year leave of absence, or when appropriate, such shorter time period Company shall be obligated to pay to Employee only the difference, if any, between the salary provided to Employee by the Company pursuant to this Agreement for the applicable period and the total amount of disability insurance payments payable to Employee through or by any such program or programs of disability insurance attributable to the same applicable period. If Employee's absence because of disability continues for more than one (1) year and the term of this Agreement has not expired, Company shall have the full and unrestricted right, in its sole and exclusive discretion, immediately to terminate Employee's employment by Company. 3.4 Death of Employee 3 4 In the event of the death of Employee during the term of this Agreement, this Agreement shall immediately terminate, and Employee's estate shall be entitled to receive any unpaid amounts of base salary and additional compensation for services provided by Employee to Company up to and including the date of Employee's death and an additional payment equal to the aggregate of Employee's base salary and additional compensation during his last full year of employment by Company, but under no circumstances whatsoever shall Employee's estate be entitled to receive any other compensation of any kind or nature whatsoever for any period of time after the date of Employee's death. 3.5 Duties of Employee After Termination of Employment Following any termination of Employee's employment with Company, Employee shall fully cooperate with Company in all matters relating to the winding up of his pending work on behalf of Company and the orderly transfer of any such pending work and of his duties and responsibilities for Company to such other employees of Company as may be designated by Company. Company shall be entitled to such full-time or part-time services of Employee as Company may reasonably require during all or any part of the thirty (30) day period, Saturdays, Sundays and federal holidays excepted, immediately following any termination of Employee's employment by Company. Employee shall receive reasonable compensation for any such services so rendered. Immediately upon any termination of Employee's employment with Company, Employee shall return to Company any and all property of Company of any kind or nature whatsoever in Employee's possession, custody or control. 3.6 Option to Terminate Without Reasonable Cause If the Corporation terminates Employee's employment for any reason other than cause, Employee shall be entitled to receive the following severance benefits, which shall then cause, Employee shall be entitled to receive the following severance benefits, which shall satisfy all of the Corporation's liabilities to Employee for any claims related to such termination. (a) a continuation of his base compensation for a period of one (1) year after the date of termination; and (b) during any such period that he is receiving a continuation of his salary. Employee shall also receive medical coverage for himself and his dependents and life insurance for himself, all at a level equivalent (or as nearly equivalent as practicable) to the benefits he was receiving immediately prior to his termination. (Employee agrees to cooperate with the Corporation to facilitate its provision of such benefits to Employee at the lowest reasonable cost.) No vacation benefits shall accrue during any such period. In any such case, Employee's continued salary payments shall be made in accordance with the Corporation's then existing payroll policies. (c) During any period that his salary is continued in accordance with Section 3.6, Employee agrees to advise and consult with the Corporation's officers and directors with respect to the Corporation affairs if requested to do so. 3.7 Option to Terminate Upon Change in Control In the event of a merger or sale, or in the event a third party obtains majority control of the Company, FOLIARD shall have the option to terminate his employment and shall be entitled to receive a severance payment equal to one time his annual base salary in effect at that time. 4 5 FOLIARD shall have this option for up to 180 days after said change of control occurs and must notify the Company in writing 60 days prior to his decision to terminate based upon said change of control. 3.8 Option of Employee to Terminate Employment If Employee terminates his employment with the Corporation, or his employment is terminated by the Corporation for cause, the Corporation's obligation to provide Employee with compensation and employment benefits shall cease upon the effective date of such termination and employee shall not be entitled to receive any severance payments, or any other payments or reimbursements, in connection with such termination. Section 4. Business Properties. 4.1 Business Properties. Other than as required to perform his duties in accordance with this Agreement and for purposes of furthering the business of Eltron, FOLIARD shall not use or cause to be used any customer lists, trade secrets or any other confidential business information by him as a result of his employment or relationship to Eltron or any affiliate of Eltron. 