SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-27376
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ELCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3175156
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 OCEANA WAY
NORWOOD, MASSACHUSETTS 02062
(781) 440-3333
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.... No.........
The registrant had 27,391,067 shares of common stock, $.01 par value,
outstanding as of May 1, 1998.
<PAGE>
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997
and March 31, 1998 (unaudited).................2
Consolidated Statements of Operations - Three Months Ended
March 31, 1997 and 1998 (unaudited)...........3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1998 (unaudited)...........4
Notes to Consolidated Financial Statements (unaudited).5
Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................6
Part II - OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. None.
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K..........................11
Signature ..........................................................11
EXHIBITS
Exhibit 27 Financial Data Schedule
Exhibit 27.1 Restated Financial Data Schedule - Quarter ended
March 31,1997
Exhibit 27.2 Restated Financial Data Schedule - Year ended
December 31, 1996
1
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
1997 1998
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 33,165 $ 36,798
Accounts receivable:
Trade ............................................................ 154,223 155,380
Other ............................................................ 32,200 36,357
--------- ---------
186,423 191,737
Less - Allowance for doubtful accounts ........................... 5,474 5,519
--------- ---------
180,949 186,218
Inventory .......................................................... 60,437 68,189
Prepaids and other current assets .................................. 3,255 3,753
--------- ---------
Total current assets ........................................ 277,806 294,958
--------- ---------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
Computer hardware and software ..................................... 22,118 24,029
Land, buildings and leasehold improvements ......................... 3,402 3,483
Furniture, fixtures and equipment .................................. 8,579 8,819
--------- ---------
34,099 36,331
Less -- Accumulated depreciation and amortization .................. 17,649 19,248
--------- ---------
16,450 17,083
--------- ---------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION ........................................................ 37,812 37,511
--------- ---------
$332,068 $349,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit .................................................... $154,714 $144,563
Accounts payable ................................................... 43,271 64,926
Accrued expenses and other current liabilities ..................... 19,557 23,459
Current portion of capital lease obligations ....................... 680 691
Current portion of long-term debt .................................. 78 79
--------- ---------
Total current ............................................... 218,300 233,718
--------- ---------
OTHER DEFERRED LIABILITIES ........................................... 2,213 2,214
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION .................... 920 752
LONG-TERM DEBT, NET OF CURRENT PORTION ............................... 332 327
--------- ---------
3,465 3,293
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; Authorized -- 10,000,000 shares --
Issued and outstanding -- None ................................. -- --
Common stock, $.01 par value
Authorized -- 50,000,000 shares --
Issued and outstanding - 27,218,239 and 27,409,338 shares....... 272 274
Additional paid-in capital ......................................... 100,726 101,070
Retained earnings .................................................. 9,369 10,741
Treasury stock, at cost 56,319 shares .............................. (549) (549)
Cumulative translation adjustment .................................. 485 1,005
--------- ---------
Total stockholders' equity .................................. 110,303 112,541
========= =========
$332,068 $349,552
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
2
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
------------------------
1997 1998
--------- ---------
Net sales ........................................ $ 176,279 $ 190,048
Cost of sales .................................... 156,077 167,894
--------- ---------
Gross profit ..................................... 20,202 22,154
Expenses:
Selling, general and administrative ............ 16,368 17,858
Research and development ....................... 275 275
--------- ---------
Total expenses ................................... 16,643 18,133
--------- ---------
Operating profit ................................. 3,559 4,021
Interest expense ................................. (1,144) (1,942)
Interest income and other, net ................... 574 171
--------- ---------
Income before income taxes ....................... 2,989 2,250
Provision for income taxes ....................... 1,027 878
--------- ---------
Net income ....................................... $ 1,962 $ 1,372
========= =========
Basic net income per share ....................... $ 0.07 $ 0.05
========= =========
Basic Weighted average shares outstanding ........ 26,739 27,230
========= =========
Diluted net income per share ..................... 0.07 $ 0.05
========= =========
Diluted weighted average shares outstanding ...... 29,519 28,802
========= =========
Other Comprehensive Income, Net of Tax:
Net income ....................................... $ 1,962 $ 1,372
Foreign currency translation adjustments ....... (375) 293
--------- ---------
Comprehensive income ............................. $ 1,587 $ 1,665
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
---------------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 1,962 $ 1,372
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization ................................... 2,243 2,326
Provision for doubtful accounts ................................. 300 320
Other deferred liabilities ...................................... 1 --
Changes in current assets and liabilities, net of acquisitions --