4.2 Revealing of Trade Secrets, etc. FOLIARD acknowledges the interest of Eltron in maintaining the confidentiality of information related to its business and shall not at any time during the Employment Term or thereafter, directly or indirectly, reveal or cause to be revealed to any person or entity the production processes, inventions, formulae, trade secrets, customer lists or other confidential business information obtained by him as a result of his employment or relationship with Eltron or any affiliate of Eltron, except when authorized in writing to do so by the Board of Directors of Eltron provided, however, that the parties acknowledge that it is not the intent of this Section 4.2 to include within its subject matter (i) information not proprietary to Eltron, or (ii) information which is in the public domain. 4.3 Non-Competition. During the Employment Term and for a period of one (1) year thereafter. FOLIARD shall not (a) (i) compete with Eltron in the Territory (as hereinafter defined) in the conduct of its business as a manufacturer of plastic card printers and related accessories or in the conduct of any other business carried on by Eltron, or (ii) engage or participate, directly or indirectly, in any business or businesses substantially similar to the business as conducted by Eltron as of the date of this agreement or as may thereafter be conducted by Eltron at any time during the Employment Term, (b) solicit or cause to be solicited within or without the Territory any customers of Eltron, or (c) recruit or cause any other person to recruit any employee of Eltron to any of said business or businesses. Section 5. Invention. 5.1 Assignment. Without further consideration FOLIARD shall fully and promptly report to Eltron all ideas, concepts, inventions, discoveries, formulae and designs conceived or produced by FOLIARD at any time during the Employment Term, whether alone or with others and whether patentable or unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to the business of 5 6 Eltron as conducted at any time or at any time during the employment Term, and shall assign and hereby does assign to Eltron or its nominee FOLIARD's entire right, title and interest in and to all such Inventions. 5.2 Cooperation. FOLIARD shall take all reasonable action requested by Eltron to protect or obtain title to any and all United States and/or foreign patents on any such Inventions, including execution and delivery of all applications, assignments and other documents deemed necessary or desirable by Eltron, provided FOLIARD is reimbursed for reasonable expenses incurred by FOLIARD in connection with such execution and delivery. Section 6. Miscellaneous. 6.1 Remedies. The parties acknowledge that any breach, violation or evasion by FOLIARD of the terms of this Agreement will result in immediate and irreparable injury and harm to Eltron, and will cause damage to Eltron in amounts difficult to ascertain. Accordingly, Eltron shall be entitled to the remedies of injunction and specific performance, or either of such remedies, as well as to all other legal or equitable remedies to which Eltron may be entitled, including, without limitation, termination of the Employment Term and this Agreement. Any breach, violation or evasion by Eltron of the terms of this Agreement will result in immediate and irreparable injury and harm to FOLIARD, and shall entitle him to all legal or equitable remedies to which FOLIARD may be entitled. 6.2 Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a) "Engage or participate in any business" referred to in Section 4.3 hereof shall by deemed to mean engaging or participating in any business or businesses; directly or indirectly, whether for his own account or for that of any other person, firm or corporation, and whether as a stockholder (except as a stockholder in a publicly-held corporation with more that 500 holders of common stock of which FOLIARD owns less than 1% of the outstanding securities of any class), principal, agent proprietor, partner, officer, director, employee or consultant, or in any other capacity; (b) "Territory" shall mean any domestic or foreign jurisdiction in which Eltron or any affiliate or subsidiary of Eltron, as of the date of the Agreement or any time during the Employment Term, has conducted any part of its business, whether design, development, engineering, manufacturing, sale, distribution or servicing of its products or other marketing operations. 6.3 Notices Any notice or other communications required or permitted to be given to the parties hereto shall be deemed to have been given when received addressed as follows (or at such other address as the party addressed may have substituted by notice pursuant to this Section 6.3): 6 7 (a) If to Eltron: Eltron International, Inc. 41 Moreland Road Simi Valley, CA 93065 Attention: Chairman/CEO (b) If to FOLIARD: Patrice FOLIARD 3091 Calvert Court Camarillo, California 93012 6.4 Heading The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement or as in any way limiting or amplifying the terms and provisions hereof. 6.5 Governing Law. The Agreement, shall in all respect, be interpreted, construed and governed by and in accordance with the law of the State of California. 