Accounts receivable ........................................... (39) (4,690)
Inventory ..................................................... 122 (7,473)
Prepaids and other current assets ............................. (497) (527)
Accounts payable .............................................. 15,045 20,950
Accrued expenses, other current liabilities and other ......... (11,954) 3,715
-------- --------
Net cash provided by operating activities .................. 7,183 15,993
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...................... (1,866) (2,092)
Increase in other assets and deferred costs ....................... (178) (131)
Purchase of Prophet Group ......................................... (391) --
Purchase of Data Supplies, net of cash acquired ................... (2,575) --
-------- --------
Net cash used in investing activities ....................... (5,010) (2,223)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under lines of credit ................................ (4,141) (10,583)
Repayment of capital lease obligations and long-term debt ......... (214) (165)
Exercise of common stock options .................................. 307 345
-------- --------
Net cash used in financing activities ....................... (4,048) (10,403)
-------- --------
FOREIGN EXCHANGE EFFECT ON CASH ..................................... (333) 266
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... (2,208) 3,633
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ............................................... 23,259 33,165
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 21,051 $ 36,798
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 1,172 $ 2,049
======== ========
Income taxes paid ................................................. $ 656 $ 212
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital lease obligations ............................. $ 1,339 $ --
======== ========
Acquisitions of businesses:
Fair value of assets acquired .................................. $ 6,332 $ --
Less cash paid ................................................. 1,600 --
======== ========
Liabilities assumed ........................................ $ 4,732 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ELCOM INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Elcom
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of March 31, 1998, and the results of operations and cash
flows for the periods ended March 31, 1997 and 1998. The results of operations
for these periods are not necessarily comparable to, or indicative of, results
of any other interim period or for the year as a whole. Certain financial
information that is normally included in financial statements prepared in
accordance with generally accepted accounting principles, but which is not
required for interim reporting purposes, has been omitted. For further
information, reference should be made to the consolidated financial statements
and accompanying notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and the Company's current report on Form 8-K
dated December 12, 1997, filed on March 11, 1998 concerning a change in the
Company's certifying accountant for its subsidiaries and operations domiciled in
the United Kingdom.
2. Net Income Per Share
Net income per share is based on the weighted average number of common
and common equivalent shares outstanding during each period presented,
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. This statement establishes revised
standards for computing earnings per share ("EPS") by replacing the presentation
of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS gives
effect to all potential common shares outstanding during the period. As a
result, all previously reported earnings per share have been restated.
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
Basic March 31,
-------------------------------------- -----------------------------
1997 1998
----------- -----------
Net income $1,962 $1,372
=========== ===========
Weighted average shares outstanding 26,739 27,230
=========== ===========
Basic net income per share $0.07 $0.05
=========== ===========
Diluted
--------------------------------------
Net income $1,962 $1,372
=========== ===========
Weighted average shares outstanding 26,739 27,230
Dilutive effect of stock options 2,780 1,572
----------- -----------
Weighted average shares as adjusted 29,519 28,802
=========== ===========
Diluted net income per share $0.07 $0.05
=========== ===========
Options to purchase 1,650,188 shares of common stock at prices ranging
from $5.99 to $8.80 were outstanding at March 31, 1998 but not included in the
computation of diluted earnings per share because such options' exercise prices
were greater than the average market price of the Company's common stock in the
quarter ended March 31, 1998.
5
<PAGE>
3. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
displaying comprehensive income and its components. The Company's comprehensive
income components consist of net income and foreign currency translation
adjustments.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
To date, substantially all of the Company's net sales have been derived
from the sale of PC products by its wholly-owned subsidiary, Catalink Direct,
Inc., and its subsidiaries ("Catalink"), to corporate customers. In addition,
the Company, through its wholly-owned subsidiary, Elcom Systems, Inc. ("Elcom
Systems"), generates revenues from licensing its PECOS.net technologies and
providing related services to other companies. On a stand-alone presentation
basis, for the quarters ended March 31, 1997 and March 31, 1998, revenues
generated from Elcom Systems' licenses, including associated professional
services and maintenance fees, were approximately $1.2 million and $897,000,
respectively.
The Company was founded in 1992, commenced operations in December 1993,
and has experienced rapid growth by offering its PECOS.cm technology to its
Catalink customers, by subsequent use of PECOS, and by various marketing
efforts, including the expansion of its direct sales force nationwide and by the
acquisition of six PC products remarketers. The Company's remarketer acquisition
strategy includes training an acquired company's sales force to use PECOS as a
value-add differentiator to prospective customers in those new markets.