6.6 Severability In case this Agreement or any one or more of the provision hereof shall be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions shall not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein and there shall be deemed substituted such other provision as will most nearly accomplish the intent of the parties to the extent permitted by applicable law. 6.7 Whole Agreement. This Agreement embodies all the representations, warranties, covenants and agreement of the parties in relation to the subject matter hereof, and no representations, warranties, covenants, understandings or agreement, or otherwise, in relation thereto exist between the parties, or in an instrument in writing signed by the party to be bound thereby which makes reference to this Agreement. 6.8 No Rights in Third Parties. Nothing herein expressed or implied is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their respective successors and assigns or personal representatives, any rights or remedies under or by reason of this Agreement. 6.9 Assignment. Except as provided by section 3.3 to this Agreement, Eltron may assign its rights and delegate its responsibilities under this Agreement to any affiliated company or to any corporation which acquires all or substantially all of the operating assets of Eltron by merger, consolidation, dissolution, liquidation, combination, sale or transfer or assets or otherwise. Except as herein 7 8 before provided neither of the parties hereto may assign any rights or obligations under this Agreement. 6.10 Amendment. The Agreement may not be amended orally but only by an instrument in writing duly executed by the parties hereto. 6.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. ELTRON INTERNATIONAL, INC. By /s/ Patrice Foliard ------------------------------- Patrice Foliard By /s/ Donald K. Skinner ---------------------------------- Donald K. Skinner Chairman/CEO By /s/ Robert G. Bartizal ---------------------------------- Robert G. Bartizal Compensation Committee By /s/ George L. Bragg ---------------------------------- George L. Bragg Compensation Committee By /s/ William R. Hoover ---------------------------------- William R. Hoover Compensation Committee 9 APPENDIX 'A' The following defines the criteria to be used for allocating the 1997 bonus program to Patrice FOLIARD: 1. MOST IMPORTANT TASKS: (MIT) FOLIARD shall be entitled to receive a maximum bonus equal to 75% of his quarterly salary. MIT's will be created, by FOLIARD and approved by the Chairman/CEO and the Compensation Committee of the Board of Directors, prior to the beginning of each quarter. Each task will be assigned a numerical weighting for bonus allotment. At the end of each quarter, MIT's will be reviewed by FOLIARD and the Chairman/CEO and the Compensation Committee of the Board of Directors to assess task completion and to complete the amount of bonus to be awarded. The recommended bonus will be further reviewed by the compensation committee of the Board of Directors. 9 EX-10.5 5 EXHIBIT 10.5 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT WITH DANIEL C. TOOMEY, JR This EMPLOYMENT AGREEMENT ("Agreement") dated as of January 1, 1997 ("Effective Date"), between Daniel C. Toomey, Jr. ("Toomey") an individual residing at 15509 Harte Lane Moorpark, California 93021, and Eltron International, Inc. ("Eltron"), a California corporation. WITNESSETH: WHEREAS, Eltron desires to retain Toomey as a senior executive of Eltron and Toomey desires to perform such duties, This agreement replaces all previous employment agreements between Eltron and Toomey. NOW, THEREFORE, it is mutually agreed by among the parties as follows: Section 1. Employment, Term and Duties 1.1 Employment Upon the terms and subject to the conditions and contained herein, during the Employment Term (as hereinafter defined), Eltron hereby employs Toomey as a senior executive officer of Eltron. Toomey shall report directly to the President of Eltron. Toomey hereby accepts such employment and, during the Employment Term shall devote his fill business time, skill, energy and attention to the business of Eltron, and shall perform his duties in a diligent, trustworthy, loyal, businesslike and efficient manner, all for the purpose of advancing the business of Eltron. 1.2 Employment Term. The Employment Term shall commence on the Effective Date and, unless extended by mutual agreement of the parties hereto, or sooner terminated or canceled pursuant to Section 3.2 hereof, shall terminate and expire on the 1st annual anniversary of the Effective Date, provided however, that for purposes of Section 4.3 hereof, the Employment Term shall be deemed to be 1 year. 1.3 Duties and Responsibilities Toomey shall serve Eltron initially as its Vice President of Finance and shall have the duties and responsibilities of its Chief Financial Officer. Toomey agrees to observe and comply with the policies, procedures and rules of Eltron regarding performance of his specific duties and the duties of Eltron employees in general. Toomey specifically covenants, warrants and represents to Eltron that he has the full, complete and entire right and authority to enter into this Agreement, that he has no agreement, duty, commitment or responsibility of any kind or nature whatsoever with any other party, person or entity which would conflict in any manner whatsoever with any of his obligations to Eltron under this Agreement, and that he is fully ready, willing and able to perform each and all duties and responsibilities set forth in this Agreement. Section 2. Compensation 2.1 Base Salary During the first year of the Employment Term the Eltron shall pay, and Toomey shall be entitled to receive from Eltron, a base salary for full-time employment referred to in Section 1 hereof, compensation at the rate of $115,000 per year, payable in equal bi-weekly installments. Eltron shall make all deductions, withholdings and/or payments that are required by law from the gross sums payable to Toomey pursuant to the provisions of this Section. 1 2 2.2 Adjustment During the Employment Term, the base salary and bonus Toomey is entitled to receive will be reviewed each December by the Compensation Committee of the Board of Directors and adjusted effective January 1 of the coming year. The salary and incentive bonus adjustment Toomey is entitled to receive will be determined at the sole discretion of the Compensation Committee. 2.3 Additional Compensation An incentive bonus shall be payable to Toomey. The incentive bonus shall be an amount not exceeding 50% of Toomey's base salary for FY 97. The bonus Toomey shall be entitled to receive will be based on the audited financial statements of the Company and will be calculated based on the criteria found in Appendix A. In the event that either the nature of the Company changes by virtue of a merger, acquisition or similar event or if Toomey is called upon to serve in a substantially different role by the Company, the Bonus criteria will be reviewed and revised to reflect such terms as are mutually acceptable to both Toomey and the Compensation Committee of the Company's Board of Directors. 2.4 Incentive Stock Option Plan Toomey shall be eligible to participate in Eltron's Incentive Stock Option Plans. 2.5 Expenses Eltron shall reimburse Toomey for all ordinary and necessary expenses incurred and paid by him in the course of the performance of his duties pursuant to this Agreement and consistent with Eltron's policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to Eltron's requirements with respect to the manner of reporting such expenses. Eltron shall continue in effect (or substitute on a comparable basis) the major medical, hospitalization, life, travel, accident and disability insurance policies covering Toomey and/or his eligible dependents. Eltron shall reimburse Toomey for the fees and continuing education expenses required to maintain his status as a Certified Public Accountant in an amount not to exceed $800 per annum. Section 3. Termination. 3.1 Termination. Eltron shall have the right to terminate the Employment Term for Reasonable Cause (as hereinafter defined) or in the event Toomey suffers an illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more than (90) consecutive days in any one year or upon the death of Toomey. Notwithstanding anything to the contrary set forth in this Agreement, Toomey's obligations and covenants set forth in Sections 4 and 5 hereof shall survive the termination of this Agreement. 3.2 Termination of Employment for Cause Eltron may at time during the term of this Agreement, by written notice, terminate the employment of Toomey for cause. In such event, Toomey shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by Toomey to Eltron up to and including the date of termination of the employment of Toomey, but under no circumstances whatsoever shall Toomey be entitled to receive any other compensation of any 2 3 kind or nature whatsoever, including, without limitation, for any period of time after the date of the termination of the employment of Toomey. The following shall be deemed to constitute the types of acts or conduct which shall constitute grounds for termination of Toomey's employment for cause by written notice pursuant to this Agreement: (a) The commission by Toomey of any serious felony. (b) Any breach by Toomey of any material term, provision or covenant contained in this Agreement and the failure of Toomey to cure the same within a reasonable period of time not to exceed sixty (60) days of receipt of written notice of such failure (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) and the demand that the same be cured; (c) The persistent and willful failure, neglect, inability or refusal of Employee to perform his duties and responsibilities under this Agreement and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured; or (d) Any material breach by Employee of any of Company's material policies, practices, rules and/or regulations and the failure to cure the same within fifteen (15) days of receipt of written notice (which notice must state specifically and precisely what action or inaction by the Employee constitutes the breach and what Employee must do or not do to correct the breach) of such failure and the demand that the same be cured. 