In October 1994, the Company completed the acquisition of a
Connecticut-based PC products remarketer, which was accounted for on a
pooling-of-interests basis. Accordingly, the results of this entity (which was
merged into Catalink in December 1995) have been included with the Company's
results since the date of the Company's organization. In February 1995, the
Company acquired Catalink Direct (Pennsylvania), Inc., formerly known as
Computerware Business Trust, a Pennsylvania-based PC products remarketer (which
was merged into Catalink in December 1997). In June 1995, the Company acquired
all of the equity of a PC products remarketer in the United Kingdom operating as
Lantec. The Computerware and Lantec acquisitions have been accounted for as
purchase transactions.
In February 1996, the Company completed the acquisition of AMA (UK)
Limited, a remarketer of PC products in the United Kingdom, which has been
accounted for on a pooling-of-interests basis. Accordingly, AMA's results have
been included with the Company's results since the date of the Company's
organization. In December 1996, the Company acquired Prophet Group Limited, a PC
products remarketer and in February 1997, the Company acquired Data Supplies
Limited, a PC products remarketer, both of which are located in the United
Kingdom. The Prophet Group and Data Supplies acquisitions have been accounted
for as purchase transactions.
In April 1997, Elcom Systems acquired certain key elements of the
electronic procurement software which is being augmented and developed into
PECOS Procurement Manager ("PECOS.pm"). The purchase price, as amended, was
approximately $1.4 million, consisting of cash and stock. The Company intends to
continue its investment in PECOS.pm in 1998, including the continued development
of an intranet-enabled version which is now available, to integrate other
PECOS.net functions and features.
On July 23, 1997, the Company announced that its Board of Directors
authorized the engagement of the investment banking firm of Salomon Smith Barney
to assist the Company by coordinating and evaluating options
6
<PAGE>
which would enable the strategic potential of the Company to be realized. The
rapid growth of the Company, and the Board of Directors' belief that the
Company's stock is undervalued in the marketplace, prompted the Company to take
this step. These actions, intended to maximize stockholder value, include
evaluating the possible sale or merger of the Company, strategic financing
options, and potential strategic partners. The Company is continuing ongoing
discussions with several companies. As long as the Board of Directors believes
that such discussions may lead to a merger, acquisition, or other potential
financial arrangement which would be, in the Board's opinion, in the best
interests of the stockholders, these discussions will continue. Further, due to
the size and scale of the Company's PC remarketing and services business in the
U.K. and the current strength of the U.K. stock market, particularly for
information technology stocks, the Company and Salomon Smith Barney are
evaluating alternative options which are intended to take advantage of this
strength. This process also includes investigation of various potential options
for Elcom Systems as a separate company, including possible strategic alliances
with a technology or financial partner. In this regard, the Company is currently
investigating the divestiture of a majority share of Elcom Systems. The
Company's objective is to reduce its holdings in Elcom Systems to less than 50%
in order to allow it to account for its ownership via the equity method and
therefore not report subsequent operating losses incurred by Elcom Systems
beyond its residual investment therein, if any. In this event, Elcom Systems
would become a stand-alone company able to absorb the incremental losses
necessary to introduce and market PECOS.pm. There can be no assurance that the
Company will be successful in consummating any transaction(s) or realizing
additional stockholder value as a result of this process, which is currently
ongoing.
The Company intends to acquire additional companies either to expand
its customer base and the use of PECOS or to complement its Elcom Systems' PECOS
technology, although there can be no assurances as to the success or timing of
any such acquisitions.
Catalink's revenues and gross profit have always been affected by
general price reductions by PC manufacturers, which have been substantial over
the last several years. Manufacturers' price reductions require that Catalink
increase its base unit volumes, and associated peripheral product sales to
existing and newly acquired customers, to overcome the effect of such cost
cutting and to increase its revenue volume in order to sustain its level of
gross profit. Consequently, the impact of any lessening of corporate customer
demand on Catalink's revenues is amplified in this environment.
In addition to general price reductions by PC manufacturers, the
Company believes its first quarter revenues were affected by delayed customer
purchases in anticipation of further price decreases from major manufacturers,
several of which occurred during the month of March. Although the Company's
volume of personal computers shipped to customers showed 30% growth compared to
the same period last year, these price decreases had a significant effect on the
average unit value of personal computers sold and the Company's net sales
compared to last year.
Results of Operations
Quarter ended March 31, 1998 compared to the quarter ended March 31, 1997.
Net Sales. Net sales for the quarter ended March 31, 1998 increased to
$190.1 million from $176.3 million in the same period of 1997, an increase of
$13.7 million or 8%. The Company increased sales through incremental penetration
of the marketplace. Net sales in the United States increased to $108.4 million
in the 1998 quarter, from $103.3 million in the quarter ended March 31, 1997, a
5% increase. Net sales of the Company's United Kingdom based operations
increased to $81.6 million in the 1998 quarter from $73.0 million in the first
quarter of 1997, a 12% increase. As noted above, the Company believes that the
relatively sluggish increase in sales is attributable primarily to substantial
price reductions made by manufacturers and a resultant softening of demand as
customers assessed such price decreases and also anticipated additional price
decreases. Further, in the United States, the sluggish growth in sales also
reflects the residual impact of the Company's November 1997 implementation of a
new Oracle-based MIS system.
Gross Profit. Gross profit for the quarter ended March 31, 1998
increased to $22.2 million from $20.2 million in the 1997 quarter, an increase
of $2.0 million or 10%. The increase in gross profit dollars generated
7
<PAGE>
resulted primarily from the overall growth in net sales. Gross profit as a
percent of net sales increased to 11.7% in the 1998 quarter from 11.5% in the
1997 quarter. The gross profit percentage was higher in 1998 due to the direct
purchasing programs implemented with certain manufacturers in the United States
and from increased professional services revenues in both the United States and
the United Kingdom. The decrease in the gross profit percentage in the first
quarter of 1998 to 11.7% from the 12.5% achieved in the fourth quarter of 1997
reflects a decrease in manufacturer funds and incremental discounts available to
the Company as well as an increase in the proportion of sales to larger volume
customers. The Company anticipates that ongoing increases in direct purchasing
volume and continued growth in higher-margin professional services revenues
should mitigate a portion of the product gross margin decline expected to be
associated with targeted expansion of sales to high volume corporate accounts
during 1998, which typically generate lower gross margin percentages than other
customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 1998 increased to $17.9
million from $16.4 million in the 1997 quarter, an increase of $1.5 million or
9%. This increase is primarily attributable to the cost of the Company's
investment in administrative and operational infrastructure to support the
future growth of the Company's business. The Company's new management
information system in the United States is functional and is being augmented to
enable the Company to operate more efficiently. Once implemented world-wide, the
Company anticipates that this system will provide an information systems
backbone to achieve more timely and precise information reporting and is
expected to provide an efficient means to assist in the consolidation of the
information and other internal systems of potential acquisitions. Selling,
general and administrative expenses increased slightly as a percentage of net
sales for the quarter ended March 31, 1998 to 9.4% from 9.3% in the 1997
quarter, which reflects the softness of net sales in the first quarter of 1998,
as noted above as well as an increase in the operating loss generated by Elcom
Systems.
Research and Development Expense. Research and development expense
remained unchanged at $275,000 in the 1997 and 1998 quarters. The Company's
research and development expense is focused on developing incremental
functionality and features for its PECOS.net technologies, including the aspects
of the PECOS.pm technology acquired in 1997, as well as modifications to allow
its PECOS.net technologies to communicate using the Internet and the continued
development of a browser compliant and Java-enabled version of its PECOS.net
technologies for license to other companies. The Company expects to continue
investing significant amounts in research and development.
Interest Expense. Interest expense for the quarter ended March 31, 1998
increased to $1.9 million from $1.1 million in the comparable period of 1997 an
increase of $800,000. Interest expense in both years reflects floor plan line of
credit borrowings in support of the Company's accounts receivable and inventory
and for 1998 is reflective of the increase in the Company's net sales and
substantially higher inventory balances versus the 1997 period.
Interest Income and Other, Net. Interest income and other, net, for the
quarter ended March 31, 1998 decreased to $171,000 from $574,000 in the 1997
quarter. Other income in the 1997 quarter included proceeds of $389,000
resulting from the sale of the Bristol, PA. rental division in March 1997, net
of certain redundant operating and severance expenses of the Pennsylvania
operations group. This group was phased-out and consolidated into the Company's
headquarters and new East Coast configuration and distribution facility which
was opened late in the first quarter of 1997 in Canton, MA.
Income Tax Provision. The income tax provision in 1997 primarily
related to the income taxes of the Company's United Kingdom based operations, as
well as certain current state income taxes payable by the Company, and in 1998
also reflects federal income taxes in the United States. Throughout much of
1997, the Company did not provide federal income taxes as it had net operating
losses available to offset such provisions.