3.3 Disability If, during the Employment Term, Employee becomes disabled due to illness, injury or similar cause in such a manner that he is unable fully to perform his duties pursuant to this Agreement, he shall be entitled upon certification of such disability by a physician of Company's choice to a leave of absence from Company for the duration of such disability as certified by such physician up to but not exceeding the expiration of a period of one (1) year or until the end of the Employment Term of this Agreement, whichever first occurs. Such period of not to exceed one (1) year shall be integrated with the existing Company disability policy; provided, however, in no event shall Employee receive disability income coverage beyond the period of one (1) year except to the extent provided in the Company's existing disability policy. Employee's salary as provided in this Agreement, including the Base Salary and the additional Compensation, shall continue to be paid by the Company during any such leave of absence not to exceed one (1) year, provided, however, that if Employee receives any payment or payments on account of such disability from any employer-provided, governmental, employee-provided or other program or programs of disability insurance attributable to the one (1) year leave of absence, or, when appropriate, such shorter time period, Company shall be obligated to pay to Employee only the difference, if any, between the salary provided to Employee by the Company pursuant to this Agreement for the applicable period and the total amount of disability insurance payments payable to Employee through or by any such program or programs of disability insurance attributable to the same applicable period. If Employee's absence because of disability continues for more than one (1) year and the term of this Agreement has not expired, Company shall have the full and unrestricted right, in its sole and exclusive discretion, immediately to terminate Employee's employment by Company. 3.4 Death of Employee 3 4 In the event of the death of Employee during the term of this Agreement, this Agreement shall immediately terminate, and Employee's estate shall be entitled to receive any unpaid amounts of Base Salary and Additional Compensation for services provided by Employee to Company up to and including the date of Employee's death and an additional payment equal to the aggregate of Employee's Base Salary and Additional Compensation during his last full year of employment by Company, but under no circumstances whatsoever shall Employee's estate be entitled to receive any other compensation of any kind or nature whatsoever for any period of time after the date of Employee's death. 3.5 Duties of Employee After Termination of Employment Following any termination of Employee's employment with Company, Employee shall fully cooperate with Company in all matters relating to the winding up of his pending work on behalf of Company and the orderly transfer of any such pending work and of his duties and responsibilities for Company to such other employees of Company as may be designated by Company. Company shall be entitled to such full-time or part-time services of Employee as Company may reasonably require during all or any part of the thirty (30) day period, Saturdays, Sundays and federal holidays excepted, immediately following any termination of Employee's employment by Company. Employee shall receive reasonable compensation for any such services so rendered. Immediately upon any termination of Employee's employment with Company, Employee shall return to Company any and all property of Company of any kind or nature whatsoever in Employee's possession, custody or control. 3.6 Option to Terminate Without Reasonable Cause If the Corporation terminates Employee's employment for any reason other than cause. Employee shall be entitled to receive the following severance benefits, which shall than cause, Employee shall be entitled to receive the following severance benefits, which shall satisfy all of the Corporation's liabilities to Employee for any claims related to such termination. (a) a continuation of his base compensation for a period of one (1) year after the date of termination; and (b) during any such period that he is receiving a continuation of his salary. Employee shall also receive medical coverage for himself and his dependents and life insurance for himself, all at a level equivalent (or as nearly equivalent as practicable) to the benefits he was receiving immediately prior to his termination. (Employee agrees to cooperate with the Corporation to facilitate its provision of such benefits to Employee at the lowest reasonable cost.) No vacation benefits shall accrue during any such period. In any such case, Employee's continued salary payments shall be made in accordance with the Corporation's then existing payroll policies. (c) During any period that his salary is continued in accordance with Section 3.6, Employee agrees to advise and consult with the Corporation's officers and directors with respect to the Corporation affairs if requested to do so. 3.7 Option to Terminate Upon Change in Control In the event of a merger or sale, or in the event a third party obtains majority control of the Company, Toomey shall have the option to terminate his employment and shall be entitled to receive a severance payment equal to one time his annual base salary in effect at that time. Toomey shall have this option for up to 180 days after said change of control occurs and must notify the Company in writing 60 days prior to his decision to terminate based upon said change of control. 4 5 3.8 Option of Employee to Terminate Employment If Employee terminates his employment with the Corporation, or his employment is terminated by the Corporation for cause, the Corporation's obligation to provide Employee with compensation and employment benefits shall cease upon the effective date of such termination and employee shall not be entitled to receive any severance payments, or any other payments or reimbursements, in connection with such termination. Section 4. Business Properties. 