Net Income. The Company generated net income for the quarter ended
March 31, 1998 as a consequence of the results of the factors described herein.
The March 31, 1998 quarter is the tenth consecutive quarter in which the Company
has reported net income since its initial public offering on December 19, 1995,
after reporting net losses in all previous quarters from its inception in 1992.
8
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the quarter ended March
31, 1998 was $16.0 million, which is primarily due to an increase in accounts
payable and other accrued expenses of $24.7 million (primarily related solely to
the timing of certain payments), offset by a $12.2 million combined increase in
inventory and accounts receivable. Net cash used for investing activities was
$2.2 million, consisting primarily of additions to property, equipment and
software. Net cash used in financing activities was $10.4 million, primarily due
to a $10.6 million net decrease in borrowings under floor plan lines of credit.
Net cash provided by operating activities for the quarter ended March
31, 1997 was $7.2 million, reflecting the Company's net income, adjusted for
$2.2 million in depreciation and amortization, a net increase of $3.1 million in
accounts payable and accrued expenses and relatively stable levels of accounts
receivable and inventory in the period. Net cash used in investing activities
was $5.0 million, consisting primarily of $1.9 million in additions to property,
equipment and software and $3.0 million of cash paid for acquisitions. Net cash
used in financing activities was $4.0 million, consisting primarily of a $4.1
million decrease in net borrowings under the Company's lines of credit.
At March 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $36.8 million and floor plan lines of
credit from Deutsche Financial Services Corporation ("DFSC"). The United States
DFSC facility provides for aggregate borrowings of up to $120 million, with
interest payable at prime (8.5% at March 31, 1998) minus 1%. Availability of
United States borrowings is based on DFSC's determination as to eligible
accounts receivable and inventory. As of March 31, 1998, the Company's
borrowings from DFSC on its United States floor plan line of credit were $109.6
million, which approximated the Company's availability based on eligible
accounts receivable and inventory at that date. Approximately one-half of the
Company's initial United States borrowings do not bear interest until after
interest-free periods of 30 to 90 days have lapsed. The United States DFSC line
of credit is secured primarily by the Company's United States inventory and
accounts receivable, although substantially all of the Company's other United
States assets also are pledged as collateral on the facility. In December 1997,
the Company also established a United Kingdom DFSC credit facility which
provides for aggregate borrowings of up to (pound)30 million, or approximately $
50 million, as of March 31, 1998. Availability of United Kingdom borrowings is
based upon DFSC's determination of eligible accounts receivable and amounts
outstanding bear interest at the Base Rate of National Westminster Bank plc
(7.25% at March 31, 1998) plus 1.25%. The United Kingdom DFSC facility replaced
four separate facilities previously maintained in the United Kingdom. As of
March 31, 1998, the Company's borrowings under its United Kingdom DFSC facility
were (pound)20.8 million or $34.0 million, which approximated the Company's
availability thereunder.
The Company is dependent upon the DFSC lines of credit to finance
increases in its eligible accounts receivable arising from sales of PC products
as well as its United States inventory purchases and hence, the Company expects
that its borrowings under such facilities will need to increase in order to
support the Company's anticipated growth. There can be no assurance, however,
that the DFSC lines of credit will continue to be available, or be increased to
support the Company's requirements. The DFSC lines of credit limit borrowings to
defined percentages of eligible inventory (in the United States) and accounts
receivable and contain financial covenants with respect to the Company's net
worth and debt-to-equity ratios, and customary default provisions.
The Company also has a $9.5 million floor plan financing agreement with
IBM Credit Corporation ("IBMCC") to support purchases of IBM products. The IBMCC
borrowing facility is secured by the IBM products purchased under the
arrangement and relates to domestic operations only. At March 31, 1998, the
Company's borrowings from IBMCC on its floor plan line of credit were
approximately $0.2 million.
As of March 31, 1998, the Company had borrowings aggregating
approximately $143.8 million outstanding under these borrowing facilities, which
approximated its availability thereunder. The Company also included a note
payable of approximately $0.8 million, related to its acquisition of Data
Supplies Limited, in lines of credit.
9
<PAGE>
Based upon ongoing analyses, and the requirement that it establish a
direct purchasing relationship with a major PC manufacturer to support
fulfillment requirements under a contract awarded in 1996, the Company started
purchasing selected products directly from manufacturers in late 1996. Although
the Company's inventory investment imposes certain costs and risks and has
increased substantially since late 1996, the Company believes that this
investment will improve its delivery time to customers and the quality control
of configured systems and, over time, may increase the profitability of the
Company. These direct purchasing arrangements have favorably impacted gross
profit, particularly in the third and fourth quarters of 1997, as the volume of
direct purchases increased significantly over prior quarters and the Company
earned substantial direct purchasing rebates and incremental discounts. The
Company's purchasing volume in the first quarter of 1998 reduced the level of
such rebates and incremental discounts the Company earned versus the third and
fourth quarters of 1997. There can be no assurances that these manufacturer
rebates and discounts will be available in the future, or if available, that the
Company will be in a position to purchase the levels of products necessary to
receive comparable or increased levels of such rebates and incremental
discounts. The Company also believes that it can substantially mitigate the
risks associated with its additional inventory positions by limiting the range
of models it stocks to those in demand and by carefully monitoring items on hand
and their associated net carrying costs, relative to demand. The Company also
intends to continue to maintain logistical and traditional relationships with
selected distributors and/or aggregators.
On February 23, 1996 the Board of Directors of the Company authorized
the purchase of up to 600,000 shares of common stock to be held as treasury
stock specifically for reissuance in connection with acquisitions. The Company
anticipates that it may acquire shares in the open market under this
authorization from time to time.
The Company's principal commitments consist of leases on its office
facilities, obligations under lines of credit, which are demand facilities and
are treated as current liabilities, and capital leases. Future growth of the
Company will require ongoing investment in property, equipment and software.
The Company believes that its cash and cash equivalents, together with
its existing sources of liquidity, will be sufficient to meet its working
capital and capital expenditure requirements for the next year, so long as its
financing sources continue to make lines of credit available. However, as the
Company's business strategy includes growth through acquisitions, additional
sources of financing may be required to accomplish the Company's growth plans.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q includes forward-looking
information. All statements other than statements of historical fact, including,
without limitation, those with respect to the Company's objectives, plans and
strategies set forth herein and those preceded by or that include the words
"believes," "expects," "anticipates," or similar expressions, are
forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, it can give no assurance that the
Company's expectations are correct. These forward-looking statements involve a
number of risks and uncertainties which could cause the Company's future results
of operations to differ materially from those anticipated. Such risks and
uncertainties include: the industry's acceptance and usage of electronic
commerce software systems, the impact of competitive technology products,
service providers, and pricing, control of expenses, levels of gross profits,
revenue growth, overall business conditions, price decreases of PC products,
corporate demand for PC products, the success and timing of fully implementing
the Company's new management information system and problems associated
therewith, availability of appropriate financing, risks associated with
acquisitions of companies, the consequent results of operations given the
aforementioned factors, and the other risks detailed in the Company's 1997
Annual Report on Form 10-K and from time to time in the Company's other reports
filed with the SEC, including the Company's prospectus included as part of the
S-1 Registration Statement declared effective on December 19, 1995 under the
Securities Act of 1933. Regarding the Company's evaluation of possible strategic
partners and financing alternatives, including for Elcom Systems, there can be
no assurance that any strategic alternatives, including any possible
arrangements with a strategic partner of the possible sale, merger or financing
can be successfully identified or solicited, negotiated, or consummated to the
betterment of the Company or the Company's stock price, or what the timing,
terms, or ultimate impact of any such arrangement might be.
10
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27.1) Financial Data Schedule. (x)
(27.2) Restated Financial Data Schedule - Quarter ended
March 31, 1997 (x)
(27.3) Restated Financial Data Schedule - Year ended
December 31, 1996 (x)
- ---------------------------------
(x) Filed herewith.
(b) Reports on Form 8-K.
On March 11, 1998, the Company filed a Current Report on Form 8-K dated
December 12, 1997 with respect to a Change in Registrant's Certifying
Accountant. The Audit Committee of the Board of Directors of the Company
recommended and approved the dismissal of Deloitte & Touche, the Company's
independent accountants for its subsidiaries and operations domiciled in the
United Kingdom and recommended and approved the engagement of Arthur Andersen
LLP, the Company's principal independent accountants, as the sole independent
accountants for the Company's consolidated operations, including for its United
Kingdom based business.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Elcom International, Inc.
(Registrant)
Date: May 8, 1998 By: /s/ Laurence F. Mulhern
------------------------------
Laurence F. Mulhern
Chief Financial Officer and
Treasurer
11
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