4.1 Business Properties. Other than as required to perform his duties in accordance with this Agreement and for purposes of furthering the business of Eltron, Toomey shall not use or cause to be used any customer lists, trade secrets or any other confidential business information by him as a result of his employment or relationship to Eltron or any affiliate of Eltron. 4.2 Revealing of Trade Secrets, etc. Toomey acknowledges the interest of Eltron in maintaining the confidentiality of information related to its business an shall not at any time during the Employment Term or thereafter, directly or indirectly, reveal or cause to be revealed to any person or entity the production processes, inventions, formulae, trade secrets, customer lists or other confidential business information obtained by him as a result of his employment or relationship with Eltron or any affiliate of Eltron, except when authorized in writing to do so by the Board of Directors of Eltron; provided, however, that the parties acknowledge that it is not the intent of this Section 4.2 to include within its subject matter (i) information not proprietary to Eltron, or (ii) information which is in the public domain. 4.3 Non-Competition. During the Employment Term and for a period of one (1) year thereafter. Toomey shall not (a) (i) compete with Eltron, in the Territory (as hereinafter defined) in the conduct of its business as a manufacturer of bar code printers and related accessories or in the conduct of any other business carried on by Eltron, or (ii) engage or participate, directly or indirectly, in any business or businesses substantially similar to the business as conducted by Eltron as of the date of this agreement or as may thereafter be conducted by Eltron at any time during the Employment Term, (b) solicit or cause to be solicited within or without the Territory any customers of Eltron, or (c) recruit or cause any other person to recruit any employee of Eltron to any of said business or businesses. Section 5. Invention. 5.1 Assignment. Without further consideration Toomey shall fully and promptly report to Eltron all ideas, concepts, inventions, discoveries, formulae and designs conceived or produced by Toomey at any time during the Employment Term, whether alone or with others and whether patentable or unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to the business of Eltron as conducted at any time or at any time during the employment Term, and shall assign and hereby does assign to Eltron or its nominee Toomey's entire right, title and interest in and to all such Inventions. 5 6 5.2 Cooperation. Toomey shall take all reasonable action requested by Eltron to protect or obtain title to any and all United States and/or foreign patents on any such Inventions, including execution and delivery of all applications, assignments and other document deemed necessary or desirable by Eltron, provided Toomey is reimbursed for reasonable expenses incurred by Toomey in connection with such execution and delivery. Section 6. Miscellaneous. 6.1 Remedies. The parties acknowledge that any breach, violation or evasion by Toomey of the terms of this Agreement will result in immediate and irreparable injury and harm to Eltron, and will cause damage to Eltron in amounts difficult to ascertain. Accordingly, Eltron shall be entitled to the remedies of injunction and specific performance, or either of such remedies, as well as to all other legal or equitable remedies to which Eltron may be entitled, including, without limitation, termination of the Employment Term and this Agreement. Any breach, violation or evasion by Eltron of the terms of this Agreement will result in immediate and irreparable injury and harm to Toomey, and shall entitle him to all legal or equitable remedies to which Toomey may be entitled. 6.2 Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a) "Engage or participate in any business" referred to in Section 4.3 hereof shall by deemed to mean engaging or participating in any business or businesses; directly or indirectly, whether for his own account or for that of any other person, firm or corporation, and whether as a stockholder (except as a stockholder in a publicly-held corporation with more that 500 holders of common stock of which Toomey owns less that 1% of the outstanding securities of any class), principal, agent proprietor, partner, officer, director, employee or consultant, or in any other capacity; (b) "Territory" shall mean any domestic or foreign jurisdiction in which Eltron or any affiliate or subsidiary of Eltron, as of the date of the Agreement or any time during the Employment Term, has conducted any part of its business, whether design, development engineering, manufacturing, sale, distribution or servicing of its products or other marketing operations. 6.3 Notices. Any notice or other communications required or permitted to be given to the parties hereto shall be deemed to have been given when received, addressed as follows (or at such other address as the party addressed may have substituted by notice pursuant to this Section 6.3): (a) If to Eltron: Eltron International, Inc. 41 Moreland Road Simi Valley, California 93065 Attention: Chairman/CEO (b) If to Toomey: 6 7 Dan Toomey 15509 Harte Lane Moorpark, California 93021 6.4 Heading. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement or as in any way limiting or amplifying the terms and provisions hereof. 6.5 Governing Law. The Agreement shall in all respect be interpreted, construed and governed by and in accordance with the law of the State of California. 6.6 Severability. In case this Agreement, or any one or more of the provision hereof, shall be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions shall not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein and there shall be deemed substituted such other provision as will most nearly accomplish the intent of the parties to the extent permitted by applicable law. 6.7 Whole Agreement. This Agreement embodies all the representations, warranties, covenants and agreement of the parties in relation to the subject matter hereof, and no representations, warranties, covenants, understandings or agreement, or otherwise, in relation thereto exist between the parties, or in an instrument in writing signed by the party to be bound thereby which makes reference to this Agreement. 6.8 No Rights in Third Parties. Nothing herein expressed or implied is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their respective successors and assigns or personal representatives, any rights or remedies under or by reason of this Agreement. 6.9 Assignment. Except as provided by section 3.3 to this Agreement, Eltron may assign its rights and delegate its responsibilities under this Agreement to any affiliated company or to any corporation which acquires all or substantially all of the operating assets of Eltron by merger, consolidation, dissolution, liquidation, combination, sale or transfer or assets or otherwise. Except as herein before provided neither of the parties hereto may assign any rights or obligations under this Agreement. 6.10 Amendment. The Agreement may not be amended orally but only by an instrument in writing duly executed by the parties hereto. 7 8 6.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. ELTRON INTERNATIONAL, INC. \s\Daniel C. Toomey, Jr. By \s\Donald K. Skinner - ------------------------------ ------------------------------------ Daniel C. Toomey, Jr. Donald K. Skinner Chairman/CEO By \s\Robert G. Bartizal ------------------------------------ Robert G. Bartizal Compensation Committee By \s\George L. Bragg ------------------------------------ George L. Bragg Compensation Committee By \s\William R. Hoover ------------------------------------ William R. Hoover Compensation Committee 8 9 APPENDIX 'A' The following defines the criteria to be used for allocating the 1997 bonus program to Daniel Toomey: 1. MOST IMPORTANT TASKS: (MIT) Toomey shall be entitled to receive a maximum bonus equal to 50% of his quarterly salary. MIT's will be created, by Toomey and approved by the Chairman/CEO and the Compensation Committee of the Board of Directors, prior to the beginning of each quarter. Each task will be assigned a numerical weighting for bonus allotment. At the end of each quarter, MIT's will be reviewed by Toomey and the Chairman/CEO and the Compensation Committee of the Board of Directors to assess task completion and to complete the amount of bonus to be awarded. 9 EX-11.1 6 EXHIBIT 11.1 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
1994 1995 1996 ------------- -------------- ------------- Net Income 3,623,204 7,119,701 7,098,556 Weighted average shares outstanding 5,681,222 6,700,890 7,226,352 Option issued within twelve months of initial public offering assumed to be cheap stock and treated as outstanding for all periods. Number of shares calculated using the treasury stock method in accordance with APB15. ---- ---- ---- Number of shares calculated using the treasury stock method in accordance with APB15 530,574 648,076 595,027 ------------- -------------- ------------- Total weighted average shares outstanding 6,211,796 7,348,966 7,821,379 EARNINGS PER SHARE $0.58 $0.97 $0.91
EX-21.1 7 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF ELTRON INTERNATIONAL, INC. 1. Donner Media, Incorporated, a Wisconsin corporation (80% owned subsidiary) 2. Privilege S.A., a French corporation 3. RJS, Inc., a California corporation 4. Eltron International, FSC, a Barbados corporation 5. Eltron Holdings Limited, a United Kingdom corporation 6. Russet Limited, a United Kingdom corporation 7. Eltron International Limited, a United Kingdom corporation 8. Eltron Singapore, a Singapore corporation EX-23.1 8 EXHIBIT 23.1 1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Eltron International, Inc. on Form S-8 (File number 33-80233) and Form S-3 (File numbers 333-2530 and 333-6157) of our report dated February 24, 1997, on our audits of the consolidated financial statements of Eltron International, Inc. as of December 31, 1996 and for the years ended December 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND LLP Sherman Oaks, California March 28, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DECEMBER 31, 1996 10-K. U.S. DOLLARS YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 1 1,291 7,945 16,783 452 16,948 44,507 10,187 2,463 54,245 9,883 811 0 0 24,238 19,313 54,245 88,510 88,510 50,171 50,171 25,025 0 0 13,314 0 0 0 0 0 7,099 .91 .91
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